Home / Specials / Paytm stock performance: what are the lessons?

Since listing on the stock market, One 97 Communications, or Paytm as it is better known, is down more than 50%from its issue price. Given that this was India’s biggest initial public offer till date, a lot of investors must have lost a lot of money.

This in an environment where even public sector stocks have gone up. So, what went wrong with Paytm? The world over, investors have valued loss-making digital businesses highly simply because they expect them to become monopolies or at least quasi-monopolies in the years to come. Like Zomato and Swiggy are expected to have huge market shares in the food delivery business.

When it comes to Paytm, while it is present in multiple businesses, 70% of its revenue comes from its digital payments business. How do things look on this front? Typically, in valuing a digital business, investors look at the ‘network effects’ that could lead it to exercise some form of monopolistic power. As Jonathan Knee writes in The Platform Delusion: “Network effects have been touted as the dominant source of competitive advantage in the digital age. This phenomenon makes a product inherently better with the addition of every new user." For example, every new WhatsApp user drives up this network’s value by strengthening the dynamic of “I am on WhatsApp" because everyone else is on this platform.

In the case of Instagram, celebrities open accounts on it because that is where their fans are, while regular users do likewise because that is where the celebrities are.

In the case of Paytm, this would mean shopkeepers must accept payments through this platform because users like to pay that way and shoppers must use Paytm to pay because merchants prefer it that way. This dynamic, however, is unlikely to play out in our market simply because of other major competitors like Google Pay and PhonePe have equally deep pockets. Also, India’s Unified Payments Interface (UPI) has partly taken network effects in the digital payments business out of the equation.

Also, as Suresh Ganapathy and Param Subramanian of Macquarie Research point out in a recent research note: “[Reserve Bank of India’s] proposed digital payments regulations could cap wallet charges… Add to that, Paytm’s foray into insurance was recently rejected by the insurance regulator...." To complicate matters further, One97 has Chinese investors and that will likely be a stumbling block if it seeks a full-fledged commercial banking licence.

Paytm has also been betting big on giving loans. Nonetheless, the average ticket size of its loans has been shrinking. As the Macquarie analysts note: “In the past 12 months, Paytm’s average ticket size for loans disbursed by it has been consistently coming down and stands at sub 5,000 levels." This led them to conclude that the company is mostly giving out small-value buy-now-pay-later loans. This limits the potential of the company to earn higher revenue.

This brings us to the much broader issue of all the so-called innovation happening in finance. There is no denying that genuine efforts are being made to make international payment systems faster or push financial inclusion at a much faster pace. But the trouble is that investors, markets and the media tend to get carried away with buzzwords that are thrown at them. As Knee writes: “...‘Artificial intelligence’, ‘winner-takes-all’, ‘network effects’, ‘big data’ and other buzzwords are routinely invoked as a kind of ‘trigger’ to inspire the belief that you clearly have a winner on your hands and that no further close examination is required."

But there is a rather basic point that we seem to be forgetting here. As John Kenneth Galbraith writes in A Short History of Financial Euphoria: “The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves, in one form or another, the creation of debt."

This is true about the most recent round of financial innovation as well, where terms like ‘buy now pay later’, ‘peer-to-peer lending’, etc, have become buzzwords. It is worth asking what sort of social need something like ‘buy now pay later’ solves. Also, unlike bank loans, in peer-to-peer lending, the lending risk is borne by the individual using a platform to give out such a loan.

To conclude, financial innovations can ensure that our market for loans becomes broader. Take the case of sub-prime home loans given in the US and Europe because of the innovation of asset securitization. This expanded the market. But what it could not ensure was that these loans were repaid. Hence, success in finance depends not just on giving out more loans, but on these loans getting repaid. This remains a major risk, which will possibly impose limits on the growth of such platforms.

Further, one needs to keep in mind that the financial system is already a very competitive space, with commercial banks, non-banking finance companies (NBFCs), small-finance banks, cooperative banks, micro-finance institutions and even individual lenders vying for business. A lot of positive analysis on new-age finance-technology companies doesn’t seem to take this competition into account. Not all the competition that exists is going to sit around doing nothing in defence.

Vivek Kaul is the author of ‘Bad Money’.

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