NEW DELHI/MUMBAI (Reuters) - Facebook's FB.O $5.7 billion investment in Reliance RELI.NS promises to be the biggest headache yet for Paytm, a SoftBank-backed pioneer in India's digital payments market but which has been losing ground to rivals with deeper pockets.

FILE PHOTO: A vendor weighs vegetable next to an advertisement of Paytm, a digital payments firm, hanging amidst his vegetables at a roadside market in Mumbai, India, April 2, 2019. REUTERS/Francis Mascarenhas

Facebook’s WhatsApp, which has been working on gaining regulatory approval for payments services in India, is gearing up for a full rollout of those services by June, according to a source familiar with the matter.

The partnership with Reliance, announced on Wednesday, will give WhatsApp an inside track on payments for Reliance’s retail unit, which aims to serve tens of millions of small shops across India. It will also be able to link up with Reliance’s telecoms business, which has taken the market by storm since its launch in late 2016, and WhatsApp itself has an enormous presence in India with more than 400 million users.

“If someone would have lost sleep as the Facebook-Reliance deal was announced, it must be Vijay Shekhar Sharma,” said a second source, referring to Paytm’s founder.

The source, who has close ties to both Reliance and Paytm, declined to be identified to protect business interests.

Compared to other major players in India's digital payments markets, Paytm is seen as more vulnerable to attack, already on the backfoot amid competition from Alphabet's GOOGL.O Google Pay and Walmart's WMT.N PhonePe.

While having previously attracted investments from the likes of Japan's SoftBank 9984.T, China's Alibaba BABA.N and U.S.-based Berkshire Hathaway BRKa.N, it lacks its own wells of capital for funding, putting it at a disadvantage.

Paytm also remains unprofitable, with its parent firm reporting a loss of over $500 million in the year ended March 2019.

Launched a decade ago as a platform for mobile recharging, Paytm grew quickly after ride-hailing firm Uber UBER.N listed it as a quick payment option. Its use swelled further in 2016 when a ban on high-value currency notes spurred digital payments.

But it underestimated the impact of a state-backed digital payment system that was rolled out in 2016. On that network, Google Pay and PhonePe together accounted for nearly 80% of 1.31 billion transactions in January. Paytm was a distant third with about 10%, according to data from payments firm Razorpay.

India’s digital payments market is expected to more than double in size to $135 billion in 2023 from 2019 levels, according to a study by PwC and Indian industry lobby group ASSOCHAM.

Individual market share can, however, be difficult to assess. Paytm has branched out into services including insurance and gold sales, movie and flight ticketing, and bank deposits and remittances.

Paytm declined to comment.

GOLIATH-LIKE OPPONENT

Paytm has long seen the threat posed by WhatsApp, and when the messaging service launched a trial of its payment services in early 2018, Sharma accused Facebook of “cheap tricks”.

Paytm was also part of a lobbying campaign against U.S. firms over local data storage - an issue now mostly resolved but which had been an impediment to WhatsApp gaining regulatory approval. With Reliance behind it, WhatsApp’s path to final approval for the payment service is now expected to be smooth.

On one hand, the market is expanding, and sources familiar with the matter say Paytm has seen a boost in transactions as the COVID-19 crisis pushes commerce online.

But the Reliance-Facebook combination represents a Goliath-like opponent, especially given Reliance’s track record in decimating rivals when it entered the telecoms market with Jio Infocomm and cut-throat pricing.

“This is a formidable combination of bandwidth and platform player so it will easily shake up the payments industry,” said Ashvin Parekh, an independent financial services consultant.

He added that in any bruising battle over digital payments, a telecom firm like Reliance’s Jio would be hard to beat as it has far more insight into consumer data habits and a greater number of stores to reach potential customers.

Paytm has raised more than $3 billion since it was founded, with the most recent infusion of $1 billion coming last autumn. But should it need more, fundraising now looks far more difficult. SoftBank, its biggest investor, has problems of its own and has backed away from pouring more funds into money-losing startups.

A recent move by India to intensify scrutiny of Chinese investments in the country could also complicate any future fundraising efforts.