No FASTag, no bank, no fluff: How Paytm cut its way to a profit

Mint

3 days ago

Mumbai: In 2017, the Indian government made FASTag toll payment mandatory for all new vehicles. Paytm, already eyeing dominance in digital finance, quickly seized the moment. The fintech company's banking arm, Paytm Payments Bank Ltd (PPBL), jumped in and by 2020 had become the country's top FASTag issuer, with three million tags.
But behind the scenes, things were less straightforward. 'Two teams, issuer and acquirer, ran the whole FASTag tech and product back-end," said a person with direct knowledge of the matter, requesting anonymity. 'Oddly, the teams weren't a part of PPBL. They were under One97 Communications, the parent company."
This corporate structure of Paytm Payments Bank, which depended heavily on infrastructure from One97 Communications, raised red flags at the Reserve Bank of India (RBI), India's central bank, particularly around governance and data security, according to people familiar with the matter.
In January 2024, the RBI took unprecedented action, directing the bank to cease all banking activity from 29 February onward.
Beyond concerns about data handling and the intermingling of financial and non-financial operations, the regulator cited multiple lapses, including submission of false information, non-disclosure of related-party transactions, a high number of dormant accounts, cybersecurity deficiencies, and serious non-compliance with know your customer (KYC) and anti-money laundering norms.
Following the crackdown, key services went dark overnight, and revenue slumped even as fixed costs remained the same. In the June quarter (Q1) of 2024-25, Paytm reported that its net loss had widened 135% over the previous year to ₹840 crore, while revenue fell 36% to ₹1,502 crore.
'You can lose revenue in a week, but you can't cut costs that quickly," Sachin Dixit, who leads Internet Equity Research at brokerage JM Financial, told Mint.
Paytm had been on a gradual path to profitability since its initial public offering (IPO), trimming net losses. However, the RBI's action made course-correction urgent.
The FASTag unit was among the first to go. 'Once the ban happened, everything came to a standstill," the person cited above said. 'Initially some of them were moved to the UPI team and other teams, but eventually most were let go."
UPI is short for unified payments interface, an instant money transfer system.
Queries sent to the company had not elicited a response at the time of publishing. Multiple requests to Paytm management for an interaction were turned down.
In a bid to stem losses, Paytm launched a sweeping operational overhaul: trimming teams, slashing costs, and leaning heavily on artificial intelligence (AI) to drive efficiency. The result? A U-turn into the black.
On 23 July, founder Vijay Shekhar Sharma, also called VSS, declared a ₹123 crore net profit for Q1. 'No adjusted Ebitda or Esop fluff, Paytm is PAT positive", he declared.
Ebitda is earnings before interest, taxes, depreciation, and amortisation; PAT is profit after tax, and Esop is employee stock ownership plan.
This felt like redemption after a forgettable debut on the bourses. One97 Communications had launched India's largest-ever IPO, raising $2.46 billion in November 2021. But the shares crashed on debut, triggering circuit breakers. This wiped out nearly $900 million for high-profile backers such as SoftBank's Vision Fund, Warren Buffett's Berkshire Hathaway, and Jack Ma's Ant Group within two days.
The stock closed 37% below its issue price, marking one of the worst global debuts for a billion-dollar IPO in the first two days post listing. Experts at the time said the company's IPO was mispriced, with a valuation of nearly $19 billion. They also cited the absence of a clear path to profitability, and intense competition in the payments business.
Inside the deep cuts
Paytm's profitable turn hasn't been driven by a sudden surge in revenue. It has come from aggressive cost cutting (see chart).
'About five quarters ago, things were in the doldrums. You had a lending partner pulling back due to the ban, which consequently, led to lower payments revenue. What we're seeing now is not dramatic growth, just a reversion to normal," Piran Engineer, investment analyst at CLSA, told Mint.
Cut what doesn't bring in profits and double down on what does, was Paytm's mantra.
The fintech company makes money through three main streams: payments, financial services, and marketing. In payments, it facilitates merchant and consumer transactions—via UPI, co-branded credit cards, and payment devices like soundboxes. Its financial services arm focuses on lending to consumers and merchants. Though Paytm doesn't lend directly, it partners with lenders. Other offerings like insurance and broking are at an early-stage. Finally, marketing revenue is generated from ads, promoting financial products, and selling deals, vouchers and travel tickets on its platform.
The biggest savings came from three areas: employee costs (especially non-sales roles), marketing, and Esop expenses.
'They've reduced employee costs by about 20–25%, which alone translates to annual savings of ₹800–1,000 crore. Then there's a cut in discretionary spending, things like promotions, cashbacks, and fixed marketing spends, for another ₹500 crore in annual savings," said Engineer.
To do that, Paytm scaled back experimental projects, as a result of which it could trim its workforce expenses, especially non-sales employee costs.
'Paytm was known for its efforts to do everything, they had a huge focus on building Paytm as a super app. The app now is focused on payments, deprioritizing other segments," said the person quoted above.
In addition, the company had effectively gone into a hiring freeze. Sharma, during the earnings call for Q4 of 2024-25, said Paytm will not be backfilling roles.'We are not filling the positions that get emptied. It may not look like a (further) drop, but as the cost of people declines, more productivity is showing up," said the founder.
AI played a role, too. Paytm has quietly used automation to replace manual tasks, especially in back-end metrics such as customer support, JM Financial's Dixit said. This could turn into a huge cost saving given its 70–75 million active users and 13 million paying merchants, according to the latest quarterly report.
AI also helped reduce tech infrastructure costs by identifying 'slow hours", where server usage could be scaled down. 'Suppose you're using cloud infrastructure with dedicated machines to handle traffic spikes. Based on usage patterns, AI suggested that during certain night hours, we could reduce capacity to a dramatically lower volume, without affecting performance," said Sharma, during the Q4 earnings call.
Marketing was another major area that saw a pullback. With consumer payment monetization still limited, Paytm chose to spend less on acquiring monthly transacting users (MTUs), focusing instead on channels that directly bring in revenue.
'Until Q2 of 2024-25, they were restricted from onboarding new customers (as part of RBI action from January 2024 mentioned earlier). But even in Q3 and Q4, if you look at their UPI user additions, growth has remained relatively stagnant. It's inching up, maybe by one to two million users a quarter, but not at the pace it potentially could," said Dixit. 'The company feels that if it can't generate a reasonable lifetime value-customer acquisition cost ratio, there's really no point in spending inorganic dollars to acquire them."
The company's MTU grew about 2% sequentially in Q1 to 74 million. The user base is still down 6% from 78 million a year ago.
Market cheers, regulators wait
One of the biggest turning points came when founder Sharma forfeited the Esops—21 million employee stock options worth over ₹1,800 crore—granted to him when the company listed back in 2021.
'The Esop costs were meant to taper off eventually but this played out faster than expected after VSS (Sharma) voluntarily surrendered his, amid regulatory concerns," Pranav Gundlapalle, senior research analyst at Bernstein, told Mint.
Last August, India's market regulator said that the grant of 21 million Esops to Sharma violated shareholder classification norms—large shareholders in a position to influence company decisions cannot hold Esops. Sharma owned a 14.7% stake in Paytm a year before the fintech's 2021 listing. To become eligible for Esop grants, he reduced his shareholding to 9.1% by transferring 30.97 million shares to a company that acted on behalf of his family trust.
Sebi had issued notices to Sharma and other board members who held roles during Paytm's November 2021 IPO over alleged misrepresentation of facts.
Sharma has since settled the case with Sebi.
The sharp decline of Esop expenses in Q1 this year signalled the end of a key cost overhang. These steps were also a signal of goodwill, market watchers said.
Once known for his flamboyant persona and a leadership style that made Paytm townhalls feel more like parties than serious company meetings, Sharma has undergone a marked transformation. Over the past year, Sharma appears to have consciously reduced his public appearances, cut down on casual social interactions, and is now laser-focused on rebuilding the company's credibility.
Still, Sharma's trademark selfies haven't stopped. First came a photo with former Sebi chairperson Madhavi Puri Buch in February. More recently, Helios fund manager Sameer Arora snapped a selfie with Sharma at a local chaat shop in Delhi, within a week of the company turning a corner.
With the company under intense regulatory scrutiny, Sharma's actions over the year were likely meant to send a message that Paytm is trying to clean up its act.
Those actions did work on the stock market. Investor confidence has improved, as reflected in the stock price recovery. Paytm's stock opened at ₹1,001.60 on 21 July, before the company reported its Q1 earnings, and over the past week has maintained an upward trajectory, closing at ₹1,075.80 on 1 August.
Jefferies and Dolat Capital have raised their 12-month targets on Paytm, with Jefferies hiking it from ₹900 to ₹1,250 and Dolat from ₹1,200 to ₹1,400. Both maintain a 'buy' rating.
But to keep the momentum going, with growth in profits, and bringing back a massive revenue chunk, Paytm will likely need to show deeper monetization, and eventually, clarity on the regulatory front.
Paytm Payments Bank Ltd is still facing a regulatory embargo due to persistent non-compliance with regulations and other issues flagged by the RBI. This includes co-mingling of financial and non-financial businesses within the Paytm ecosystem, as in the case of the FAStag business.
Last month, the bank appointed a new CEO, Arun Kumar Bansal, a former executive director at IDBI Bank, to replace Surinder Chawla. The bank also revamped its board, adding former bureaucrats and public sector bankers as independent directors.
Meanwhile, nine months after submitting its application for a payment aggregator licence, Paytm has still not received approval. This comes at a time when PayU, MobiKwik's Zaakpay, PBFintech's lending arm, and other peers have received their payment aggregator licence.
A payment aggregator licence lets a fintech collect and settle payments for businesses, making it easier and safer for them to accept digital payments.
The delay in securing this licence persists despite Paytm bringing Chinese investor Antfin's stake below 10%, a move aimed at resolving a key hurdle. Antfin is an affiliate of the Alibaba Group.When Paytm filed its draft red herring prospectus (DRHP) in July 2021, Chinese ownership in the company was significant—Antfin (Netherlands) Holding B.V. held 27.9% and Alibaba.com Singapore E-Commerce Pvt Ltd held 6.8%, together accounting for 34.7% of the pre-offer paid-up equity capital. This level of Chinese investment had raised eyebrows among market watchers and regulators.
In the latest trim, Antfin sold a 4% holding in the company for $246 million via a block deal in May this year. This reduced its holding from 9.85% previously to around 5.85%. In August 2023, Antfin had transferred 44% of its Paytm stake to CEO Sharma, who took it through his overseas firm, Resilient Asset Management.
'On the regulatory side, any favourable action would be an indication that they've done enough to pass the intense regulatory scrutiny," said Gundlapalle.
more tests
The first step, cost rationalization, is already in place. From here, the real conviction has to be around the belief that EPS (earnings per share) growth won't just be linear; it could scale meaningfully as the topline expands," said Gundlapalle.
That next phase, however, will test Paytm's staying power. Two levers are key to sustaining profitability: personal loan distribution and co-branded credit card revenue.
'Lending growth remains soft due to subdued consumer credit demand, a major headwind since lending is a high-margin business. If that slows further, the non-linear profit growth story could wobble," said Gundlapalle. 'The second risk is retaining market share in revenue-generating payment products, largely merchant acquisition for credit card payments. That's where Paytm earns a large part of its payment revenue."
Apart from the two main revenue drivers, Paytm's management might see a struggle in finding incremental revenue sources. It has pointed to several future revenue bets: UPI monetization with merchant discount rate (MDR), buy-now-pay-later (BNPL), scaling Paytm Money, international expansion, and a revival of the wallet business.
But each of these growth levers is either on pause or uncertain.
UPI MDR, a payment processing fee that merchants have to bear for UPI transactions, is off the table in the near term after finance minister Nirmala Sitharaman's comment on it being a rumour.
Paytm's international markets may take two–three years to deliver revenue, while Paytm Money is still a niche player in a crowded wealthtech market.
'For additional long-term growth, we are exploring opportunities in select international geographies, which will start showing results after three years," the company said during its management commentary this quarter.
Paytm has managed to arrest its slide into losses and is showing early signs of a turnaround. But sustaining this momentum will require more than cost cuts. Sharma still needs to prove that the company's growth bets can scale up meaningfully.