How Paytm went big on Indian demonetization
India’s biggest fintech has doubled its user base in a year and is on track to have 500 million customers by 2020. It is backed by Ant Financial and Softbank and spurred by state policy on financial inclusion. How far can Paytm go?
|Paytm’s founder Vijay Shekhar Sharma
It is a year since Indian prime minister Narendra Modi turned his country’s transactional finances upside down with his demonetization programme. The dust has now settled.
People will argue for years about the pros and cons of what he did, but there is near universal agreement on the company that did best out of the whole thing.
Paytm was already big news before Modi’s demonetization shock last November 8, when he withdrew all the Rp500 and Rp1,000 banknotes from circulation to curb corruption and the black economy, he said, apparently without warning anyone in the banking sector that he was about to do so.
The rags-to-riches story of Paytm’s founder, Vijay Shekhar Sharma, who not so long ago would walk 20 kilometres across Delhi because if he paid for an auto-rickshaw he would not have enough money for dinner, and who was flat broke as recently as 2003, was by then already well-rehearsed in Indian media. The journey of his company from a prepaid mobile webcharge website in 2010 to an Alibaba and Ant Financial-funded juggernaut that is the largest mobile payment service platform in India was well underway.
But demonetization gave the company an almighty lift. Modi’s move completely pole axed India’s cash transaction economy and forced people, and in particular the small merchants who are legion in the country, to look at alternatives.
The Paytm wallet was the simplest answer and people flocked to it. It went from 125 million wallet customers before demonetization to 185 million three months later, and it has continued to grow, hitting 280 million users by November 2017.
Sharma and his staff saw an opportunity and put everything they had into it; Sharma has said that he and his staff did 600 days’ worth of work in 60. They ran full-page ads the following day praising Modi for “taking the boldest decision in the financial history of independent India,” a stunt that was not without its critics. Opposition politician Rahul Gandhi suggested Paytm stood for “Pay to Modi” (it is actually Payment through mobile).
It is important for any company like ours that has such big ambitions to have partners and shareholders who share our conviction on the journey - Madhur Deora, Paytm
Sharma’s catch-phrase is ‘Go big or go home’ – it is on his office wall, on his coffee mugs, all over his interviews – and he certainly ran big on demonetization.
Looking back on it now in New Delhi, Paytm’s CFO Madhur Deora, who joined from Citi a month before demonetization, is keen to point out that the company was already very much on its way before Modi’s unexpected bounty came along.
“We were doing payment solutions for offline merchants since October 2015,” he explains, making it the only company outside the card networks that was doing so in India at the time. “So when demonetization happened, we had the product and the sales infrastructure already. It took a lot of effort to scale up, but the foundations were already there.
“Clearly, it made the adoption for a lot of users a lot faster,” he says. “It went from being one of the options to be being a necessity of the hour, and our brand become a lot bigger.”
Signing up merchants at a cracking pace (in October COO Kiran Vasireddy said Paytm had gained five million merchants with QR code acceptance in a year and that the company processed $1.6 billion of transactions during the recent Diwali month, up three-and-a-half times year on year), the company learned a great deal about merchant and consumer behaviour and the power of the offline merchant network.
One thing that was on its way with or without demonetization was Paytm’s engagement head-on with the world of banking.
Back in 2014, the Reserve Bank of India released draft guidelines for a new kind of institution called a payments bank.
These would be able to accept restricted deposits (no more than one lakh rupees, or Rp100,000, per customer, equivalent to about $1,530) and could not issue loans or credit cards, but could run current and savings accounts, issue ATM and debit cards and operate net and mobile banking. Forty-one institutions applied, Paytm among them, and in August 2015 Paytm was one of 11 entities to be given in-principle licences.
Progress among the 11 has been mixed. Three ended up giving their licences back, concluding it was not worth going ahead. The telco Airtel was first out of the blocks, launching a new bank in partnership with Kotak Mahindra in November 2016. India’s national post office has launched one and the other telcos are expected to do so.
Paytm launched its payments bank in May this year with big ambitions. The mobile wallet business had been a curtain raiser, Sharma said at the time: the payments bank would be the main show.
The first step was to transfer in all of those wallet accounts, giving the bank an almost 200 million-strong head start at launch; the target, stated brazenly and frequently, is to hit 500 million current and saving accounts by 2020.
Paytm’s CFO Madhur Deora
Renu Satti, who formerly ran Paytm’s movie ticketing business, CEO of the new bank. More broadly, Deora, as well as being CFO and senior vice-president of Paytm, also has responsibility for driving the company’s push into financial services. To him the payments bank licence is “a huge responsibility. From day one, we have wanted to get this right.”
It is also an opportunity.
“At a fundamental level, what a payment bank offers us is the opportunity to be the primary deposit relationship for our customers,” says Deora. “Take a step back. All these things we are building are what you can do with your money: spend it, save it, borrow it. In having the deposit relationship, then we can have all those things you can do with your money in one place. That’s a huge differentiator for us.
“Now you have the largest merchant network in the country, by far the largest spending network whether online or offline, combined with the ability to save, borrow and deposit the salary, all in one place.”
To Deora, the restrictions of a payments bank licence relative to the bricks-and-mortar banks “are fine. The customer chooses where they want to keep their money.”
The ceiling on maximum deposits? “If you are a customer, why would you want to have more than 100,000 rupees in a savings account, when you can have a savings product available seamlessly?”
Paytm's first investment offer was characteristically Indian: a gold product.
To see how that came about it is worth looking at Paytm’s shareholders, partners and influences. Sharma apparently first had the idea of launching the company’s wallet product after visiting China and seeing vegetable sellers taking payments from customers using their phones. It is no surprise that Alibaba and Ant Financial – the enterprises Paytm most resembles – have been involved since the early days.
In March 2015, Alibaba, through its Ant subsidiary, invested $575 million in One97 Communications, the parent company of Paytm, and has made further investments since – they are probably in for about $800 million so far, although both Paytm and Ant are cagey about exact amounts. Deora was involved in putting Alibaba and Paytm together during his time at Citi.
From Ant’s point of view, Paytm fits like a glove. One of Ant’s main methods of international expansion is to buy a minority stake in businesses elsewhere that resemble it, contributing the tech into the back end while the local recipient has all the licences and the cultural knowledge of that market. There is no better equivalent to Ant anywhere in the world than Paytm, in terms of scale, vision, entrepreneurial approach and technique.
To some, it makes the two businesses almost interchangeable.
“Paytm is basically Alibaba,” says Piyush Gupta, chief executive of DBS, when asked what he has learned from Paytm in the development of DBS’s own digital banking offer in India, digibank. “They are driving the same model through India as the one Alibaba does in China, using the same tech. The underlying model and what they are trying to do are exactly the same.”
It is interesting, however, to ask just how much influence Ant has on Paytm’s direction and processes. In Euromoney’s interview earlier this year, Ant’s India head Benny Chen presented Ant as a driver of Paytm’s strategy to move away from simple mobile recharge to become more of a lifestyle application, as Ant is in China, as well as contributing the technology behind the scenes. In practice, what is the role?
“Well, there are different layers of that,” says Deora.
At the top, there is a lot to learn from Ant and Alibaba’s experience (and indeed Softbank, which invested $1.4 billion in May).
“It is important for any company like ours that has such big ambitions to have partners and shareholders who share our conviction on the journey,” Deora says. “We are dramatically expanding some of our business verticals and believe in the long-term power of some of these products we are launching. If your partner is somebody who has seen that themselves, have learned it and gone through it, it makes them more confident about us, and it is incredibly important advice.”
|Not just a one-way street
It is tempting to assume that movements between banks and powerhouse fintechs like Ant Financial and Paytm are a one-way street, with bankers abandoning the old model to move to the new.
However, it is not entirely true. In June, Citi appointed Shinjini Kumar from Paytm to be head of its Indian consumer banking division. Kumar’s remit at Citi includes retail banking, wealth management, cards and mortgages in India.
Kumar had been expected to be chief executive of Paytm Payments Bank, a role now filled by Renu Satti. She was previously at PwC, and before that the Reserve Bank of India.
That said, Madhur Deora moved from Citi to Paytm to become its CFO. Win some, lose some.
So there is a boardroom level of crossover. According to the Paytm website, Jing Xiandong, COO of Ant Financial, and Peng Yijie, president of Alipay International (in dealings with Paytm they go by their English names Eric and Sabrina), are both on the Paytm/One97 board.
K Guru Gowrappan, is listed as an ‘additional director’; Guru is in charge of Alibaba’s international product and business development strategy. (Also on the board, incidentally, is Mark Schwartz, vice-chairman of Goldman Sachs; Goldman executives and alumni are ubiquitous in Asia fintech.)
It appears that the board composition has changed and is not yet reflected on the site, but, at the very least, Jing is still there representing Ant.
Then there are the specific ideas that come from China. If Paytm has an idea, Deora says, then Ant and Alibaba can offer a perspective on how the same idea might have worked out in China, since in all likelihood they have already done it.
This brings us back to Paytm’s wealth management product. One of the most remarkable stories in finance is Yu’e bao, the money-market product launched by Ant Financial in 2013.
Only ever launched as a way to do something with all the cash swimming around Alipay accounts (the name means ‘leftover treasure’), it almost by accident became China’s biggest money-market fund in a matter of months, in an extraordinary example of a simple idea gaining vast and rapid traction.
Earlier this year, it overtook the JPMorgan US government money-market fund with $150 billion under management and became the biggest fund of its kind in the world.
“So, looking from the outside, we thought: ‘We should do Yu’e bao,’” says Deora. “We would ask them: ‘Tell us about the two or three features that made it powerful.’”
But Paytm’s local knowledge also told them how it would need to be tweaked to be successful locally. “Bringing that to India, we say: ‘We should not do it as a money-market fund. We should do gold.’ We put our layer of learning on top of theirs.”
The product was a joint launch between Paytm and MMTC-Pamp, itself a joint venture between a government of India group and Switzerland’s precious-metals firm Pamp.
That JV is India’s only internationally accredited refinery for gold (and has its own vaults). The product, called Digital Gold, allows users to buy, store, sell and resell pure gold online instantly, and to get it delivered to them as minted coins.
India is the only place in the world this would make sense as a debut launch product.
“As a country, we have an insatiable appetite for gold,” says Siddhartha Sengupta, deputy managing director at State Bank of India. “Bigger than any country on Earth.”
Indians hold more than 24,000 tonnes of gold, worth more than $900 billion, according to World Gold Council data from the time of the product’s launch in April. Indians bought more gold in 2016 than any other financial asset, but face obvious issues with storage and security.
“Our solution around the gold product was simply that it is an asset class with a lot of resonance with Indians,” says Deora. “More than any other financial product. More than any product at all.
“We wanted to start with something people understand.”
Previously, buyers in India could only buy a minimum of one gram, costing 3,000 rupees, or about $50.
“You’re unsure about the price you’re getting, the quality you’re getting. If you’re a small saver you may not have enough,” says Deora. “How can we solve these things?”
Our mission is quite clear: 500 million Indians into the financial mainstream. Anything that helps further that agenda is something we want to be a part of - Madhur Deora
Through Paytm, one can invest as little as a single rupee in gold – and in this respect, it is strikingly similar to Ant’s Yu’e bao, where one can earn interest on a holding as small as a single yuan.
A spokesperson for Paytm says that the platform has handled $18.3 million-worth of gold transactions in six months, and had handled over one million buyers by Dhanteras, the first day of the Diwali festival, on October 17; transactions were expected to leap dramatically over the course of the festival.
Ant is also then involved in the technology side, including contributions to the risk management and some product systems. Softbank is a newer partner.
“We have less history of working with them, but we couldn’t be more excited,” Deora says. “They bring in their big-picture thinking, their global network.”
They have also made the place flush with cash. The Softbank investment put Paytm’s valuation somewhere over $7 billion.
“To be honest, if we had raised half as much capital, we would still have been OK,” says Deora. “We are incredibly well-capitalized.”
Sharma has said in interviews before that for the next five years growth is more important than profitability, but Deora says that at a company level Paytm is “meaningful contribution positive,” which presumably means they make money. It has always continued to invest in its systems, particularly in that post-demonetization spell, but the capital drain is not really that big.
“The amount of capital we have is far in excess of what we need for the next two or three years,” he adds.
Bankers should not hold their breath waiting for a listing.
“It’s not on our radar right now,” says Deora. “Never say never. I say we’re not going to think about it for the next three years, and that may become five or seven. We’ve not had any serious discussions around listing.”
Paytm is part of a much broader theme of India: the use of technology as a method of financial inclusion. Euromoney has written before about India’s Digital Stack, a state-led combination of various infrastructures to enable digital finance, including the Aadhaar biometric identity card and the Unified Payment Interface (which Paytm was linked to earlier this year).
The government believes these initiatives can bring hundreds of millions of Indians into the financial mainstream, and it stands to reason Paytm should be a large part of that.
“Our mission is quite clear: 500 million Indians into the financial mainstream,” Deora says. “Anything that helps further that agenda is something we want to be a part of.”
Getting there is going to require smartphone penetration in India to reach the levels it has hit in China, which is not yet the case, but the trends are pointing in the right direction. Aadhaar, Deora says, “is incredibly helpful in signing up customers, and clearly we use all that infrastructure.”
Still: those numbers. Only Ant and Tencent (through WeChat) speak of customer targets like these in a domestic market. Also, India is a long way from being homogenous: it has over 1,000 recognized languages, of which 30 are each spoken by more than a million native speakers. China, too, has many languages, but the written form is recognizable among speakers of many of them in a way that is not the case between, say, Tamil and Bengali.
“Clearly, as you go from 100 million to 500 million users in India, there are challenges,” Deora says. He believes there will be 500 million smartphone users within a few years, so the challenge is probably just a question of time; more pertinent are the demographics.
“There are multiple languages, you come across people who are extraordinarily well-educated and others who are not educated; how do you have a solution for all, not just the top of the pyramid?”
Central to the company’s approach has been thinking about who will use the app.
“If I think about 500 million customers, we are trying to build a solution for the 500 millionth customer,” says Deora. “If it is relevant for them, it will be relevant for everyone before them.”
Although Ant and, to a slightly lesser extent, Tencent are taking on the world (Ant wants two billion customers worldwide), Paytm has been principally a domestic operation so far. But it might not stay that way.
It is a surprise to many to learn that Paytm’s principal overseas market is not another south Asian state but Canada, where the company began as a two-person team working out of local libraries in Toronto in 2014. Now it has a payment app for Canadian bill payments and a team of software, data and machine-learning engineers building new technologies for that market.
“Developed markets are very different,” says Deora. “Our learnings there will be helpful going forward.”
He says that “international expansion could be on the cards” in the years ahead and that “it could be developed markets or developing markets. But we are super-focused on achieving our current [domestic] target first.”
He adds: “There is so much to do in India. Access to financial services for 500 million people is actually a pretty large endeavour.”