Paytm Payments Bank's route to profitability

• Payment banks in India are stipulated by the regulator to reach micro businesses and low income households
• Paytm Payments Bank leverages its payments on the Unified Payments Interface (UPI), which has been evolving as the mobile payments standard in India
• Paytm Payments Bank needs to prove that it can monetise the platform through added services such as Paytm Money

Paytm started as a prepaid mobile recharge website in 2011, but has emerged over the last 12 months into a full-fledged digital payments play under the Paytm Payments Bank which was launched in May 2017 under a restricted banking licence.

Payment banks in India are stipulated by the regulator to reach micro businesses and low income households. The bank is designed in a way to bring half a billion Indians on to the mainstream economy. It is well known that the bank wants to build scale first and continues to be in an “investment mode”.

Paytm Payments Bank aims to digitise the payments process through the entire customer consumption cycle, and build products and services for the unbanked and under banked people by radically simplifying payments processes in regards to product functionality, marketing and process automation.  Furthermore, use cases drive penetration which is the key agenda. Initially, the payments bank only had a savings account and digital debit card but has begun to diversify their business model and product range.

The payments bank is ranked among the top 20 digital banks in the Asia Pacific, Middle East and Africa in The 2018 Asian Banker Top Digital Banks and FI Ranking.

Modularising complex financial products for the Indian market

The bank’s expertise is modularising complex financial products for the Indian market such as the popular Super Liquid Gold,which allows customers to invest for as low as $0.02 (INR1.00). This amount can be redeemed at any point of time, free of charge, while at commercial banks, investors need a minimum investment of $14.5 (INR1,000).

Paytm Payments Bank follows a zero charge policy on all online transactions and there are no minimum balances required on the deposit side. The long term revenue strategy is to build products on top of savings accounts and base transactions such as current deposit account, bill payments, merchants QR payments and top up of airtime, financial services from which the company can charge a fee.

For some of these products, Paytm Paymnts Bank is forced to leverage on its partner ecosystem. Beginning 2018, it partnered with IndusInd Bank offering a fixed deposit account, which will automatically be created for users who have balance in excess of approximately $1500 (INR100,000)– the regulatory threshold a payment bank can accept. Customers’ deposits cannot be issued as loans but only be invested in government securities. Paytm Payments Bank had outstanding demand deposits worth $502,000 (INR3.25 Cr) as of September 2017 and it aims to convert this deposit base into assets under management, starting with mutual funds, and following a similar modularised low entry pricing strategy.

The bank also is ramping up its corporate offerings such. It already offers digital food coupons that are issued by employers and has plans to introduce a salary account for employees.

The impact on financial inclusion 

As of May 2018, Paytm Payments Bank had 230 million users, the majority of which are wallet customers. The bank leverages its payments on the Unified Payments Interface (UPI), which has been evolving as the mobile payments standard in India. Currently, Paytm Payments Bank owns 40% to 45% of the UPI market share.

Out of the ten million transactions done on the platform every day, roughly 58% of the accounts are from tier 2 cities, with metro cities accounting for 31%. The rest of transactions come from tier 1 cities.

There are over 7.5 million merchants that accept payment through Paytm. The goal for 2018 is to enable ten million merchants for accepting payments digitally. It is already the largest merchant acquirer in the country, given that there are only 3.1 million POS stations in the country that can accept a debit or credit card.

Customer on-boarding is digital in three steps to verify users with the 12-digit Aadhaar number that takes less than three minutes. Mobile wallet companies are required to collect full authentication documents for customers and verify them physically asstipulated by the Reserve Bank of India (RBI). Paytm Payments Bank has recently claimed that it has over 100 million KYC-registered wallets with complete and minimum KYC.

On-boarding in rural areas is also done through agents who are equipped with mobile phones that act as mini bank tellers. Paytm aims to build a network of more than 100,000 agents by end of 2018, which work as banking outlets, such as small shops and merchants in villages across the country. The company eventually wants to see a Paytm banking outlet within one kilometre of every person in India.  

Regional and global comparison

UPI India also lowered the entry barrier for international competitors such as Tez India by Google, which launched in September 2017 and had, as reported, 14 million registered users as of March 2018. Amazon has Amazon Pay and WhatsApp is expected to launch its payments platform within Facebook, which has approximately 250 million users.  Then there is Money on Mobile in India which is a business-to-business-to consumer play targeting the unbanked and underbanked market.

While 2017 was marked by building infrastructure, Paytm Payments Bank needs to prove that it can monetise the platform through added services such as Paytm Money. The bank is in the midst of diversifying its product scope beyond payments although the restricted banking licence proves somehow a drag. Earning revenues through loans and wealth management will be the most important route to profitability but, for the moment, this can only be achieved with third party financial services providers. Paytm Payments Bank does not pursue a third party market place model but will reconfigure and simplify existing market products selling under its own brand. Success will also come when they can cover the last mile in the smaller towns, villages and rural areas of India.