BENGALURU : Paytm (One 97 Communications Ltd) has spent nearly ₹14,500 crore to convince Indians to substitute digital payments for cash. For a few months after demonetization in November 2016, it seemed like the company was on the cusp of victory.

But now, Paytm is in danger of having its lunch eaten by newer payment apps, even as cash remains the preferred choice of payments for most Indians.

Though digital payments are still expected to grow to $1 trillion by 2023 compared with $200 billion in 2018, according to a 2018 Credit Suisse report, digital wallets, where Paytm has established a monopoly, may soon become obsolete. Growth in digital payments is now being led by the Unified Payments Interface (UPI) platform. Dozens of large companies and small startups from Reliance Industries to Facebook to Razorpay are launching UPI-based products.

Two newer payment apps, in particular, are threatening to topple Paytm. For many months now, Walmart-owned PhonePe and Google Pay, the search giant’s eponymous payment app, have recorded more transactions on UPI than Paytm, said several people familiar with the matter. This development has been reported earlier in many publications.

With the expansion of UPI, usage of wallets is expected to wind down completely over the next few years. According to the latest data from the Reserve Bank of India (RBI), wallet transaction value dropped to ₹15,109 crore in October 2019, from ₹18,786 crore a year ago.

View Full Image Paytm's passbook

This has major implications for Paytm, which at $16 billion is India’s most valuable internet startup by far, ahead of the $10 billion valued Oyo. Clearly, as a funding slowdown for startups begins to take hold in India and globally, investors are raising doubts about Paytm’s soaring valuation and its business model.

Paytm’s corporate governance practices also attract scrutiny, not least because of the unrestrained power wielded by its founder and chief executive (CEO) Vijay Shekhar Sharma. Such practices are in the spotlight given the dramatic change in the fortunes of Uber and WeWork, where the controversial management styles of their founders were unquestioned by investors for many years, as long as business was growing and capital was easily available.

But Paytm’s biggest challenge remains in its core payments business. The company did not respond to a questionnaire from Mint.

Losses soar, growth falls

Paytm has jumped on the UPI platform, but both Google Pay and PhonePe are racing ahead, partly by splurging on cashbacks and marketing—the same means that were earlier deployed by Paytm to beat rivals such as Freecharge, PayU and MobiKwik.

The efforts made by UPI-based apps have started to take a toll on Paytm. The company’s revenues increased only 8% to ₹3,579.7 crore for the year ended 31 March 2019, according to its annual report. At the same time, it was forced to spend hundreds of crores of rupees on cashbacks to match its rivals. Consequently, its reported net loss ballooned to ₹4,217.2 crore in FY19, compared with ₹1,604.3 crore in the previous fiscal year.

These are worrying numbers, especially for a firm that is losing market share and whose ability to retain its leadership position is unclear. Yet, last month, Paytm raised $1 billion in fresh capital from existing investors Ant Financial, SoftBank Vision Fund and Discovery Capital, as well as from new investors T Rowe Price Associates Inc. Paytm’s valuation jumped to $16 billion from $10-11 billion, when it had secured its last funding round from Berkshire Hathaway in September 2018.

Since early 2015, Paytm has raised nearly $4 billion in capital to lure customers and merchants alike. Most of its spending has gone towards cashbacks and marketing. Clearly, the spending was unsustainable. In recognition, the company has moved to slash spending on cashbacks to bring expenses under control over the past six months. It has even begun to charge customers for processing transactions, a fee that it used to bear earlier.

Paytm has also redoubled efforts to increase revenues from its financial services businesses. CEO Sharma and his investors are betting that after drawing in millions of customers by offering cashbacks, the company can persuade them to take loans, buy insurance and spend on wealth management services on the platform—all of which offer higher margins than plain digital payments.

But despite its efforts, Paytm primarily remains a payments app. It has struggled to expand the newer businesses, in which it faces competition from established offline financial services firms as well as specialty internet startups.

Digital-offline war

One 97 was founded by Sharma in 2000 as a provider of mobile-based services. Many years later, he pivoted and entered the wallet business. After a large funding round by Ant Financial, an affiliate of Alibaba Group Holding, in early 2015, the company quickly became the leading mobile payments app in the country.

It received an unexpected boost from demonetization in November 2016 that forced Indians to use digital payments instead of cash for many months. Paytm ended up as the single-biggest beneficiary of the move and its business boomed. In May 2017, it closed a $1.4 billion round from SoftBank Vision Fund.

But at the same time, UPI, which offered a faster, more convenient way of making payments, had started coming up as an alternative to wallets. By the end of 2017, growth of digital wallets had stalled, as UPI-based apps like Google Pay and PhonePe were leading the expansion of digital payments. By then Paytm, too, had moved to the UPI platform to survive.

Currently, both Google Pay and PhonePe have more than 65 million monthly active users, a key indicator of the size of a payments app’s business. Paytm claims to be the largest payments app and says it has more than 140 million monthly users.

Since cutting cashbacks earlier this year, Paytm has consciously reduced its people-to-people business, which had no margins and burnt a hole in its finances. Payments on online firms such as Flipkart, Amazon, Swiggy and others are now in place. Instead Paytm has been growing its offline merchant payments, which has become the key battleground in digital payments.

India’s retail market is mostly unorganized and dominated by offline stores. Payments firms are now in race to persuade kirana stores, pharmacies, roadside cigarette sellers and others to use their apps to accept payments.

Google launched an app for merchants in September. Already, more than 5 million merchants have downloaded the app, shows Android data. PhonePe has more than 8 million merchants on its platform, according to the company. Paytm, which had a head start of several years, has 14 million merchants, but the speedy growth of its rivals is worrying the company’s investors.

That’s understandable: much of the growth in digital payments over the next decade will come from offline merchants accepting digital payments. “Paytm cannot lose the offline battle," said an executive at a digital payments firm, requesting anonymity. “Online payments is done and is likely to be stable for now. The growth is in offline payments. This is the big areas of focus for Paytm. So Google Pay’s growth is a major cause of worry for Paytm."

Paytm and others will soon have to face a formidable rival: WhatsApp, the messaging service owned by Facebook. WhatsApp launched payments on trial for some of its users in February 2018. But its full launch has been delayed because of concerns raised by RBI and the government over data localization and other regulatory compliance issues. Industry executives say WhatsApp’s entry in the payments space will transform the sector as it is the most widely used app in India.

Paytm recognized the threat from WhatsApp. In February 2018, Sharma alleged that the messaging service was flouting rules and putting consumers at risk because it was skipping steps in the payments process. Sharma has been lobbying the government to bar WhatsApp from launching its payments service. But in October, Facebook CEO Mark Zuckerberg told investors in an earnings call that WhatsApp would soon launch its payments service in India.

Another headache for Paytm, and other digital payment apps, is the KYC (know your customer) deadline of February 2020 set by RBI. Paytm said less than a third of its 350 million registered users are KYC compliant. Unless the central bank extends the deadline or eases its regulations, majority of Paytm users would be barred from using the platform. Others such as Google Pay, PhonePe and Amazon Pay would also be hit by the measure.

Weak corporate governance

Earlier this year, Sharma rehired his former secretary, Sonia Dhawan, at Paytm First Games (Gamepind Entertainment), a joint venture between Paytm and Alibaba.

Dhawan had been arrested in October 2018 after Sharma and his younger brother, Ajay Shekhar Sharma—a senior executive at Paytm—had accused her and others of extortion.

In late October 2018, Ajay Shekhar Sharma filed a police complaint accusing Dhawan, her husband Rupak Jain, and two others of demanding ransom from the Paytm CEO. He had said in the complaint that Dhawan, who was close to the Paytm CEO, had access to confidential data about the company and Sharma. The four alleged blackmailers were arrested following the complaint.

However, in statements to various media outlets, Dhawan denied any wrongdoing. She was finally granted bail in March 2019 by the Allahabad high court.

In June, Dhawan joined social networking startup Sheroes, where Sharma is a board member. In September, Gamepind Entertainment hired Dhawan as vice president of corporate communications. Paytm even awarded her shares in the company in June, show documents with the Registrar of Companies.

It is not clear what led to the reconciliation between Sharma and Dhawan. What is clear, however, is the unrestrained power wielded by Sharma despite the presence of powerful investors such as Alipay, SoftBank and SAIF Partners, and their toleration of Paytm’s corporate governance practices.

Several former and current Paytm executives, speaking on condition of anonymity, confirmed that Sharma is the all-powerful founder-CEO. “Among Paytm investors, Alipay has the most say, but only to a limited extent. Paytm is practically a one-man show and it is run as per Vijay’s wishes. As long as there is growth, investors tend to overlook other matters. Systems and processes are very weak," said a Paytm executive.

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