Paytm: India’s most-valued unicorn has spread itself too thin by experimenting with new services

On February 19, India’s most valued tech startup expanded its stockbroking services to include futures and options trading. With this new feature, the 10-year-old fintech firm set itself up to compete with the more established tech-savvy brokers such as Zerodha and Upstox as well as legacy trading platforms such as Sharekhan and Angel Broking. The move also put Softbank-backed Paytm in direct competition with broking arms of large Indian banks such as HDFC Securities and ICICI Securities.

Paytm’s unique selling proposition, which it probably hopes will help it win despite the intense competition, is that it is offering the “lowest brokerage”. The company charges investors just Rs 10 ($0.13) for each future and options trade, nearly half of its popular rivals.

Such expansion and undercutting are nothing new to Paytm and its parent firm One97 Communications.

Over the years, Paytm, which started as a mobile wallet, has diversified into financial services – such as insurance sales, wealth management and digital gold – travel and movie ticketing, fantasy sports, e-commerce and also launched a payments bank (a bank operating on a smaller scale without involving any credit risk), among other things. In many of these segments, Paytm has tried to carpet bomb existing players with lower service costs, discounts and cashback.

While experimenting with new services and spending on growing them is vital for a tech venture, some believe that Paytm may have spread itself too thin. After all, despite this massive expansion, One97 is yet to start making money and its losses run into thousands of crores.

“The emphasis on growth in both existing and new businesses has hurt Paytm badly,” said Jeffrey Lee Funk, a tech consultant and former associate professor at the National University of Singapore. “It should have focused on payments, which is the most profitable segment.”

Unicorn to shooting star

In November 2016, when the Indian government decided to discard currency notes of Rs 500 and Rs 1,000, Paytm became the star of India’s fintech universe and tech startup ecosystem almost overnight. In the first few weeks after demonetisation, the company’s business grew by leaps and it was counted among the “most trusted brands of 2016”.

But over the last four years, newer technology and the entry of global heavyweights, such as Google, Amazon, Walmart and WhatsApp, have displaced Paytm from its pole position. For instance, the Indian government’s unified payment interface, which allows users to transfer money directly from bank accounts, has eliminated the need to add money into digital wallets.

In January, Paytm was at a distant third place after Walmart-owned PhonePe and Google Pay in terms of the number of UPI transactions.

Similarly, despite spinning off its e-commerce business into a separate entity called Paytm Mall in 2017, the company has not managed to make a dent in the sector that is dominated by Amazon and Walmart-owned Flipkart, which together hold over 85% of the market share.

Wins and losses

Ideally, the diversification should have paid off as Paytm had a customer base of 100 crore to cash on. But the intense competition has forced the company to pour money into cashback and marketing, making it hard to bring down its burn rate.

The company has managed to constantly raise funds to fill the gap, but that is not enough. “(Fundraising) strengthens the company for a long fight but I do not see this as indefinitely sustainable: buying customers with cashbacks and discounts and throwing more millions of dollars at them when the market heats up. Customers are fickle and use multiple apps and payment systems,” Prasanto K Roy, an independent tech policy analyst, had told Quartz in November 2019 after Paytm announced a $1 billion funding. “Paytm has unsustainable cash burn, and it has to get to profitability,” Roy said. “Another $1 billion is not necessarily that path.”

Forget breakeven or profitability, the Noida-based company has been on a loss-making spree.

In fact, venturing deeper into financial services space could further deplete Paytm’s coffers, believe experts.

“It is needless to mention that financial service is a tough business with almost identical product offerings by many players,” said Pavel Naiya, senior analyst at Counterpoint Research. “It is, therefore, more vital now to maintain its customer trust and existing userbase which they have built over the period with a huge investment in its tech platform and by expanding its payment and partner network.”

Tight spot

Only time will tell if Paytm’s diversification and discounting strategy will help it in the long run. But in the immediate future, this diversification has put it in a tight spot.

Having a presence across multiple sectors has made it necessary for Paytm to constantly pump more funds into the business. So far, it has managed to do this pretty smoothly, but it could become hard now – and for no fault of the company.

Paytm’s biggest investors like Japan’s Softbank and China’s Ant Group are currently on a sticky wicket. While Softbank is reeling under the effect of loss-making investments like WeWork, Ant Group’s owner Jack Ma is facing heat from Chinese authorities.

“Paytm’s main investors, Ant and Softbank, are struggling…One question is who will provide more funding for Paytm now that Softbank has been weakened, and Ant’s investments are restricted,” said Funk, adding a warning that it will be hard to turn the company’s overall huge losses to profits over the next few years.

Further compounding Paytm’s problems is the continued anti-China sentiment in India as border tension prevails. So taking money from a Chinese entity is more likely to dent Paytm’s image, despite its founder trumpeting the nationalism card.

The company cannot wish away the fact that Ant Group is its biggest backer.

This article first appeared on Quartz.