In an interview, Paytm founder Vijay Shekhar Sharma spells out the company’s plans after it raised $1.4 billion from SoftBank Group Corp. ahead of the launch of a payments bank this month. Edited excerpts:
How do you plan to use this money?
We wish to acquire 500 million new customers and launch a slew of financial services products such as deposits, wealth management, insurance, financial lending and many more.
How do you plan to lend given payment banks are not allowed to do so?
Our business model is to help consumers and businesses get loans from various financial institutions like NBFCs (non-banking financial companies) and banks. We are not planning to build a loan book on Paytm balance sheet and payment banks are anyway not allowed to do so. We plan to build relationships with financial institutions and we have already done that with some like ICICI Bank, Bank of Baroda and firms like Capital First and Capital Float. They will help lend to customers on our behalf.
Working with financial institutions won’t offer high margins. Are referral commissions enough to sustain a business?
Firstly, this will only be a part of the business. Also, it is about risk and reward sharing. Financial institutions will lend the capital and we will offer disbursement and underwriting skills with our technological know-how and the rich database that we already have.
There is a huge opportunity in lending to people and businesses at the bottom of the pyramid, who are not served by existing institutions.
How do you plan to compete with telecom operators with a payments bank licence and an already existing vast network and reach?
In payments, we have already built a very large offline merchant network and we will be leveraging this network to create a vast banking correspondent network on the ground.
Why raise so much capital in such a short span? And why SoftBank, what do they bring to the table?
We are at an inflection point in our journey with Paytm. We are looking to acquire 500 million customers and we plan to invest Rs10,000 crore over the next three to five years towards enabling half a billion Indians to join the mainstream economy. This requires a lot of investment.
With regard to SoftBank…they are a long-term investor. And with long-term capital you can do a lot of things without worrying about the pressure of exits. We now have three long term investors with SoftBank, Alibaba (Group Holding Ltd) and SAIF (Partners). I don’t think we will require more capital after this round till we turn profitable.
Also, SoftBank and Masa Son (Softbank founder Masayoshi Son) have a longstanding relationship with financial institutions and funds across the globe. They also bring credibility to the table. Japanese capital is very well respected in India.
SoftBank hasn’t made too many successful investments in the country so far. What is your opinion about their investment strategy?
I look at SoftBank as a long-term capital partner. It is an incredible partner to have on your cap-table (capital table). I can’t comment about their other investments in the country. All I know is that they have been extremely supportive of Alibaba in China and I see no reason why that will not happen in India. I see a similar long-term relationship work with us here.
Two of the biggest start-ups in the country have seen the founders being sidelined after raising excessive capital by diluting their stake in the company. Are you taking any measures to not allow something similar to happen at (Paytm’s parent) One97 Communications Ltd?
Some of the founders today are left with very less skin in the game. A lot of companies get diluted very fast in a rush to raise money from several investors. Rule of the business should be to have a few long-term investors/shareholders.
With a smaller number of long-term shareholders, you can easily agree on a long-term vision versus having a museum of shareholders (from early-stage to long-term) where it is a continuous process to manage investor relations and conflicts.
Will you be pushing for any specific rights to safeguard your interest in the long term?
In One97 I have been very lucky to not have diluted a large amount of equity.
How much have you diluted in this round?
The exact figures will be reflected soon.
How long will it be before One97 turns profitable?
In our last board meeting, we told our investors that we are net contributory margin-positive already. How we define net contribution margin is by net of marketing, cash-back and payment gateway costs.
But is that a fair way of assessing the health of the business?
We don’t have to worry about profitability in the immediate future. The market opportunity is big enough for us to continue to invest.
What is the long-term vision for the company? An IPO?
The long-term vision is to not rush into an IPO and remain long-term private. Till the time we build a very strong moat, we don’t have an obligation anyway.
Now with SoftBank as a large stakeholder do you see a possibility of merging with Flipkart over the years?
I am currently focused towards building One97.