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The Indian fintech giant, backed by Buffett, faces challenges as the IPO draws nearer

Paytm, a mobile payment pioneer in India and one of the country’s best-known startups, set out years ago to build a ubiquitous digital financial ecosystem, much like Ant Group Co.’s Alipay in China.

Now that the owner of Paytm is nearing a $ 2.2 billion listing, which will beat Ant in the public markets, the company is not the dominant player it set out to be and faces growing challenges in the an increasingly crowded Indian payments market. It has already been used in a key area by competitors like Alphabet. obsolete Inc.’s

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Google and Walmart Inc.

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-supported Indian startup PhonePe.

One97 Communications Ltd., to which Paytm belongs, is aiming for a market valuation of 25 billion US dollars when it goes public this fall. The listing will generate high profits for 43-year-old founder Vikay Shekhar Sharma and a star-studded list of investors including SoftBank Group corps

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Vision Fund and Warren Buffett’s Berkshire Hathaway Inc.

Ant has invested around $ 900 million in One97 and would be one of the biggest winners of the deal, which comes at a time of simmering tensions between India and China. Ant intends to cut his stake from 29.6% now to below 25%, according to people familiar with Ant’s mindset.

Ant and her sister company Alibaba Group Holding GmbH.

– which owns another 7.2% of One97 – first invested in the owner of Paytm in 2015 before the company saw an increase in user numbers. Ant early on had ambitions to replicate his success in China in other developing markets, and investing in Paytm was an important part of that project. It also bought minority stakes in other digital payment companies in Southeast and South Asia.

One97 Communications, which owns Paytm, is targeting a market valuation of $ 25 billion when it goes public.


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Dhiraj Singh / Bloomberg News

Of these companies, Paytm, pronounced pay-tee-em and an abbreviation for “Pay through Mobile”, gained local significance. Between 2015 and 2017, Ant dispatched engineers and technical staff – about 100 at one point – to Paytm’s offices in Noida to expand the payments platform and address issues like fraud prevention, according to people familiar with the matter.

Paytm’s mobile payment app saw a surge in downloads during this period after the Indian government suddenly banned 86% of the country’s cash flow in an attempt to eradicate corruption, tax evasion and fake invoices. Paytm became synonymous with e-wallets, digital accounts that could be used to pay utility bills and purchase everyday goods and services such as milk packages and train tickets.

Paytm had 225 million subscribers in 2017, more than any other company in India, and Berkshire paid about $ 300 million for a small stake in One97 the following year.

Paytm has already been overtaken in an important area by competitors such as Google and the Walmart-backed Indian startup PhonePe.


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Dhiraj Singh / Bloomberg News

Mr. Sharma, who founded One97 in 2000 and is its Chairman and CEO, has drawn parallels in the past between his humble roots and the background of Mr. Buffett and Ant’s controlling shareholder, Jack Ma. He predicted a few years ago that Paytm will have half a billion users by 2020.

“He’s an all-time optimist and a very optimistic speaker,” said Chris Skinner, a fintech commentator who published a book in 2018 called Digital Human that included an interview with Mr. Sharma.

Paytm has not achieved this goal of having half a billion users by 2020. In March, One97 served 333 million consumers, around a third of whom had transacted at least once on the Paytm platform in the previous year, according to the company’s draft IPO prospectus. According to techARC, a research company, India had around 500 million smartphone users at the end of 2019.

Ant withdrew his direct stake in Paytm after Paytm development got underway. Ant’s global ambitions have also been hampered by geopolitical tensions.

Last year, deadly border conflicts between China and India sparked a public and political backlash in the South Asian country against mobile apps owned by companies in China.

After India began scrutinizing Chinese investments, Eric Jing, chairman and chief executive of Ant, a Chinese citizen, was replaced on One97’s board of directors by Douglas Feagin, another Ant executive and US citizen. The change – which happened earlier this year – was initiated by Ant and came at a time when Mr. Jing had to focus more on the internal affairs of the Hangzhou-headquartered company after the failed IPO, people familiar with the matter said.

Top executives from Ant and One97 still maintain regular communication and sometimes consult with each other on strategic decisions, people said.

In contrast to Ant, One97 has not made an annual profit in recent years. Payment and financial services revenues have increased, but total revenues have declined over the past fiscal year as the pandemic affected some of their other businesses.

Paytm also faced much more competition after India introduced a government-run digital payments network called Unified Payments Interface, which enables direct transfers between bank accounts.

While e-wallets have to be topped up with money on a regular basis, in UPI transactions – which are also processed via smartphone apps – money is immediately debited from the interest-bearing bank accounts. Its relative simplicity and the fact that it can work across different companies’ payment apps has made it the payment method of choice for many consumers.

In the fourth quarter of 2018, Paytm processed 35% of all UPI transactions, which together with its share of e-wallets made it the market leader at the time, according to S&P Global Market Intelligence.

A lot has changed since then. Alphabet, which launched the Google Pay payment app in India in late 2017; and PhonePe, a payment app controlled by Walmart Inc.-backed Indian startup Flipkart, has been aggressively spending money to attract people to their platforms that enable UPI payments. Paytm did not match this marketing spend and its share of transactions began to decline.

Almost nine out of ten mobile payment transactions in India are now UPI-based, and e-wallets have fallen out of favor. In the second quarter of this year, Paytm’s UPI market share fell to 14%, while PhonePe and Google Pay together handled around 80% of all UPI transactions, according to S & P’s analysis of government data.

The overall cake is still being expanded. Although India remains a largely cash-based economy, digital payments are growing rapidly and the Covid-19 pandemic has spurred more online and cashless transactions. Since 2019, the annual value of mobile payments has grown 70% to nearly $ 480 billion in 2020, according to S&P.

More and more global companies are moving into the digital payments space in India. WhatsApp from Facebook Inc., ubiquitous in India, started offering mobile payments last year. Tech giant Prosus NV recently announced it would buy Indian payment platform BillDesk for $ 4.7 billion. Smartphone penetration is also increasing in India, in contrast to China, where the market is almost saturated.

Of course, companies in India make very little money from UPI payments. “The path to profitability for fintechs like Paytm will depend on their ability to rapidly grow related financial services such as credit, insurance and wealth management products,” said Sampath Sharma Nariyanuri, fintech analyst at S&P Global Market Intelligence.

A majority of UPI transactions are direct money transfers between individuals that do not pay any fees. To make money, Paytm is focusing more on getting store owners and merchants to use its payment solutions and point of sale devices when customers make purchases. Most of these are non-UPI transactions where merchants pay fees, according to one familiar with the matter. Paytm now has connections to 21 million merchants, up from 11 million in 2019, and claims to be the market leader in facilitating payments between consumers and merchants.

In March, One97 served 333 million consumers, about a third of whom acted at least once on the Paytm platform in the past year, according to the company’s draft IPO prospectus.


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Indranil Aditya / NurPhoto / Zuma Press

Rivals aren’t far behind. PhonePe said in June that its payments network is accepted by 20 million merchants across India. “Everyone targets the same merchant,” said Satish Meena, an e-commerce analyst who previously worked for research company Forrester in India.

In the meantime, One97’s forays into other companies are faced with the challenge of expanding into industries in which established players have a dominant market share. The company has expanded into areas such as hotel bookings, asset management, personal loans, and software and cloud services for businesses.

For example, Paytm Money Ltd., the company’s four-year-old brokerage and wealth management arm, is competing with India’s largest online stockbroker, Zerodha Broking Ltd., which is already profitable, Zerodha’s CEO recently said on Twitter.

Paytm believes its ability to sell services to its existing users will lower its customer acquisition costs and give it a competitive advantage, according to a person familiar with the company’s mindset.

One97 also owns a 49% interest in Paytm Payments Bank Ltd., a licensed depository bank controlled by Mr. Sharma. She hopes to convert this into a small financial bank – a type of niche bank in India that can offer limited banking services – that would give more flexibility in lending, according to analysts.

Write to Jing Yang at [email protected]

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