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National
Pooja Sitaram Jaiswar

Linking credit cards to UPI, a win-win for payment gateways giant Paytm

UPI has emerged as a greater transaction medium and fintech platforms are expected to benefit from this development. (REUTERS)

Citi Research in its report said RBI has proposed to allow the linking of credit cards (starting with Rupay credit cards) on the UPI platform. This could be a boost for credit penetration into digital payments which has been declining owing to the popularity of UPI and could potentially pave the way for improved monetization of mobile/UPI payments for payment cos. While merchant adoption will need to be watched, this move (when extended beyond Rupay) can sharply improve the acceptance network for credit cards (both virtual and physical) given UPI-QR code penetration (50%) vs PoS device penetration (<5%).

Data by Citi showed that credit cards have been losing market share in the past five fiscals. The credit card market share dropped to 30% in FY21 from 37% in FY20 and 39% in FY19. The market share was at 43% and 44% in FY18 and FY17 respectively. The market share is expected to come down to 27% in FY22.

As per RBI's data, at present, there are more than 26 crore unique users and 5 crore merchants onboarded on the UPI platform. During May this year, 594.63 crore transactions amounting to Rs10.40 lakh crore were processed through UPI.

Currently, UPI transactions are carried out by linking Savings and Current Accounts through the Debit Cards of users.

Citi is optimistic about Paytm and expects the company to benefit from linking credit cards to UPI. It's not just Citi, but also Goldman Sachs that believes that the development will enhance the scope of digital payments in India and benefit fintech platforms like Paytm.

On 8th June, to enhance the UPI system, RBI proposed to link credit cards with the payment interface. To start with Rupay credit cards will be enabled with this facility.

RBI expects this arrangement to provide more avenues and convenience to the customers in making payments through the UPI platform. This facility would be available after the required system development is complete.

NPCI is expected to introduce necessary instructions for linking credit cards to UPI in due course.

Goldman Sachs has given a buy rating on Paytm with a potential upside of 72%.

In its research note, Goldman said, "for Paytm, we expect a positive impact on the company’s payments vertical (higher usage of MDR-bearing credit cards), while there could be some increase in competitive intensity for Paytm’s BNPL product, though we highlight the superior user experience of Paytm’s one-click checkout."

Goldman noted that Paytm has managed to expand its merchant acceptance for its BNPL product to 9 mn merchants (online+offline) in Mar 2022 versus 700k as of June 2021, "likely by forgoing MDR on BNPL for some of these merchants, but offsetting this through convenience fees and/or late payment/interest fees."

The latest data given by Paytm on stock exchanges showed that the merchant GMV processed through its platform for the two months ending May 2022 aggregated to approximately 1.96 lakh crore ($26.2 billion), marking a y-o-y growth of 105%.

Furthermore, Paytm Super App has touched a new milestone achieved in user engagement, with the average monthly transacting users (MTU) at 74.3 million in the first two months of FY23, registering a growth of 48% Y-o-Y.

In offline payments, Paytm maintained its leadership with the deployment of 3.4 million devices at merchant stores across the country, as per the regulatory filing on Wednesday.

Highlighting strong and improving monetization from the payments vertical and rapid scale-up of financial services, Goldman Sachs backed Paytm’s path to profitability and reiterated its ‘Buy’ rating on the stock with a target price of 1,070 on May 22, 2022.

Meanwhile, Citi is positive on Paytm due to better monetization of UPI-based payments) and for banks/card issuers (higher volumes owing to better acceptance.

Citi's report said, for Paytm, a shift from debit/bank accounts to credit cards may improve the monetization of UPI payments - a positive.

"Paytm's BNPL offering may see more competition (see above) but merchant adoption of Paytm Postpaid should be higher than the credit card on UPI, as MDRs for PostPaid (borne by merchants) will likely remain well below credit cards," Citi added in its note.

Further, Citi's note said that Paytm monetizes Paytm Postpaid (BNPL) on both the merchant and consumer sides.

On June 7, Citi also exuded confidence in Paytm’s future growth and profitability plans in a note, citing steady improvement in payment monetization and scaling up the financial services rapidly. It has resumed its coverage for the Paytm stock with a ‘Buy’ Rating and a target price of 915.

Before the RBI policy, another top brokerage, JP Morgan also backed Paytm’s strong growth on June 3, reinstating its ‘Overweight’ rating on Paytm stock with a March 2023 price target of 1,000.

On BSE, Paytm shares have currently closed at 616.45 apiece up by 1.66%. At the closing price, Paytm's market cap stood at 39,991.85 crore.

In FY22, Paytm recorded a strong performance with a massive improvement in all key financial metrics. The company registered an 89% year-on-year jump in revenue growth in Q4FY22 at 1,541 crore, while the contribution profit grew 210% year-on-year to 539 crore. For the full-year FY22, the company’s revenue from operations grew 77% year-on-year at 4,974 crore, while contribution profit increased 313% year-on-year to 1,498 crore.

Paytm is on track to achieve operating breakeven by the quarter ending September 2023 given its consistent focus on driving revenue growth along with lowering costs.

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