Mayur Sontakke, CFA, FRM | May 17, 2020 | More on: BABA 9988
On 8 November 2016, India’s Prime Minister Narendra Modi made certain banknotes in circulation invalid with no warning. The idea was to curb black money stored in high-value paper money.
While one can debate about the success of the demonetisation move to serve the intended purpose, one thing was for sure. India’s mobile payments industry skyrocketed thereafter.
It was a perfect setting for mobile payments to grow. Here’s what happened.
The tale of two revolutions
In April 2016, the Government of India launched a Universal Payments Interface (UPI) to connect banks through mobile applications. UPI is open-source, meaning anyone can use to build services on top of it.
Just two months before demonetisation, Reliance Jio, a new entrant to the telecoms industry, had enticed consumers with cheap data and mobile phones. By the end of October 2016, Jio had gathered 35 million subscribers.
The year before, Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988) and Ant Financial had picked up a 40% stake in Paytm, an emerging payments company.
Paytm, which reported an annualized gross transaction value of US$3 billion in March 2016, saw it rising to US$5 billion in March 2017. This was a result of demonetisation, which pushed the cash-based Indian economy to go mobile.
This was just the beginning. Between April 2017 and March 2018, Paytm clocked in gross transaction value of US$25 billion. The following financial year, it doubled to US$50 billion.
The telecoms revolution and the payments revolution together spurred on Paytm.
Alibaba’s role
Without Alibaba’s millions and technology, Paytm wouldn’t have achieved that.
Before Alibaba came calling, Paytm was fighting with other wallets to survive and thrive. Alibaba’s US$700 million investment in Paytm in 2015 set the company on the right track at the right time.
On the technology front too, Alibaba’s experience helped. Alibaba’s Alipay was operational for over a decade when the company invested in Paytm.
As a result, Paytm got an edge over competitors, who were still stitching together their technology. Today, Paytm is India’s most-valued unicorn with a US$16 billion valuation as of its last funding round.
Alibaba’s investment into Paytm also gave legitimacy to India’s fintech growth story.
Victory? Not yet
Although Paytm has established a monopoly in digital wallets, challenges are looming.
The company’s losses more than doubled in FY2019 (April 2018 to March 2019) to US$560 million. The competition is rising and consumer preferences are changing.
While Alibaba’s investment in Paytm has yielded phenomenal returns, Paytm’s e-commerce foray (also funded by Alibaba) is in trouble.
Amazon and Walmart-owned Flipkart are consolidating their position in India’s e-commerce market, a revolution that is in its nascency.
India has recently restricted capital inflows from companies where Chinese nationals are beneficiary owners. This could also restrict further capital flows for Paytm.
Foolish conclusion
Alibaba fueled India’s payments revolution and Paytm’s rise as the industry leader. Paytm is India’s most valued startup now. However, challenges are looming but investors should watch this exciting space.
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