Paytm is playing the smartest game in fintech

Published on
August 27th, 2021
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The clever strategy behind Paytm's products.
These days, it is common for news articles to criticize tech startups because of their huge losses. A few days back, I came across such an article in the Quartz magazine — “India’s most-valued unicorn has spread itself too thin.” The summary of the article is: Paytm is expanding into too many sectors at once. Instead, it should focus on becoming No.1 in digital payments.
I looked up all the different sectors in which Paytm is present. The list was mind-boggling. Take a look:
Digital Payments - Paytm UPI, Paytm Wallet

E-Commerce - Paytm Mall

Finance - Paytm Money, Paytm Payments Bank, Paytm Insurance, etc.

Gaming - Paytm First Games

The more I looked at this list, the more confused I became. “Paytm is a digital payments company. Why is it getting into e-commerce and gaming and insurance and stocks?”

This is exactly what Quartz is trying to say in its article. I’ve broken down the argument into 3 points for simplicity.
1. Paytm is spending huge amounts of money to acquire customers through cashbacks and offers. So, it has huge losses.
One97 is yet to start making money and its losses run into thousands of crores.
2. Getting into the new markets like insurance and stocks means the company has to compete with existing players like Zerodha, Upstox, etc
Having a presence across multiple sectors has made it necessary for Paytm to constantly pump more funds into the business.
3. Paytm’s products aren’t successful while competing with existing players in the market.
Paytm Mall […] has not managed to make a dent in the sector that is dominated by Amazon and Walmart-owned Flipkart.
According to Quartz, expanding into all these different sectors is a mistake. The article quoted the fact that Paytm was in the 3rd position in the digital payments sector, and concluded that Paytm should focus on its main product: digital payments. The article makes total sense.
Or does it?

What Quartz got wrong about Paytm

After reading the Quartz article a few times, I spotted a problem.
Quartz’s article criticized Paytm’s products like Paytm mall for not being successful in the market.
That’s their mistake – they are looking at Paytm Mall as a standalone product, separate from Paytm. I think the purpose of Paytm Mall, and other products like Paytm Money and Paytm First Games, are different. I think these Paytm’s products have a more logical and solid purpose.
To understand what that “purpose” is, first we should understand the...

No.1 problem in the digital payments market

Before going to college, I used the Paytm app to pay bills, recharge mobile, and make payments. This continued until Google Pay arrived. With their attractive cashbacks and rewards, everyone on campus was using GPay and collecting scratch cards. I even forgot that I had Paytm installed on my phone.
Eventually, GPay’s offers stopped, and the craze died down. Then during the pandemic, Paytm came up with some cashbacks for paying bills, and I started using it again. I’ve also used PhonePe for some time.
Do you see what happened here?
I wasn’t loyal to one payments app. Whichever app gave cashback, I started using that app. Once the cashbacks stopped, I started using another app.
This is the No.1 problem in the digital payments sector — customer retention.
Once a payments app has attracted customers using cashback and offers, it has no way of retaining them. That’s because people can easily switch to another payments-app without any hassle. Since every payments app in India is built on UPI, they offer the same functionality. The only thing different is their colour (lol).
White colour UPI app - Paytm
Blue colour UPI app - GPay
Purple colour UPI app - PhonePe
So, these apps have to keep offering cashback so that customers don’t leave the app. But offering cashback isn’t sustainable — it entails huge losses for the companies. GPay spent Rs 1100 crores on cashbacks last year. How long can a company keep burning money on cashback?
This is where Paytm’s products come into the picture.

Paytm’s brilliant strategy:

You understand the problem with the digital payments market - it’s very hard to keep people in your app. And it isn’t sustainable to keep giving them cashbacks.
That’s why I find Paytm’s products such an elegant solution to this problem.
Paytm’s products keep people using the app without giving them cashbacks. Their strategy is brilliant. Once people start using the app, Paytm can entice them with Paytm Mall and Insurance and Games. Once customers start using these services, it becomes more difficult for them to leave Paytm and switch to another app. Another benefit is the extra revenue Paytm gets when people use its products.
This, my friends, is the purpose of all of Paytm’s products — customer retention.
No, the purpose of Paytm Mall isn’t to compete with Flipkart and Amazon.
No, the purpose of Paytm Money isn’t to compete with Zerodha and Upstox.
This is what Quartz got wrong. The purpose of all Paytm’s products isn’t to become successful in their respective markets. They only have to ensure customer retention.
Other payments apps are also following Paytm’s strategy. For example, PhonePe launched 2 products last year: Insurance and Mutual Funds. Clearly, they have realized the benefit of this strategy. We can expect other payments apps to come up with new products soon.
I hope you understand the point I’m trying to make here: Paytm isn’t burning money on its products like Paytm Money and Paytm Insurance. It is a clever strategy to ensure customers don’t leave the Paytm app and to get extra revenue from those customers.
This article originally appeared in Integral, a newsletter to get smarter about Indian startups.
Comments (11)
Aditi Kapur
I liked how you analysed the strategy of Paytm. Paytm is not competing with the giant firms, it's making its position stronger. Now I understand why Paytm is gaining popularity day by day!
Smile Bhateja
Yeah I use paytm as a multi use-case app. Book flights, buses, movies, do recharge, shopping, play games and more. All these use cases strengthen the fintech game of paytm. And paytm mall, insurance, mutual funds seem more advanced, high effort use cases as compared to recharge. So the question for paytm I guess is that do these high effort use cases (Paytm Mall) add enough value to the paytm ecosystem to counter its cost or not?
Eugene Hauptmann
Nice, just added to the trending section here:
Abhishek Sivaraman
This might have been the vision behind all these different apps but I dont think this strategy is working. I think the Chinese model of Weibo superapp when everything can be done in one app has not scaled anywhere else apart from China. Consumers would rather prefer apps which does one thing and do it well rather than simulating a fish market in the phone.
Celine Hau
@abhishek_sivaraman1 because the market is generating enough revenue that there is no benefit to scaling outside your local country/region/area (high cost, low returns)
Amit Shekhar
Nice article, this strategy has actually helped PayTM.