For Paytm, Merchant Lending Is The Sweet Part Of The Loan Pie

“In the coming quarters merchant loans will continue to see great momentum on the back of [Paytm’s] devices story,” Bhavesh Gupta, chief operating officer of Paytm, had told analysts in a conference call on Nov. 8.

The company acquired 1 million additional merchants for its payment devices business over the second quarter, bringing the total to 4.8 million merchants as of September.

The devices—such as point of sale machines and soundboxes—not only earn recurring revenue for Paytm but are also a funnel for its merchant loan business.

“Device merchants accounted for over 85% of merchant loan disbursals,” the company noted in its earnings presentation for the second quarter.

Growing device distribution to increase penetration of high-yield merchant loans is an appealing growth trajectory, but its downside is the acquiring cost, a second financial services analyst told BQ Prime. Acquiring a device merchant costs upwards of Rs 1,200 as opposed to an active monthly user whose acquisition cost is around Rs 250 to Rs 300, the second analyst added.

An additional risk in the merchant lending business pertains to vetting the borrower for regulatory and statutory clearances, which many small business can be “laissez-faire” about, Iyer said.

The average ticket size for the buy-now-pay-later product is around Rs 4,500 as opposed Rs 1,48,000 for merchant loans, according to a Nov. 8 report from Macquarie Research.

While Paytm saw good traction for its financial services business in the second quarter, the share of merchant loans remains low, the report added. Although merchant loans accounted for 17% of the loan value disbursed in the second quarter, by volume their share remains under 1%. Higher volumes are essential in a distribution business.

A plateau risk can occur with personal, especially at higher ticket sizes, according to the first analyst. Merchants loans are crucial if that happens, and if it doesn’t, it can be a dual engine, this person added.

The business transition was planned as payments to lending and hence retail loans account for a big share, but Paytm could very well deploy its cash holdings to expand device distribution, the first analyst quoted above said.