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Paytm (One 97 Communications Ltd) has spent nearly ?14,500 crore to convince Indians to substitute digital payments for cash. For a few months after demonetization in November 2016, it seemed like the company was on the cusp of victory.

But now, Paytm is in danger of having its lunch eaten by newer payment apps, even as cash remains the preferred choice of payments for most Indians.

Though digital payments are still expected to grow to $1 trillion by 2023 compared with $200 billion in 2018, according to a 2018 Credit Suisse report, digital wallets, where Paytm has established a monopoly, may soon become obsolete. Growth in digital payments is now being led by the Unified Payments Interface (UPI) platform. Dozens of large companies and small startups from Reliance Industries to Facebook to Razorpay are launching UPI-based products.

Two newer payment apps, in particular, are threatening to topple Paytm. For many months now, Walmart-owned PhonePe and Google Pay, the search giant’s eponymous payment app, have recorded more transactions on UPI than Paytm, said several people familiar with the matter. This development has been reported earlier in many publications.

With the expansion of UPI, usage of wallets is expected to wind down completely over the next few years. According to the latest data from the Reserve Bank of India (RBI), wallet transaction value dropped to ?15,109 crore in October 2019, from ?18,786 crore a year ago.

This has major implications for Paytm, which at $16 billion is India’s most valuable internet startup by far, ahead of the $10 billion valued Oyo. Clearly, as a funding slowdown for startups begins to take hold in India and globally, investors are raising doubts about Paytm’s soaring valuation and its business model.

Paytm’s corporate governance practices also attract scrutiny, not least because of the unrestrained power wielded by its founder and chief executive (CEO) Vijay Shekhar Sharma. Such practices are in the spotlight given the dramatic change in the fortunes of Uber and WeWork, where the controversial management styles of their founders were unquestioned by investors for many years, as long as business was growing and capital was easily available.

But Paytm’s biggest challenge remains in its core payments business. The company did not respond to a questionnaire from Mint.

Losses soar, growth falls

Paytm has jumped on the UPI platform, but both Google Pay and PhonePe are racing ahead, partly by splurging on cashbacks and marketing—the same means that were earlier deployed by Paytm to beat rivals such as Freecharge, PayU and MobiKwik.

The efforts made by UPI-based apps have started to take a toll on Paytm. The company’s revenues increased only 8% to ?3,579.7 crore for the year ended 31 March 2019, according to its annual report. At the same time, it was forced to spend hundreds of crores of rupees on cashbacks to match its rivals. Consequently, its reported net loss ballooned to ?4,217.2 crore in FY19, compared with ?1,604.3 crore in the previous fiscal year.

These are worrying numbers, especially for a firm that is losing market share and whose ability to retain its leadership position is unclear. Yet, last month, Paytm raised $1 billion in fresh capital from existing investors Ant Financial, SoftBank Vision Fund and Discovery Capital, as well as from new investors T Rowe Price Associates Inc. Paytm’s valuation jumped to $16 billion from $10-11 billion, when it had secured its last funding round from Berkshire Hathaway in September 2018.

Since early 2015, Paytm has raised nearly $4 billion in capital to lure customers and merchants alike. Most of its spending has gone towards cashbacks and marketing. Clearly, the spending was unsustainable. In recognition, the company has moved to slash spending on cashbacks to bring expenses under control over the past six months. It has even begun to charge customers for processing transactions, a fee that it used to bear earlier.

Paytm has also redoubled efforts to increase revenues from its financial services businesses. CEO Sharma and his investors are betting that after drawing in millions of customers by offering cashbacks, the company can persuade them to take loans, buy insurance and spend on wealth management services on the platform—all of which offer higher margins than plain digital payments.

But despite its efforts, Paytm primarily remains a payments app. It has struggled to expand the newer businesses, in which it faces competition from established offline financial services firms as well as specialty internet startups.

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