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At the heart of Paytm's slide lies the abject failure of its Super App strategy, notes Indrajit Gupta.
For more than three weeks now, the indignation and diatribe launched against the Reserve Bank of India (RBI) for its action against Paytm Payments Bank have beggared belief.
The primary arguments trotted out -- all of it remarkably specious -- is that the regulator doesn't understand the fintech sector (and the need for stringent KYC norms), isn't willing to create space for innovation in the banking sector, and it tends to favour the incumbent banks.
None of this is new. In the past, too, Vijay Shekhar Sharma, the high-profile and maverick poster boy of India's startup world, has made it a habit of publicly cocking a snook at the regulator.
This time, the most breathtaking attack -- calling the 60-year old regulators fuddy-duddy and biased against fintechs -- was from none other than Ashneer Grover, a startup founder with a questionable reputation himself.
The gyrations in the Paytm stock have been equally intriguing.
It crashed from a high of around Rs 761 before the RBI directive to Rs 325 by February 15, only to recover to around Rs 428 on February 26.
Analysts covering the stock are a divided house. Macquarie downgraded the stock and fixed the target price at Rs 275.
Jefferies stopped its coverage entirely. Goldman Sachs maintained a neutral position and set a target price of Rs 450.
So what explains this wide divergence?
I urge you to read, as I did, Paytm's earnings call transcript in January, days before the RBI directive, released on the last day of the month.
You'd find absolutely no hint of the impending regulatory trouble and might leave with the impression that Paytm was in the pink of health, recording eye-popping growth rates.
So much so, before each of the analysts from storied brokerages asked a question to the Paytm leadership, they faithfully congratulated Mr Sharma for the company's "great results".
A case of wilful blindness, did you say?
Let's deconstruct what's really going on, starting with Paytm's business model.
Paytm's secret sauce, it claimed, was its Super App strategy.
It had amassed millions of users -- both customers and merchants.
All it had to do was create a flywheel effect -- a favourite startup term -- through a plethora of services, ranging from e-commerce, travel, storing money in the wallet, opening a deposit account, to paying for mobile recharge, electricity, gas, FASTag, among others.
On listing day in November 2021, the stock slid from its IPO valuation of a stupendous $20 billion to $13.5 billion, making it one of the worst performing IPOs in the world.
By February 2024, its market cap was at $3.12 billion. Here's the upshot: None of its planned services have set its cash registers on fire.
Neither its wallet business nor its payment bank licence offer even an iota of margin that would offer any cheer to its investors.
Plus, a digital public infra like UPI made it free for users to transfer small ticket funds digitally.
Paytm still has over Rs 8,500 crore of cash from marquee investors like SoftBank, Ant Financial and Berkshire Hathaway, all of whom have exited the company.
Starting some time in 2022, Paytm did find a ray of hope though: Selling large volumes of small-ticket personal loans to its customers and merchants in a jiffy.
It signed partnerships with non-banking financial companies (NBFCs) and banks like Aditya Birla Finance, Hero Fincorp, Shriram Finance, Poonawala Finance and Piramal Finance.
Most of these NBFCs do not have any real competence in digital lending or a digital platform of their own.
On the other hand, Paytm had a robust app and technology and a wide customer base.
It could, therefore, cross-sell loans to its Paytm Payments Bank customers and merchants.
And it was able to secure mouthwatering spreads of 15-20 per cent for sourcing loans for its lending partners and helping with collections.
It seemed like a veritable gold mine. Except for a fly in the ointment -- its lax KYC norms.
One of its former tech partners affirms that Paytm asked them to remove filters so that Paytm wouldn't face any constraints in onboarding customers and demonstrating scale.
Establishing the identity of the customer and his current location was a tricky issue.
While Aadhaar could validate identity, it wasn't useful as address proof.
And there were enough instances of PAN being blatantly misused to open Paytm Payments Bank accounts, leading to several cases of online fraud.
Now, while there is enough hoopla about using algorithms to determine credit worthiness, the fact is that managing collections is a real challenge in the Indian environment.
The small ticket size, coupled with a lack of proper address proof, also makes it tough to recover bad loans.
Besides, the credit market began to overheat, with the same customers getting access to multiple fast, easy loans, often using fake PAN cards.
The RBI sensed this growing stress and clamped down on personal, unsecured loans by increasing the risk weight ratios and unveiling digital lending guidelines that would curb unchecked growth in digital lending.
By the end of last year, Paytm's one-trick pony had almost come to an end.
And immediately after the January 31 RBI directive, its major lenders like Aditya Birla Finance simply stopped funneling small loans through Paytm, citing reputational risk.
Given the heat from the RBI, it is unlikely that these NBFCs will muster up courage to lend through Paytm for a while.
In any case, the spreads for a direct sales associate in the digital lending space will continue to narrow.
As a marketplace, Paytm will be expected to offer its customers the option of choosing from a selection of lenders, not an opaque, exclusive deal with a lender.
That will eat away all the abnormal margins that had the analysts salivating.
Indrajit Gupta is co-founder at Founding Fuel.
Feature Presentation: Aslam Hunani/Rediff.com
