Paytm: On the money

We meet at a coffee shop in south Delhi near his home, and Vijay Shekhar Sharma, founder and CEO of Paytm, predictably, pays for his coffee using Paytm. It’s not unexpected; Sharma believes in his product and has never shied away from using it publicly—whether to donate to the recent Kerala flood relief efforts or to pay for a cappuccino. That belief in his company could have been one of the things that attracted investment firm Berkshire Hathaway to Sharma and Paytm.

There’s a lot happening at Paytm and Sharma is not averse to talking about it, but what’s on top of my mind is obviously his visit to Berkshire Hathaway’s office in Omaha and what happened there. “I went as a fanboy,” says Sharma, still looking somewhat star-struck. While Sharma did not get to meet the legendary Warren Buffett, chairman of Berkshire Hathaway, he’s delighted with the selfies he took next to Buffett’s memorabilia.

Tell me about this meeting, I ask, and Sharma settles down to talk. He was in Toronto when he got a call from Mark Schwartz, Paytm board member and former chairman of Goldman Sachs AsiaPacific. Schwartz had met Todd Combs, an investment manager at Berkshire Hathaway. Combs wanted to know more about “our company”, Schwartz told Sharma, and that set the ball rolling. A meeting between Sharma and Combs was arranged, and a few days later, Sharma was in Omaha. What happened at the meeting has been covered in exhausting detail, but Sharma adds his own fanboy touches: all the selfies he took at the Berkshire Hathaway office, including his fast-food meal complete with Buffett’s favourite Cherry Coke.

The upshot of that meeting with Combs is that Berkshire Hathaway invested $300 million (around ₹2,200 crore) in One97 Communications, Paytm’s parent company, valuing it at $10-12 billion. In 2017-18, it raised $1.4 billion from SoftBank Group Corp. and $900 million from Alibaba.

Flush with funds, Sharma says he has big plans for his company which already runs Paytm, Paytm Payments Bank, Paytm Money, and Paytm Mall. Is this the makings of an Internet conglomerate, I ask him. “Conglomerates have a nasty architecture,” he says vehemently. “The best thing is to call ourselves a financial services company; we would want to become India’s largest financial services group.”

It sounds ambitious, but Sharma has been working on this for some years now. When I met him in late 2015, Paytm was already becoming a threat of sorts to banks. Back then, I had asked ICICI Bank’s Chanda Kochhar about the meteoric rise of Paytm and what she was doing about it. “We too are constantly looking at technologies that could make a difference to the way we offer our services to our customers,” she had said. And Vinay Dev Jhari, then vice president of Sapient Global Markets, India, an advisory firm that works with financial services companies, explained: “Banks are jittery, that’s why they are investing in technology.”

This was in 2015. What Sharma has up his sleeve in 2018 should have sent financial services companies scurrying to the nearest techie for help. But the battle in online financial services has intensified, and everybody is prepared. The competition, thus, is tougher today.

Arvind Singhal, chairman and managing director of consulting firm Technopak, says a company like Paytm now competes with virtually everyone—from Reliance Industries, and Walmart, to Amazon, Google, and Flipkart, not to mention the smaller fintechs. “I think there is going to be convergence in business offerings by many of the players,” he says.

Thus, Flipkart—which is already into financial services—could scale up rapidly, while Reliance already has a complete suite of services. That is why Paytm—which is largely still a fintech company—is trying to improve Paytm Mall, he explains, adding, “they have a lot of work to do”.

Over the next three to five years, India will see multi-product, multi-services companies, rather than firms offering just one or two products and one or two services as they do now, he adds.

Meanwhile, over the next few years, Sharma wants Paytm to offer every financial service—from payments and deposits, to wealth management, lending, and insurance.

“A year or two ago, it was all about the wallet. The entire digital payments commentary was synonymous with wallets. However, the game has now changed. UPI has made wallets redundant. India offers an even bigger opportunity in form of access to credit and other financial services,” Laurent Le Moal, CEO, PayU Global, told Fortune India recently.

That’s the large space Sharma is stepping into. In early September, Paytm launched its investment and wealth management app, Paytm Money. Headed by Pravin Jadhav, Paytm Money is based in Bengaluru, away from the company’s headquarters in Noida.

At heart, Paytm Money is an app that allows users to invest in a range of mutual funds on one platform. Reports say Paytm Money has tied up with 25 mutual funds to sell direct plans, which means investors go directly to the fund house without having to go through an intermediary and paying a commission for that.

For a third party like Paytm to be allowed to sell direct funds, it is necessary to be a registered investment advisor. Paytm Money has already got the necessary approvals from market regulator SEBI (Securities and Exchange Board of India) to be an investment advisor.

The big advantage of direct funds is that an investor doesn’t spend on paying commissions and fees to intermediaries. It’s a huge plus for Paytm Money, as it is targeting small investors. “We are looking at investors who will invest `500- 1,000 a month. Unlike a traditional wealth management company that focusses on AUMs or assets under management, our focus is purely on the number of investors that are investing. We don’t mind if they are low-ticket investors, or if they are not investing as per the industry standards; we are looking at people who are investing for the first time,” says Jadhav .

An average mutual fund investor with a systematic investment plan invests `4,500-6,500 a month, according to Jadhav; Paytm Money is looking to change that and get people who can afford to spare much less every month. It looks like that strategy is working; Jadhav says they had 850,000 people registered on the Paytm platform who wanted to get onto the money app. Now, he says, in a month, they have 1.5 million people on the waiting list.

Small investors are the next big target for fintech companies. Apart from Paytm Money, there’s PayU. The Naspers-backed payments company shut down its wallet earlier this year and is now completely focussed on microcredit. It also recently got a licence to operate as a non-banking financial company (NBFC). Predictably, analysts see a parallel to the sachet model followed so successfully by consumer goods companies and later, telecom service providers.

Unlike shampoo and cereal, however, selling financial products and services isn’t just a matter of packaging. “Changing consumer behaviour is a challenge,” says Vivek Belgavi, partner and leader at consultancy firm PwC, explaining that people who invest are used to the “traditional tropes that work—tax consultants, CA firms, etc”. Getting them to come to an app for investment advice and products will take some work.

The language of communication is another problem for fintech companies looking to tap into the small investor population. While English is the default language, Paytm users have the option of 10 Indian languages. That helps build trust with users who otherwise feel alienated.

Things aren’t going so well for Paytm in another of its financial services plays: the payments bank. Paytm Payments Bank was one of the early movers in this space, and much was expected of it on the financial inclusion front.

But earlier this year, the Reserve Bank of India (RBI) questioned the ties between Paytm Payments Bank and the parent company One97 Communications, and their policy of offering cashbacks for opening a bank account. The RBI asked Paytm to stop opening any more accounts after it found some deviations from licensing norms. To add to that, in July, Renu Satti, an old hand at Paytm, quit as Paytm Payments Bank CEO, the second such resignation after previous CEO designate Shinjini Kumar, who was hired from PwC.

Sharma, however, seems unfazed. “We have to be serious about regulation,” he says. “We can’t be huge in financial services if we can’t be completely regulated in all these entities.”

Meanwhile, Paytm is not relying on financial services alone. It is betting big on O2O (online to offline) commerce, says Sharma. Paytm Mall, the company’s commerce site, is working to get as many sellers, both online and offline, on its platform. Paytm is signing on shopkeepers all over the country, including cloth merchants, grocery shops, electronics stores, and all kinds of small establishments. So, if a customer is buying something online, they can get it from the nearest registered seller, making the delivery time shorter.

In the same way if a person is buying something at an offline store, and if the seller is registered with Paytm, they will be able to offer incremental offers like EMIs. It is especially beneficial for smaller sellers, who are not able to offer these services otherwise. Physical stores will also have access to customer data and they will know a lot more about them which gives them the ability to tailor their offering accordingly.

Any shopkeeper signed by Paytm has a unique QR code assigned to them, the marker of the seller on the Paytm website, making it simpler for the company to personalise customer data for them, and be able to manage their inventory on the site and do invoicing for the customer.

“This whole concept of O2O will give us the edge; while other people are also working on it, most of it is led by the inventory-led model that they have. What we are doing is bringing millions and millions of shopkeepers of the country onto the platform,” says Amit Sinha, chief operating officer, Paytm Mall.

The competition, however, isn’t asleep. Sharma is bound to find things getting tougher as bigger players begin to flex their muscles. This year has been particularly exciting for e-commerce in the country.

In May, the world’s largest retailer Walmart bought a 77% stake in India’s largest e-commerce company, Flipkart. Amazon, meanwhile, is spending millions of dollars to capture the market—including acquiring retail chain More—and launching new products in the country. Significantly, those new products include insurance and payments.

Singhal says the Walmart-Flipkart combination is a formidable one and while he does not know their specific plans, “nobody puts $20 billion valuation on a company and not have a plan to monetise it”. He believes they would possibly compete “in a wider range of financial services, and services in general including entertainment and education”. This could be a very different ball game for Paytm, because of the presence of marquee brands such as Reliance and Amazon, Singhal adds.

So far, Sharma has managed to navigate the tumultuous technology-led business journey with the backing he got from Alibaba, while peers like Flipkart sold a majority stake to Walmart, and Snapdeal lost its mojo somewhere on the way. Now, with the tacit blessing of the Oracle of Omaha (and hard cash from Berkshire Hathaway), the always ebullient Sharma is more upbeat. “We will play for the $100 billion [valuation] run,” he says confidently. So far, the odds seem in his favour.