While increasing regulation can be a cause of uncertainty, there are several ways in which the fintech can leverage its existing merchant base
Last week, the Reserve Bank of India (RBI) declined Paytm Payments Services Limited's (PPSL) application to operate as a payment aggregator (PA) within the country. Now, PPSL can resubmit its documents within 120 days to reapply for the license. Until it gets an approval, the company, which is a wholly owned subsidiary of Paytm, has been asked to not onboard new online merchants.
The RBI introduced its PA framework in March 2020, creating a clear distinction between 'payment aggregators' and 'payment gateways'. PAs facilitate merchants to connect with acquirers and receive customer payments via cash, cheque, UPI (unified payments interface), mobile wallets, debit or credit cards. The funds are then transferred to the merchants after a specific period for a fee.
On the other hand, payment gateways only provide technology infrastructure to facilitate the processing of an online payment transaction. They do not directly handle funds.
The framework outlined that only RBI-approved firms could offer payment services to merchants. Moreover, non-banking finance companies offering PA services had to apply to the RBI for authorisation.
The central bank also mandated that a single company could not provide an e-commerce marketplace along with payment aggregator services and the two had to be distinct entities. This directive's main aim was to prevent any player's dominance in the PA domain.
Paytm Not Perturbed
Vijay Shekar Sharma-backed One97 Communications had proposed transferring Paytm's PA services business to PPSL in December 2020 to comply with RBI's guidelines. It had accordingly submitted documents for this approval in September 2021, which the RBI turned down last week.
This means that Paytm must now seek approval from RBI for past downward investments from the parent company in to PPSL to comply with foreign direct investment (FDI) guidelines.
Unfazed by RBI's rejection, PPSL's official statement claims that the decision "has no material impact on our business and revenues since the RBI communication applies only to onboarding of new online merchants. We can continue to onboard new offline merchants and offer them payment services, including all-in-one QR, Soundbox, and card machines."
However, Morgan Stanley is closely monitoring RBI's actions on Paytm, saying that this development has "increased regulatory uncertainty". The market research agency has said, "Key to track would be required timelines to get necessary FDI approvals."
Regulatory Roadblock
This is not the first time the fintech major has found itself on a boil in a regulatory cauldron. In March 2022, the RBI ordered a comprehensive audit of Paytm Payment Banks' IT systems, citing "material" supervisory concerns, and directed it to stop onboarding new customers. This is yet to be resolved.
This constant regulatory overhang can be a significant cause of worry for the company and its investors as it disrupts future revenue projections.
Dissecting the company's financials, Apurva Sheth, head of market perspectives and research at SAMCO Securities, notes that Paytm's revenue from operations for the quarter ended September was Rs 1,914 crore on a consolidated basis.
Of these, online and offline payment services to merchants generated Rs 624 crore in revenue. Since the breakup of revenue from online and offline merchants isn't readily available, it would be difficult to put a pin on how RBI's latest decision will impact the fintech's revenue projections.
Notably, the online payments space is witnessing heated competition as Paytm's rivals PhonePe and MSwipe have also entered the segment. "This decision from the RBI is hence a speed breaker in Paytm's road to growth and profitability," Sheth says.
Other Roads To Rise In Revenue
Vinit Bolinjkar, head of research at Ventura Securities, expects the current revenue run rate from existing onboarded merchants to be insignificant, just as Paytm claimed. He admits that the temporary ban would mean that future onboarding would come to a sudden halt, impacting the fintech's merchant expansion target.
This would also restrict the current year's growth to about 19 per cent."We believe that until this imbroglio is not sorted out, Paytm would have to improve the conversion ratio among the existing seeded merchants to sustain the growth trajectory," Bolinjkar added.
Sheth says, "Revenue from offline channels would form a major portion since it includes all-in-one QR payment, soundbox, card machines, etc. These contribute a major portion to the revenue generated from payment services to merchants."
The soundbox domain is the next big frontier for fintech majors, and it is expected that Paytm will continue to enhance its soundbox penetration with existing merchants. It currently charges its merchant Rs 500 to Rs 600 upfront for the device's installation and rental of Rs 120 to Rs 130 per month.
"The current penetration is only 16.3 per cent (4.8 million soundboxes in the network of 29.5 million merchants) and thus offers a significant growth opportunity in the company's existing merchant base," Bolinjkar points out. He notes that Paytm has similarly disbursed only 0.2 million merchant loans in the past 12 months, which highlights another significant growth opportunity for its existing base.
This shows that while the brakes have been slammed when it comes onboarding new merchants for its PA business, Paytm has much to offer in other avenues to realise its fiscal value within the current merchant ecosystem.