23/11/2016 3:00 PM IST | Updated 24/11/2016 12:12 PM IST

Digital Wallet Co. Paytm Will Now Let You Pay Merchants Via Debit, Credit Cards But There's One Major Catch

Capitalising on the cash crunch

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Vijay Shekhar Sharma, founder and chairman of One97 Communications Ltd, which operates PayTM,

Online wallet company Paytm is betting on exponential growth as India finds itself facing an unprecedented cash crunch.

It has plans to turn into a full-fledged payments bank that will serve as the backbone of its expanding digital payments network. And it just upgraded its app that will allow merchants to begin accepting plastic cards – debit and credit cards – without the need of a card swipe machine for no fees for a limited time, said Vijay Shekhar, founder and CEO of Paytm, adding the company's payment bank will eventually help merchants transact with low to no fees.

"We will democratise the acceptance of cards," said Shekhar, addressing the media in New Delhi.

However, there are some big challenges ahead if the app is to succeed and more than one catch.

The app upgrade follows Reserve Bank of India's notifications to increase the monthly limits set for digital wallets to Rs 20,000 for consumers and to Rs 50,000 for merchants. Small merchants -- from corner mom-and-pop shops to individual service providers like house helps and plumbers -- will be able to accept card payments if their monthly transactions are below Rs 50,000 once they self declare as a merchant. If the transaction amounts are higher than that, the merchants will need a bank account and also pay additional bank charges for credit and debit card fees that can be as high as two per cent for credit cards. A preference for cash, high cost of card machines and recurring bank charges have been one of the biggest reasons behind the low adoption of card machines by merchants in India.

Customers will also have to physically punch in their credit and debit card details on the merchant's phones, which Shekhar claims is a secure payment method as it will also require an OTP authentication by the customer.

Paytm hopes the additional bank fees for card payments can be waived once its payment bank is operational in a few months and the merchants sign up for its payment bank, said Shekhar, adding the Paytm will pay for the debit and credit card merchant fees to banks until the end of December. While the exact timeline for its bank launch is unclear, Paytm has already secured an RBI license to operate one.

Paytm's target market of small merchants also needs to be equipped with smartphones as its payment facility for cards is currently only available with its smartphone app, said Shekhar, adding the company is working on bringing to market a phone swiping machine that will make the payment process faster. That means, however, the company has limited reach at the moment as India's smartphone penetration stands at 250 million.

Paytm estimates there are about 1.4 million (point of sale) or card swiping machines across India that serve over 750 million Indian consumers with debit or credit cards. It hopes its payment app will give those merchants a cheaper option, and bring into fold many more small merchants that currently don't accept any card payments at the moment.

It also plans to aggressively go after the untapped merchant network in both small towns and rural areas. Only a fraction -- 3.5 per cent -- of all retail outlets in the country accept cards at the moment, meaning almost all of the informal mass retail segment and over 90 per cent of India's retail does not accept payments, according to Paytm.

Going into extraordinary detail about its business model, Shekhar also explained Paytm currently makes money by keeping a margin of up to 15 per cent when payments are made to merchants outside the Paytm network. Paytm also pays a small cut to banks when Paytm customers transfer money from their bank accounts into their Paytm wallets.

Given its growth potential and generous backing from its financial investors, Paytm has a huge marketing budget -- it has so far invested about Rs 2,586 crore on marketing efforts, and has set aside an additional Rs 500 crores for its marketing spend for this year alone.

Paytm claims it is adding 5 lakh customers every day with a target to reach 500 million customers by 2018. It has about 15 lakh registered merchants to date and is aiming to add 1.5 crore merchants in the next week alone.

However, financially, Paytm is yet to turn a corner and isn't yet cash flow positive. It saw about Rs 1,500 crores in losses last year, in part because of high expenses and investment spend, Shekhar said.

Shekhar said the company is well-capitalised at the moment to sustain its current growth and expansion efforts for another two to three years.