I recently published an article about India’s top 10 loss-making start-ups and Paytm was number one on that list. Paytm Revenue Model
They’re currently the second most valuable start-up in the country but they lost more than $232 million (₹1701 crore) in the financial year of 2021.
Of course, these losses are covered by Paytm’s investors and if they’re unable to turn a profit before they go public at the end of 2021 then these losses will be covered by their shareholders. Paytm Revenue Model
So, do you know how Paytm makes money? Let’s look at this article.
Paytm’s Revenue Sources
This is something that a lot of people seem confused about, how does Paytm actually make money to mitigate their losses? Where does their revenue come from?
Well that’s the question that we’re going to be answering in this article.
Paytm Wallet
So Paytm’s parent company One97 saw revenue totalling ₹3186 crore ($435 million) in the financial year of 2021. Paytm Revenue Model
And if you had shared this number with Vijay Shekhar Sharma back at the beginning of 2014, he probably wouldn’t have believed you.
Back then in FY14, the company’s revenue was just ₹210 crore ($35 million) and this was before Paytm launched their cash wallet which would completely transform both Paytm’s revenue model and India’s entire digital payments ecosystem.
See before this cash wallet Paytm was just a place for you to buy things online like any other ecommerce platform like Snapdeal or Flipkart.
The only difference with Paytm was that you were paying for intangible things like bill payments or mobile recharges whereas with Flipkart and Snapdeal you were buying physical products.
All of that changed though with the launch of the cash wallet in February of 2014.
Since then One97 has seen their revenue increase by 15x but to understand how that actually happened we first need to understand how Paytm’s wallet works?
Now you might be surprised to know that when you add money to your Paytm wallet, Paytm doesn’t actually hold that money, they can they are an RBI approved payments bank but they choose not to.
And the reason that they do that is because your money can actually make Paytm even more money if it’s in somebody else’s hands.
So when you deposit money into your Paytm wallet that money is actually ending up in an escrow account with Paytm’s partner bank.
And while it’s there it’s accumulating interest for Paytm. That interest is revenue.
And it’s one of the biggest reasons why Paytm tries so hard to get people to use their wallet.
Every single rupee that people deposit into their wallet is making Paytm money.
And a lot of Paytm’s customers don’t even realize this.
They assume that the marketing campaigns and the cash back offers are for customer acquisition or to change the behaviour of Indian society and these are some of Paytm’s goals.
But there’s actually a much simpler more short-term source of motivation here.
Paytm just wants to make money plain and simple.
But what if you decide to withdraw money from your Paytm wallet?
This is obviously a bad thing for Paytm, right.
They’re not going to be making interest on that money which is why they charge a 5% withdrawal fee.
They’re killing two birds with one stone here.
On the one hand they’re disincentivizing people from withdrawing money from their Paytm wallets in the first place.
But even if you decide to withdraw that money they’re still going to get some money out of you before you go.
So these are two methods by which Paytm generates revenue.
- They make money from your money through interest
- And another method is withdrawal fees.
But what about the method number three, how does Paytm generate revenue when you spend the money that’s in your Paytm wallet?
Well one of the biggest ways is through commissions.
Commissions on Bookings
Like I mentioned earlier before Paytm launched their cash wallet, they were an e-commerce company.
No they didn’t sell clothes or electronics or appliances. They sold intangible things.
Things that you can’t hold or touch like bill payments and mobile recharges.
But as time has gone on, the number of things that you can pay for using Paytm has expanded significantly.
You’ve got travel tickets for buses, trains, and flights, you can book a hotel room, or a movie ticket, or even tickets to an amusement park, or an event like a concert or a workshop or a comedy show.
And for all of these things Paytm is taking a cut of the transaction from the seller.
Now it’s not much usually between 2 & 3% but when you think about how many people use Paytm on a daily basis to book these kinds of tickets? That two to three percent adds up to a sizable number.
And again that’s all revenue for Paytm.
And the funny thing is that Paytm isn’t really doing all that much.
When you think about it these are tickets that you probably would have booked anyways even if you couldn’t find them on Paytm’s platform.
But you would have had to go somewhere else to book those tickets and that might have been a more complicated and more stressful experience.
But because Paytm puts everything all on one platform they’re able to demand that two to three percent from sellers.
And it doesn’t stop there either.
Because I haven’t even mentioned Paytm mall which was founded by One97 in 2017.
Commissions through E-commerce: Paytm Mall
Paytm all is kind of like a low-cost version of Flipkart or Amazon.
Just like these e-commerce platforms they rely on sellers to supply products to their customers.
They take these products, they list them on their platform and then every single time one of these products sells, they take a cut or a commission just the same way that they do with ticket bookings.
But this is where we need to draw a line between Paytm mall and other e-commerce companies like amazon or flipkart, because these companies have warehouses and they handle a lot of stuff on their own like stocking and packaging.
But with Paytm mall all of that stuff is handled by the seller.
And the first time that the seller actually comes in contact with a staff member from Paytm mall is when the delivery guy shows up to take the product and deliver it to the customer.
And the seller pays for that delivery.
One97 makes money from Paytm mall through its sellers.
These sellers pay a product commission depending on the category and the value of the product, they pay a logistics fee depending on the size and the weight of the product, and they can also pay huge penalties if they cancel an order or if they try to sell a counterfeit product or a product that’s poorly made.
Payment Gateway Solutions
On top of all of this Paytm Mall sellers also have to pay a 2.7% transaction fee because they’re using Paytm’s payment gateway.
And I wanted to take a second to talk about this payment gateway, as well as transaction fees across Paytm’s various services.
So a payment gateway is basically just a middleman between two parties who want to send money over the internet.
And for everyday people using this gateway at least Paytm’s gateway is completely free.
There are no transaction fees when you want to send money to a friend or a family member.
But if you’re a merchant, if you’re a small business or an enterprise then there are transaction fees.
And for small businesses specifically these fees are a 1.99% cut of any transactions that happen using credit card or net banking or Paytm’s wallet.
And considering the fact that there are 20 million merchants using Paytm, this 1.99% really adds up and it ends up contributing significantly to Paytm’s overall revenue.
Okay so now we’ve covered the major traditional sources of Paytm’s revenue.
You’ve got interest on wallet money, you’ve got commissions on sales, and you have transaction fees.
But now I want to talk about some of One97’s subsidiaries.
Financial Services
In recent years One97 has actively diversified.
And now in 2021 these new ventures have started to generate revenue of their own.
Firstly let’s talk about Paytm payments bank.
So the payments bank category was created by the RBI back in 2014.
But it wasn’t until 2017, that Paytm decided to found their own payments bank.
Now payment banks aren’t able to issue loans like traditional commercial banks.
But Paytm payments bank has been able to circumnavigate this rule by partnering with other banks and NBFCs to issue loans to their customers through Paytm payments bank.
So let’s say as an example that, IndusInd bank is offering loans at a 10% interest rate.
Now along comes Paytm payments bank and they partner with IndusInd bank and start offering that same loan at a 15% interest rate.
Now because they’re partnering with IndusInd bank and that bank is actually the one who’s issuing the loan Paytm payments bank isn’t technically breaking the RBI’s rules.
And on top of that they get to keep that 5% as a sort of commission for bringing new customers to IndusInd bank.
Even though those customers don’t really know that they’re dealing with IndusInd bank unless they read the fine print.
See for the average person getting a loan from a bank can be a little bit intimidating.
They don’t want to go there in person to meet somebody, or talk to somebody on the phone, and they have to fill out a bunch of paperwork, and somebody has to come to your house, or come to your office to confirm that you actually live there and do a bunch of KYC, this stuff is all a little bit scary.
But with Paytm it’s so simple it all happens on the Paytm platform and it’s relatively stress free.
At least until you have to start paying back that loan with the added 5% interest rate that Paytm put on top of it.
But that’s the price that you pay for convenience.
Besides this, Paytm payments bank also offers savings accounts, where they use the same technique as with Paytm wallet by making your money make more money by putting it in another bank, or by investing it into government bonds, and then you also have the ability to buy stocks, or mutual funds, or gold, or insurance and Paytm takes a cut of each of these transactions.
Okay so we’re almost done here, there’s just two more sources of revenue that I want to quickly skim over they’re both pretty straightforward advertising and gaming.
Advertisement & Gaming
So for advertising, Paytm is selling exposure.
Companies that want to get your eyes on their products pay Paytm to promote their products to their more than 150 million users.
Then we’ve got gaming, where Paytm is following a similar model to Dream 11.
Where players pay an entry fee to play games like rummy, or fantasy cricket, or fantasy football and a portion of that fee goes into the prize pool while the remaining portion of that fee goes into Paytm’s pocket as revenue.
So there are a lot of ways for Paytm to make money.
It is a money-making machine spread out across multiple platforms and subsidiary companies and services.
But you might be wondering why in spite of all of this money-making, Paytm is still losing millions of dollars ($232 million)
Well the simple answer is that they’re actually doing this strategically.
They’re spending more money than they have in an effort to grow more quickly.
According to Vijay Shekhar Sharma, in the fintech journey we are just gathering the ingredients now and not even started cooking.
So Paytm is currently gathering ingredients.
And they’re doing this so that when they start cooking which will be presumably right before they go public or soon after, the food is going to be delicious.
However I should note that the time for gathering ingredients seems to be coming to an end.
Between the financial year of 2020 and the financial year of 2021, Paytm saw their losses decrease by 42%.
And Vijay Shekhar Sharma himself has said that Paytm may be able to break even in 2021 and become profitable soon after.
So I’m curious to know what you guys think of Paytm’s prospects, especially in light of the fact that they’re planning to go public at the end of 2021.
Do you think that this initial public offering will be successful, do you think that Paytm will be able to achieve profitability?
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Let me know what your thoughts are in a comment down below.
