One97 Communications Limited (PAYTM) Earnings Call Transcript & Summary

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Thank you, and a warm welcome to Paytm's earnings call to discuss its financial results for the quarter and half year ended September 30, 2021. From Paytm's management team, we are today joined by Mr. Vijay Shekhar Sharma, Founder and CEO; Mr. Madhur Deora, President and Group CFO; and Mr. Bhavesh Gupta, CEO, Lending. Before we begin, a few announcements for all attendees. This earnings call is meant for existing shareholders of Paytm or potential investors and research analysts to discuss the company's financial results. This call is not for media personnel. If any media representatives are attending this call, request you to kindly drop off the call at this juncture. The information to be presented and discussed on this earnings call should not be recorded, reproduced, copied or distributed in any manner whatsoever by any of the attendees. Statements or comments made on this earnings call may include forward-looking statements. Actual events or results may differ materially from those anticipated in such forward-looking statements. Finally, this earnings call is scheduled for 75 minutes. It will have a presentation by the management, followed by Q&A. Kindly utilize the raise-hand feature on your Zoom dashboard if you seek to ask a question. We will unmute your line and take questions in the respective sequence of raised hands within the scheduled time. However, please do ensure that at all times your name is visible as first name, last name, followed by organization name in brackets for us to be able to identify you before we take your questions. A replay of this earnings call and the transcript will be made available on the company website subsequently. With this, I would like to request Mr. Vijay Shekhar Sharma to kindly initiate this earnings call.

Thank you, everyone. Good evening from India, and good morning or good afternoon as you would log in from different geographies. It is my pleasure to welcome you for Paytm's first earnings call after IPO. We have tremendous solid quarterly results out there, clearly showing platform, scale, ability of ours to monetize payments, expand our platform in terms of financial services and commerce. It is my pleasure and privilege to welcome you all to in-detail discussion of our quarterly earnings. As you could see from our announcement, our revenues have increased year-on-year. Our revenues are increasing quarter-on-quarter. Impact of COVID, scale of system deployment and scale in our non-UPI revenue, where merchants give us revenue charges, MDR charges for payments, and credit-led financial service, which gives us next level of monetization, is showing up. We believe in the next few quarters, we'll be able to not just expand revenue, but increase more number of monetization methods and subsequently increase contribution margins in due course. Our team, myself and everyone is super-energized seeing the opportunity in front of us, and we are committed to execute and deliver great results forward quarters. I invite Madhur, my teammate, President and Group CFO, to give you detailed report card of this quarter. We look forward to take every question that you may have. If we are not able to answer in this call, we look forward to have an engagement with you on [email protected]. Thank you so much and look forward to an incredible discussion this evening. Thank you.

Thank you, Vijay, and welcome, everyone, to Paytm earnings call. This is for the quarter ending September 2021. And it is my pleasure to take you through the presentation and, as Vijay said, get into Q&A. So just to remind everyone, for Paytm, our mission is to bring 0.5 billion Indians to the mainstream economy through technology that financial services, and we believe we are making great progress on this journey. This is our Q2 FY '22 numbers in a snapshot. Our revenue from operations grew to about INR 10.9 billion or about INR 1,090 crores, close to USD 145 million for the quarter. This was up 64% year-on-year. As Vijay mentioned, this was driven by 52% growth in non-UPI GMV and this was the second consecutive quarter as we are getting into showing quarterly numbers. We are showing consecutive quarters or 60% plus revenue growth on a year-on-year basis. So clearly, great momentum. Our contribution profit hit a record high at INR 2.6 billion or INR 260 crores, about USD 35 million. This was up roughly 600% on a year-on-year basis. Obviously, this is a very large growth in contribution profit. Our margin in the same quarter last year was about 6%. In this quarter, we hit 24%. So there's a huge step change and we'll talk a bit more about that later. Our EBITDA loss was INR 4.3 billion. That's about INR 430 crores or about $57 million, $58 million. This was at a margin of negative 39% of revenues. In the same period last year, our EBITDA loss was 64% of revenue. So we have made a pretty significant improvement in this. In addition to contribution profit, this was driven by a reduction in indirect costs as a percent of revenue from 70% to 63%. So we continue to make organic improvement. I should point out that this reduction was possible along with increased investments in technology and increased investments in merchant base expansion. So this is an organic decrease. We have not slashed expenses. We continue to invest relatively fully in all the areas, which we believe are creating great long-term opportunities for Paytm. Our GMV on the overall platform was about INR 2 trillion, which is about INR 2,00,000 crores for folks joining from India, or about $27 billion. This grew at 107% on a year-on-year basis. And this reflects obviously users and merchants growing on the platform and also increasing engagement of both users and merchants. Digging into revenues, we saw, as I mentioned, continued momentum in revenue growth, up 64% year-on-year. This was driven by payment and financial services revenue growing by 69%, which further was driven by the 52% year-on-year growth in non-UPI GMV as I mentioned earlier. We also had an increase in revenue from our Financial Services and Others segment or Others business line, revenue line. This was a growth of over 3x year-on-year in that revenue line. We also saw an acceleration of device deployment, which we'll talk about some more. We did share some operating metrics last Sunday, which I hope many of you have had a chance to see, but we should talk a bit more about that. Our commerce and cloud business grew by 47% year-on-year. This was driven by 2 major factors. Our advertising revenues are showing very rapid growth. This is a business which is only about 1.5, 2 years old and it's ramping up very nicely. And in our commerce business, just to remind everyone, the large chunk of this is entertainment and travel ticketing, which was heavily impacted during COVID, both wave 1 and wave 2, and we're seeing continued recovery post wave 2. Going back to GMV, our growth accelerated to 107% year-on-year in the September quarter. If you recall, in the June quarter, our GMV have also grown north of 100%. We've also shared October metrics, which we have added here, where our GMV grew 131% year-on-year. And as I mentioned earlier, non-UPI GMV grew 52%. One interesting fact that we wanted to share with our investors is that obviously, we have a set of merchants who do not pay us any MDR for payments. These merchants generated subscription revenue and merchant lending revenue, which in aggregate was more than INR 550 million in Q2 of FY '22. So that is slightly more than $7 million. That is only 5% of our revenue from operations, which on the face of it may not look very high, but this tends to be very high-margin revenue. So we are seeing value in all merchants and all GMV and being able to monetize them either directly through payments or through subscription revenues and merchant lending revenues. Our GMV growth is accelerating on a year-on-year basis in Q3 of FY '22. And we have had very strong performance during the festive season. Part of that is here in the October numbers and part of that will be disclosed to the market as we go further into the quarter. Our monthly transacting users grew 33% year-on-year in the quarter ending September 2021. In the October month also we saw strong growth, 35% year-on-year growth. This is an increase in MTU over the last 12 months of 14.4 million. So we've had a very productive 12 months with respect to user growth. Our engagement on the platform is also growing very fast. It's 55% year-on-year growth in average GMV per MTU. And this has all been possible while not increasing our marketing costs dramatically. We have kept it flat as a percentage of revenue at roughly 9% year-on-year. We talked briefly about devices earlier. To just share more color, our device merchant base expanded by 1 million in the last 12 months. Now as we stand today, 1.4 million merchants have devices from Paytm. We have really created this business over the last 2, 2.5 years. Prior to that, our key merchant offering on the offline side was basically QR code, which we obviously continue to deploy, but now we have a range of devices available as well. This is strategically important to us because our device merchants show much higher retention and much higher average spends and that has been a trend which we have noticed over the last 12 to 18 months and that continues. In addition, 4% of our device merchants have already taken a loan through our platform. So our merchant lending business helps our partner banks and NBFCs to give loans to merchants, both merchants who have devices and the merchants who don't have devices. The merchants who do have devices, 4% of them have already taken the loan and obviously, this number is growing. You may have noticed some recently announced bank partnerships for POS. There is an announcement with HDFC Bank, and there are also partnerships with other banks. This is giving us very strong momentum in the LFR market, the large format retail market in the offline world. So there's a huge push into the enterprise segment, which is being enabled partly through the bank partnerships that we have recently announced. Coming to our lending business, our value of loans disbursed through our platform reached $1 billion annualized in October 2021. There's a business which has really gone from $0 to the $1 billion run rate in less than 2 years. There's been a 700% plus growth in number of loans disbursed in Q2 FY '22. And there's been a nearly 500% growth in the value of loans disbursed. And as I mentioned earlier, this is all translating into the line called Financial Services and Others revenue, growing by about 3x on a year-on-year basis. Just to remind everyone of a few highlights of this. All of our lending products, Paytm postpaid, which is our BNPL product, our personal loans product, and our merchant lending product have fully digital journeys end-to-end. And we only do this in partnership, and we only do this in partnership with Tier 1 partners, which is usually large banks and large NBFCs in the country. Talk a little bit about contribution profit that I mentioned earlier. Our contribution profit hit INR 2.6 billion or 24% of revenue. I should point out that in the first half of this year, we have generated contribution profit of about INR 5 billion, which is roughly $65 million. And this has exceeded the full fiscal '21 contribution profit, which was INR 3.6 billion. So clearly, there's been a huge step change in this. This is partly due to the fact that high margin monetization is kicking in at scale. For example, in our lending business, for example, in our advertising business, all of this helps change the contribution profile of the company. In addition, our PG costs have reduced from 0.52% of GMV to 0.34% of GMV on a year-on-year basis. So clearly, PG cost is a large cost for us. And the more we optimize it, the more contribution profit we generate and the more investment dollars we have. In addition, our indirect expenses has reduced as a percentage of revenue from 70% to 63%, along with investments in people, marketing and technology. So as I mentioned earlier, our marketing costs maintained at 9% of revenue even as we have increased our MTU very significantly. And our employee expenses have gone from 40% to 34% of revenue even as we invest more in technology and more in merchant growth and more in merchant devices growth. Couple of breakdowns for segments. Our payments and financial services revenue, like I mentioned earlier, grew 69%. We broadly break this up into payment services to consumers, which is up 54% year-on-year. This is primarily driven by increase in non-UPI payment usage on our consumer platform. Our payment services to merchants grew 64% year-on-year, which really reflects growth in non-UPI GMV on the merchant side, on payment gateway and on our devices merchants. This has now hit a run rate of INR 16 billion or INR 1,600 crores, which is greater than $200 million revenue run rate. So just this business alone, our payment services to merchants is a $200 million run rate business and very significant, very sizable. It is both for online merchants as well as off-line merchants. And our Financial Services and Others is up 250% year-on-year. This has grown from about 4% of our total revenues last year to 8% of our total revenues, and the major driver for this is growth in our lending business and our wealth business. Commerce and Cloud grew 47%. The dark blue bars here are our Cloud business, where we are seeing rapid growth in advertising revenue, and the light blue bars are our Commerce business, where we're seeing continued recovery in ticketing revenue post wave 2. And just before we turn to Q&A, just a quick summary of our key trends. The trends in our businesses; on payment side, we are seeing growth of revenues and profitability due to growth of payments volumes from non-UPI instruments, including Paytm payment instruments and the growth in payment services to merchants. We are seeing recovery of high-margin Commerce business and growth of Cloud business, and we're also seeing an increase of Financial Services driven by huge ramp-up in lending. So that's the summary of the trends in our businesses. And how does that translate into operating and financial performance, we have been able to efficiently increase users, merchants and GMV on our platform. We are seeing strong growth and momentum in revenue growth and we think this will continue. We are seeing a step jump in contribution margin with clear trends towards continued year-on-year improvements. We are seeing indirect expenses as a percentage of revenue going down and we are very well-funded for growth opportunities ahead. Thank you very much, and I will turn this back to the moderator.

[Operator Instructions] The first question would be from Mr. Robert Sheward.

This is Rob Sheward here from Toscafund. I just wanted to ask a little about the indirect expenses. I appreciate it is starting to come down as a proportion of revenue. But I wonder if you kind of think further out into the years ahead, I mean what sort of growth rate do you need to be seeing, obviously, to support the investment and growth in the business. I just wonder on a kind of more absolute basis how quick that needs to grow.

Thank you, Robert. To be honest, over the next 1 or 2 quarters, we'll probably do more work on figuring out exactly what investment areas we sort of want to factor into our plan and share certain guidance with the Street. I think the main focus area right now is to build more technology, particularly for our merchants and also the sales team, which is going and deploying devices, which in turn translates into massive merchant lending opportunity. So at the present time, I don't have sort of a lot of guidance to share other than it should continue to come down as a percentage of revenue at least on a year-on-year basis. But over the next 1 or 2 quarters, we'll do more work to see if there's something that we can more formally share with the Street.

The next question will be from Mr. Robert Marshall-Lee.

Could you just talk a little about how you see the competitive environment? And just dovetailing with that, your marketing expense, which you highlighted at 9% of revenues, how do you assess the success or failure of that? Are there particular metrics you're using? And are there also other parts of the business where you see greater operational leverage on the cost.

Robert, maybe I'll start and maybe Vijay can jump in as well. On the payment side, what I would say is that we have been very efficient and remain very efficient over the last 6 to 8 months. And we've been very efficient over the last 2 years, in particular, on being able to grow our users and be able to grow the quality of those users into GMV on our platform while being efficient in marketing costs, both for user acquisition and retention and so on. And part of the tailwind in our business is that consumer cohorts are behaving very, very well and improving just as we move forward, right? And a large part of that is product, part of that is a large number of use cases, and part of that is just doing a better job on getting the right source of users in. So we have been able to be very efficient on that. The second thing I would say is that on non-UPI GMV, we are seeing, in some ways, very strong momentum vis-a-vis competition, right? So whether it is on the issuing side, with Paytm payment instruments such as wallet, which is going through very strong growth, or whether we see BNPL, which we can talk some more about. So on the issuing side as well as in the acquiring side, right, both in the offline world and the online world. So there are large merchants in the online world with whom we have made significant jumps in terms of the amount of activity that we do with them as a percentage of their business, so our penetration and our market share with them. And in the offline world, as I mentioned, the number of devices that we have, you can obviously see the data and also the comment that we made about making a big push into the enterprise side of the business, including through with bank partnerships. So we are seeing a significant momentum in growing non-UPI GMV -- while we're seeing significant momentum across the board, we are seeing significant sort of outperformance of competition, particularly in non-UPI GMV and in payment services to merchants. So we are seeing a lot of that market starting to shift towards us. Vijay, I don't know if you want to make any additional comments?

Yes. Thank you, Madhur. So Robert, what we've learned is that once you have number of use cases led by Paytm. For example, like FASTag, which is a car tag for toll payments in India. Paytm is a market leader and the customer has to sign up for Paytm, Paytm wallet, where we even earn interchange because we are on the issuer side of the business, along with obviously acquiring side business exists there. So we are able to make money from more number of Paytm payment instruments that customers are adapting, which we call non-UPI. The money that is generated in this is something which is helping us drive the marketing optimally, along with the marketing expenditures various banks are doing on Paytm. So imagine large private sector banks, public sector banks, who sort of have their credit card, debit card usage going down because, let's say, some or other reason that app-based payment is working out for customers, so they are not using cards. So these banks are using Paytm Wallet as a channel to drive card usage where they give free cashback, freebies, promotions, and they're funding it. So our marketing expenditure does not expand while other platform expansion happens. Similarly, there is also a very clear, I would say, network effect that we are seeing, the keyword of product ability. For example, like Google, PhonePe, who are sort of our consumer side competition, their products are based on third-party banks and systems. Our ability to run vertically integrated technology stack has started to attract the customer once they have experienced every other product and we're talking growth of customer base, merchant base, with nearly flat marketing expenditure in a market where competition has actually enhanced this expenditure. So I call it platform product leverage and overall as a business, obviously, as you could see, the other revenue line items are also, which is a platform monetization leverage, if you will. So we continue to see this, Robert, that Paytm is becoming partner of banks to grow their payment usage and revenues and we are also seeing obviously, the monetization opportunities, which are expanding on our platform, very clearly seen in the marketing. Finally, one more thing, Robert here. We have seen that customers are migrating from let's say, UPI to wallet to postpaid. These are typically the non-UPI payment instruments that we talk about and there in these cases, we don't have to spend additional incremental money because the customer is already on the platform. So a payment customer of UPI is converting to a payment customer of wallet, because he gets cashbacks on the wallet, because merchants are paying MDR for the wallet. Similarly, if the person converts to credit instrument, buy now, pay later instrument, postpaid, because customer is getting credit, we are now starting to make money. So sequentially speaking, the product stack is driving the customer source Paytm. And then product, because the customer is on Paytm app, the CLM, customer life cycle management, journey is driving him towards more MDR interchange earning revenue products that we have. So it's sort of network effect and CLM, customer life cycle management, where we are seeing that we are not necessarily requiring to spend marketing expenditure and we are seeing the growth out there.

[Operator Instructions] The next question is from Mr. Ankur Rudra at JPMorgan.

The first question, if you could elaborate on the advertising monetization in the quarter, you highlighted it's done very well. How are you finding merchants using this feature? Are there any different ways that you're finding them using advertising on your app? And how do you see this evolving over time? What's the best way of thinking about this in the medium to long term?

Would you like to start with that question?

Yes. The simplest thing, Ankur, you can -- I mean, we are pleasantly surprised that we have deep relationship of payments that extends because we have a consumer side business. So when you go to, let's say, a large retailer, or when you go to a large online commerce company, these companies leverage Paytm app to drive traffic towards their business and this win-win sort of combination, because we are able to help them get customers, is giving us advertising revenue, and it is also extending our payment business, surprisingly much better and faster and sort of a network effect, if you will, from point players who are purely, let's say, POS providers or payment gateway providers here. So, Ankur, it's a combination of our consumer offering plus payment offering that gives payment merchants and opportunity. Second, we are able to also offer, as you can guess, a customer on Paytm platform would have financially check-boxed KYC-verified customer, unlike on open internet or on a social network, you sort of are guessing who's this customer. On our platform, it's sort of a KYC-verified customer, which is an order of magnitude more valuable. And considering that we have more knowledge about this customer on our platform from financial status of the customer's context, there is a lot of interest that we are seeing continuously increasing quarter-on-quarter or month-on-month when we are able to reach out to marketeers or advertisers. Now we have internally cross-sell team of payment merchant sign-up team to cross-sell advertising. We also have started to build a separate independent advertising sales team, even though very small, but they have shown really good strong results for us. We fundamentally believe that for the traffic and scale and quality of customer base that we acquired on Paytm app, advertising will be a very strong bottom line contribution margin business. And Ankur, I want to expand to next level here, think about, for a brand in India or a retailer, including BFSI shops, if you will, meaning let's say insurance companies or anyone, you can think what are the key avenues that they can go to do a treatment. The classic ad networks of social networks, content platforms, and ad networks, and now we are going next level where a payment platform, which has built its capabilities networked with more data and filters of customers. It is actually coming out as we believe that we are going to expand much more on this and it could come out as a legitimately sizable option for the partners. When I say legitimate sizable, it means that we could potentially, in future, build a large enough choice for our advertising partners that they spend percentage which is meaningful enough on our platform.

Ankur, maybe I'll just add that I think when we started on this journey, and it really was a number of our partners coming to us and saying, "At the present point, we know that Paytm works for me for transaction standpoint, but there are times when I don't necessarily want to convert to a transaction. But I know that Paytm has a user base to that I want to over time convert and is relevant for me." And we had a whole bunch of tools built, obviously internally, in terms of understanding users and being able to show them relevant use cases. So it was quite seamless, but a pleasant surprise nonetheless, about how seamlessly that move towards being able to open to third-party effectively to advertisers that they could come. And what we do try to do, however, is to show users things which are very relevant and which feel very native on our platform. So we don't sort of create additional properties because end of the day, we are a transaction app and users come to us for that purpose. So we try to show them things which are very relevant to them. So for example, if you go to our travel section, you may see airlines or tourism boards who are trying to speak to you. If you go to our entertainment section, you may see certain OTT apps in there which speak to you in addition to obviously being able to find movie showtimes and so on. So we try to keep that very native on our platform. But just given the span of use cases that Paytm has, it can be very relevant and highly contextual traffic for our advertisers.

And then one last thing to this, Ankur. Our Mini app platform, which is sort of customer meeting merchant partner, is able to build a Mini app experience within the Paytm app, is also one big driver of advertising revenue because they are able to complete the funnel on Paytm app itself, and we promote them that you should try incentivizing customers or advertise on Paytm at different places. So there is a better funnel conversion than a click that generates an app download outside. So Mini app is behind-the-scene another engine that supports advertising.

[Operator Instructions] Next question is from Mr. Rahul Jain.

I just wanted to understand the commercials for lending business. We have seen a significant jump in the way we've been doing new loans. In terms of the commission that we earn on distributing such loan, do we receive the revenue upfront? And is it also accounted in that quarter itself? Or how it is done in case...

Yes. Thank you, Rahul. So our revenues are accounted upfront for the revenue that we receive. So our revenues are broken into broadly 3 buckets. There is a distribution marketing revenue that we earn from our lending partners for helping them reach out to consumers and merchants through our platform. Then there is a customer service fee we charge them during the low tenure of that particular loan. And our loan tenures are not very long, as you can imagine, being bill is about 30 to 90 days and the rest of the stuff is about 12 months to 13 months itself. And then there is, in cases where the lending partners use our collections infrastructure, we also have a collection-led what I'd like to say is the portfolio revenue that we get at the end of the tenure. So that's how the entire revenue is generated. So we only account for revenue on cash basis and not on accrual basis.

Okay. And any color you may want to give in terms of the split of the book in terms of personal loan to BNPL kind of things.

Yes. So at a very broad level, we haven't declared specifics, but I can give you a broad indication. At a very broad level, in terms of number of loans, as you can imagine, BNPL is a disproportionate share of our number of loans, equally followed by merchant and personal loans. In terms of value, we find that BNPL constitutes maybe a shade over 50%. The rest of them are split equally between merchant and personal loans.

Okay. And when I see amount per loan kind of the metrics, it looks like INR sub-4,000 to INR 5,000 kind of a number. And you say that 50%-odd would be around for the BNPL. So is it fair to understand that even on the personal loan or the merchant loan, the ticket size that we may be operating would be in the INR 10,000 to INR 15,000 kind of a bracket?

No, actually not. That's not the case, Rahul. The fact that we have number of loans that we issue in BNPL, as I said, it is a very, very large number. So it kind of pulls down the averages because BNPL we're operating at INR sub-4,000 levels, closer to INR 3,000, and that's by design. Whereas in personal and merchant loans, the ticket sizes are much higher, closer to INR 100,000.

Next question is from [ Sofia Duplaix ].

Could you tell us, with your customers or your new users, are you able to say which apps you think that they are coming from? Are they completely new to digitalization? Or do you see that they are coming to Paytm from perhaps a less comprehensive service provider?

Sofia, we continue to see both kind of customers. Surprisingly, we are seeing the churn from other apps' customers coming on our platform, and it is purely because the technology limitations other apps structurally have. They are working on the back of typical traditional bank, whose technically hasn't yet got scaled or integration hasn't got scaled or somewhat of the problem of method or integration or something. I can say, we are seeing both kind of customers. It's sort of in geographical difference, where in Southern India we are churning more customers from others. And in Northern India, we are getting new incremental customers, which totally are fresh. Interesting thing number two, one of the reasons that we did our own survey that why did they come. They do come for this, but then they retain themselves because there are Paytm payment instruments, which give them incentives, which are driven by the wallet and postpaid and Paytm bank account. So all these 3 things are the hook that retains them and keeps them on our platform. By the way, our retainance has been much higher in these quarters. I'm smiling at it because when we saw the churn coming to us, we in last 6 months were concerned about that does it mean that these are temporary and they can go back. Surprisingly, in our own feedback surveys from them, there was lot more retention thanks to the lock-in that they create once the customer has created a KYC. It takes a lot to do the customer and KYC, et cetera. But once they've done KYC, stored some prepaid deposit with us, or opened a bank account, or locked in with let's say FASTag, which is a toll tag, these customers retain on our platform. I think to Rahul, I wanted to add one extra thing. Considering that we had Sofia, so I didn't expand on that. So Rahul, I wanted to add 1 more thing that I personally believe, issuing and collecting a smaller ticket size of loan is the magic movement. Because it is not just costly and complex, it is also where the monetization, meaning, I would say, profitable monetization is a challenge even for the best of the financial institutions. I mean talk about NBFCs, it is tough for them to distribute a loan of INR 5,000 and collect it at a cost which is profitable for them. For banks, it is even tougher for them to go below INR 50,000, I'd say, or INR 20,000 I'd say. So I believe, Rahul, what we're doing is we're taking the tough thing first. It's surprisingly tougher for anyone to not even touch it. We are able to not just make money, we are able to rotate and have upsell, et cetera, also being done here. So we are actually liking that we are expanding smaller loan ticket size over larger loan ticket size. Because the magic happens when you are able to build a business model of large number of users with smaller loans than a large loans of small number of users. And we fundamentally believe that we will continue to write more number of users to the credit story with these small loans, who in turn then, over a period, obviously, start to take larger ticket loans from our partners.

The next question is from Mr. Charlie [indiscernible].

I just wanted to ask on the collection experience so far. Obviously, the number of loans increased dramatically that you've originated. What's the experience been like versus your own expectations and I guess, versus your banking partners?

Charlie, the experience has been very good so far and I give you, while we do not have access to the portfolio performance directly because our lending partners take the risk on their balance sheet and not necessarily that every information is shared with us. So we have 3 ways of looking at this data to give you some sense of how trends are looking. First is that where we're doing collections of the portfolio, which we do for a very large majority of the business origin through our platform, we can clearly see that the efficiencies of collections, both on merchant and consumer loans, have been performing better than what lenders had given us targets. And we hence are also being able to make some bit of trail revenue portfolio performance, which we are actually happy about. The second piece here is that we've been able to demonstrate even through COVID that newer partners have looked at our platform positively, which basically means very, very large banks and very large NBFCs we've added into our platform as lending partners in the last 6 to 9 months, which was actually the deep end of the COVID period that we were seeing. So they felt comfortable seeing what we are doing with other partners and hence they obviously approached us and we approached them to kind of work together to add them to our portfolio. And the third of it is, in the credit business, it's very clear that if the lending partners are not happy with the credit portfolio, you would not see the growth that we have seen. So we are fairly confident that what they are seeing in the portfolio and what we can imagine from our collection experience, the portfolio is holding up much better than they thought it would, and this has been the deep end of COVID as far as we are concerned. So all in all, this is looking fairly, fairly good, and we feel very confident that we can continue to have a fairly long runway ahead for ourselves of this business.

Okay. I just wondered, given that there's been some more news on regulation recently around this area, whether that has also been in line with your expectations or whether there's any kind of changes to your plans needed as a result of them?

So Charlie, glad that you asked this question. I think we've been -- we actually welcome these regulations or proposed regulations, if I may say, while these are a working group paper, which has come out and there is time for the industry to respond to it by end of December and hopefully after which the regulator will look into the recommendations and working group recommendations together before they kind of formalize any kind of incremental regulations. But on the face of it, we see it in 3 parts. Number one, we were always adhering to the existing digital lending guidelines, which came in, in June of 2020, right? So these guidelines that came in, in June of 2020, and when we look at those guidelines and read along with this working group paper, we see that there is a significant overlap of similar guidelines and maybe a lot more clarity because maybe the working group felt that some of the players were not adhering to it in full letter and spirit. But from our perspective, we've always demonstrated that we strictly adhere to the outsourcing guidelines and the lending guidelines that exist today. The second piece to see this is that there has been some level of gray in things like, could you fund in a prepaid instrument? Or could you go ahead and disburse credit on your own balance sheet without having a license? Or could you give any kind of credit guarantees, et cetera? I think the working group has really called out that these are things which they don't think are appropriate. We have not been following that model. Our model is very clearly distribution technology and collection performance led, which is fundamentally being called out as a good model in the working group paper also. And the third thing is all about the size and scale that the working group expects the partners in digital lending space to have. In fact, they endorse that the credit dispensation in India is necessitated by the fact that technology is the only way forward to reach to the masses, especially in small businesses. And Paytm being a technology partner has demonstrated that we are in the forefront of being able to achieve that objective, not only for our own customers, but in the overall ecosystem development. So I think we feel very happy and confident that if and when these regulations are implemented, either in part or full, it will further strengthen the platform capability that we've demonstrated and the model we've demonstrated. So yes, there is nothing to be concerned from our perspective. Our model stays as it is and our lenders are also absolutely aligned with that model.

The next question is from Mr. Rahul Jain again.

Thanks, Vijay, for the additional input. So my next question is on the devices business. We have seen a significant jump from 0.3 million devices to 1.3 million. I just want to understand a couple of things around it. How we are distributing this? What kind of KRAs do the distribution partners or employees do they carry in terms of the number of devices or any other variable that you might have assigned? What is that variable? And secondly, any split you want to share in terms of POS versus Soundbox kind of a mix in the devices.

Rahul, you're asking that what kind of inventory are employees typically carrying within for devices. Is that…

Incentives. So what are...

Oh! Our incentives are -- incidentally, we have a business model led by performance and meritocracy. So incentives are not for selling, but getting a merchant who is longer term on our platform. So a person who's selling Soundbox does not necessarily need to sell Soundbox; he could get equally rewarded if this shopkeeper takes, let's say, a static QR, which is, let's say, photo QR, personalized QR, or Soundbox, and the merchant is active in long term. So there is sort of a bias selection by a salesman to discover what this merchant gets because his incentives are not misaligned to oversell Soundbox. And the best part is that we have the highest retainance product ever. And I mean, obviously, it is a context in our own company, but I can tell that we see highest retainance product, like iPhone level of customer love on this product. I mean it's phenomenal in terms of merchant behavior, need, love, affection, acknowledgment that we get on Soundbox from our customers. So what kind of incentives? Incentives are led by, like I said, not device or SKU only. They are led by that the merchant is staying longer term or fulfilling the service. Amount exactly, I don't think so that it is same for Tier 1, Tier 2, Tier 3 or less than if it is more by this market. So it's not that. But the best thing I can tell you, Rahul, is that our bonus on good customer service, meaning good merchant service and good sign-up, is so much that FSE, field sales executives, could comfortably, and many of them earn INR 30,000, INR 40,000, INR 50,000 a month. So...

I just wanted to add that one of the things that we've done is that obviously, each product has its own nuances, but the experience of selling payment solutions to the long tail of merchants all over the country, that in itself has created a certain amount of IP in the company. And we started doing QR codes in early 2016. So this is sort of 5 or 6 years of experience that has sort of built in the company to solve for the types of questions that you're asking, which is how do you incentivize folks, should it be different in different cities, should it be different by different products, and how do you create that sales organization? I mean, I will point out that we have over 1 million merchants who pay us subscription fees every month. That sort of scale just does not exist. Over 1 million merchants who are paying us, over 5 million merchants who are using the Paytm for business app every month. And that sort of direct distribution from a company like ours, a technology company like ours, direct distribution to merchant base at that scale does not exist in the country. And that is quite a scale in itself. And it's also a platform to keep building new things on top such as more technology and more financial services, which is obviously what our mission is, right? So more technology, more financial services. To the specific splits, et cetera, that you asked for, or the specific granular details of what are the targets and so on, I don't think it's appropriate on an earnings call. But suffice it to say that this is scaling up and scaling up very efficiently.

Yes. So more than monetary aspect what I wanted to also understand is the sheer scale because unlike the scale up on the platform, this scale up is mostly happening on street. So adding 0.4 million devices even on a daily point is a huge number. And I'm assuming whatever number of these SFEs we have, so if you want to take this number from 1.3 million to, let's say, 2 million or 3 million, whatever is our objective, it would still require a lot of leg work. And that scale up is actually the real leg work, right? So that is what I wanted to understand.

I will say, Rahul, that it is becoming more and more efficient and products do go through that journey where the first wave you have to explain the product and sort of sell it a bit more. Right now, there's a percentage of it, and we won't share the data on that, there's a percentage of this which happens DIY. There's a percentage of it, which happens because a shopkeeper sees another shopkeeper next to them who's using it and presumably is happy with it and so on, right? So in the same sort of local areas or local networks, over time it does get easier and easier to drive adoption of a product, right? And of course, our ambitions are very large. We want to take this very deep in the country and we want to make sure that it's a fairly high percentage of our merchants who are penetrated through technology, that could be Soundbox, that would be POS devices, that could be more products that we launch, which I mentioned dynamic QR. So there are various versions of this, and our ambition is very, very large with respect to this, particularly because of the type of behavior that we see when merchants start to adopt technology. So we do see that. But for the same product in the same market, over time it gets easier. It becomes sort of a brand in itself. I would also encourage you to go to business.paytm.com where we have a huge amount of information on the various services that we have towards offline merchants.

Right. That explains. Just one small bit. In terms of selling this loan to merchants, my small channel check suggests that people are definitely aware about this thing, but for them to actually -- how you pass on that message that they have that additional advantage, how this message is getting conveyed? Are they coming through notification or SMSes or how we are reaching out to these people that they can apply for loans?

So Rahul, for all our offline merchants and online merchants, we have an app called Paytm for Business. So the moment you are logging into the app, on the home screen itself the offer is available to the merchant if you or she is eligible for credit. So we whitelist these merchants with our lending partners and that whitelist merchant gets a home screen icon plus a pop-up and various other in-app marketing communications. We refrain ourselves from intruding the personal space of our merchant partner, the consumer, by sending them SMSes. All communication happens through in-app notifications and in-app engagement that the merchant does because he's spending tremendous amount of time on a day-to-day basis on engaging with us on Paytm for Business app. So we don't see engagement of letting the merchant know that he or she has a loan offer available through Paytm and it's a full digital journey, which they can completely by themselves and get it out and take a disbursement in their account. So generally, they don't need any assistance. If they do need any assistance, so there is a click to call option, et cetera, where our helpdesk helps them to really do the journey through the phone.

I would add that given that we make loans available only to our thick-file merchants. Typically, they are highly engaged on the Paytm for Business app also, right? So there's a pretty big overlap between that behavior. So because the focus is on thick-file merchants, they are generally engaged enough with us that it's not a massive exercise to make them aware that there is a loan and where to go to get that loan because they're seeing it on the Paytm for Business app, which they are opening relatively frequently.

So by that thing, we have already 1.3 million loans as of October, and we have 5 million Paytm for Business visitors on a frequency basis. So can we say that is the first objective is to reach this 5 million and that 5 million number itself will expand over time?

So just to be clear, the 1.3 million includes postpaid, which is actually the vast majority of the 1.3 million. So the penetration rate of merchant loans, even amongst the eligible merchants is still very, very low. So there's a huge runway there.

Yes, Madhur has publicly given a 4% number.

So 4% of our device merchants and a significantly lower percentage of our non-device merchants have taken loans from us. And there is a large set of non-device merchants who are also eligible for a loan. This is thick-file, right? So I know some people have misunderstood this 4% number as saying, oh, this is 4% of eligible merchants. That's not the case. 4% is a slightly different subset, which is 4% of our device merchants have taken a loan and a significantly lower percentage of our non-device merchants have taken a loan. So the runway ahead for merchant lending, I mean we're busy scratching the surface.

As we're getting close towards the end of the scheduled time, we may just have time for one more question. Next question is from Ankur Rudra.

Actually, my question was related somewhat to the previous question. I was curious about how the increase in devices has impacted your merchant engagement levels perhaps on the business app. And how does the new cohort -- there's obviously been a very sharp increase, how does this compare with what you have seen in the first cohort of merchants which were added? And related to that maybe a partial follow-up is, have you discovered any adjacencies with the customers who take the devices? Is there a higher attach rate for merchant loans or cloud business with these merchants?

So Ankur, the way we're seeing this piece is that the incremental engagement of the merchants is only increasing. So at the moment we are able to attach our device, especially Soundbox. The transaction intensity of that merchant increases multifold, right? So versus paper QR to Soundbox to EDC, actually soundbox is performing much better than EDC on a relative basis, while the value of transactions on EDC will always be much, much higher. So the answer to your first question clearly here is that we are definitely seeing the attachment of Soundbox and devices to our existing merchants increasing their engagement level multifold. There's a direct correlation of engagement to the merchant becoming eligible for credit. So we find that the moment you are a device merchant and your engagement level is high, a reasonably large percent of these customers automatically become eligible for credit. And they also we see come through the funnel in seeking for credit through the course of the 12-month period. So if you were to compare and say number of merchants who could be highly engaged and seeking credit or eligible for credit in a paper QR, that number is going to be lower versus the number which is with devices. So that's the reason we feel very confident that more device penetration we have on a merchant base, we will have higher engagement and obviously higher monetization through credit as a mainstay business that we will do with them.

I would add what Bhavesh has said, to that, like you said, it is ease of merchant behavior, Ankur, here. The best part I can tell is that you should see our merchant base, let's say, of 100% universe split, first of all, let's cut it by merchants who pay us MDRs and subscription fees, like you said, cloud services, and the merchants who do not pay MDRs or subscription fees. This is the second bucket. In the second bucket, you could split it by somebody who's taken one of the IoT devices and then pure static QR. What I can tell you, Ankur, is that static QR is one of the lowest monetizable product, then a higher monetizable product is personalized QR, then higher to that is, let's say, a Soundbox, and higher to that is, let's say, a POS device, and higher to that is an online payment gateway merchant, and that's the bucket of sequencing. The best part is that the least monetizable merchant is also very valuable because that merchant's collection happens in the Paytm's nodal account. Now because that collection happens in the nodal accounts, so that's why multiple lenders are able to lend and then collect the money from. The reason, Ankur, that we are able to sort of bring a superior product even on the base of the base product of Paytm is because only Paytm QR can allow consumers to pay from more than linked bank account, more than UPI, which is a wallet, fixed deposit, or a postpaid account. So if there were 2 QRs on the table, Paytm QR is actually ahead of merchants acquiring value than a generic static or UPI's QR by any other competition or a product company. The best part is, once the merchants start to see it, and because we are the acquirer, we are the issuer, we are able to even give, let's say, 0% cost even for, let's say, a postpaid product there because we want to include that merchant on that, the consumer can pay the charges. So the beauty of our acquiring business now, as you could see, is that we are able to monetize the lowest value that he's not directly giving by virtue of credit and highest value customers, which are let's say, the payment gateway merchant or others are also able to get same-day payments settled in their bank account. Now this is on the real-time basis credit that we are able to give. So I believe that the merchant engagement on our platform, thanks to the consumer engagement that drives them, is better beyond just any other merchant acquiring product. More the merchants take our product, more they become sticking towards only one acquirer, which is us. Obviously, as you know, even online payment companies or everybody tries to get multiple partners. We actually are seeing merchants migrating from other POS providers or even other PG providers. And this is a phenomenal trend based on, like I said, more instruments, comprehensive coverage, based on better pricing of other instruments, basically, let's say, if a consumer is coming and paying from other banks' credit/debit card or other networks' instruments, we are the largest acquirer, aggregator, so we have the best price in the market. Literally, we have the top-notch pricing advantage because of the largest of the volume that we drive of every payment instrument in the country. So better pricing, second being that comprehensive coverage, better pricing. And third is the maturity of the product, the maturity of the scale of the product. Just like you know, AWS is a superior product, not because that it is made by IBM, but because it is made by its biggest customer, the Amazon itself. And that's exactly what the beauty of the Paytm's payment platform is. Our platform business -- we are actually able to sell our platform to any company by saying, we know your business requirement before you know your business requirement as an expectation of the technology platform because we are building it for ourselves. And these reasons, Ankur, bring a merchant. And now like I'd give you an example, the lowest value assumption merchant, called QR code merchant, is also a credit customer; and the largest value customer, let's say, largest of online acquiring merchant, is also a credit customer because that person is getting T plus 2 settlement and we are giving T equal to 0 settlement and that is a large dollar value actually here. So I hope it helps you understand that merchant business for us is actually such a high potential that we continue to drive, like in previous question, more number of sales team, more methods to sale, DIY online marketing, and even the product attention on this side is much higher for us. And that is why even though in a country where UPI does not make money, we actually make more money from payment than probably every of these payment companies have ever done.

Thank you. And with that we come to an end of this earnings call. A reminder that the replay of this earnings call and the transcript will be made available on the company's website subsequently. For the questions you could not get to, please feel free to write an e-mail at [email protected] for further reference. Thank you, everyone, for joining.

I just want to close with closing remarks. Thank you, everyone, for all the questions and engagement and attention. We obviously did a version of this on Saturday for about 1.5 hours and 1 hour and 15 minutes today. And we loved getting all the questions and being able to share our earnings and also answer business model related questions. As the moderator said, please feel free to send us e-mails at [email protected] and we'll try to respond as quickly as we can. Thank you very much and have a great day.

Thank you very much everyone for joining us to get this. Really appreciate your time today. Thank you.