Paytm Share Price Surges 5% on NPCI Approval for Third-Party App License

Paytm share price surged by 5% as it finally received approval to join the UPI ecosystem as a Third-Party Application Provider (TPAP). This approval from the National Payments Corporation of India (NPCI) is a big relief for the company operating under a multi-bank model. Analysts anticipated this positive development, which is crucial for Paytm's operations.

Partnership Details and Regulatory Challenges

Under the multi-bank model, Paytm will collaborate with four leading banks Axis Bank, HDFC Bank, Yes Bank and SBI. While these banks will serve as payment service providers, Yes Bank will assume the role of the merchant acquiring bank for UPI merchants. Analysts view this development positively, as it eliminates the last regulatory hurdle for Paytm's seamless transition in the UPI landscape.

Paytm faced a tumultuous period after regulatory actions by the Reserve Bank of India (RBI) resulting in a sharp decline of over 50% in its share price. Restrictions imposed on its partner entity, Paytm Payments Bank Limited (PPBL), restricted new deposits into user wallets and accounts. However, the RBI's directive to NPCI to review Paytm's TPAP application signals a shift in focus from regulatory hurdles to operational performance driving investor optimism.

Analyst Insights

Analysts particularly at Jefferies India Pvt Ltd highlight the importance of user and merchant retention for Paytm's sustained growth. With a cash reserve of approximately Rs 8,500 crore, Paytm is expected to allocate resources towards retaining users. The trajectory of revenue and EBITDA will gain clarity as Paytm's lending business, currently partially suspended, moves toward normalization. Analysts are keeping an eye on both good and bad possibilities related to how many users and merchants stick around, how well revenue grows, and how costs are managed. They're also waiting for clear information on how many people are leaving and when the lending business will get back on track.

Morgan Stanley analysts have given an 'equal-weight' recommendation for the stock, setting a target price of Rs 555, indicating a potential upside of 57% from the current level. They see this as a positive move and expected. They are waiting for further updates, especially regarding the impact on the company's businesses in February 2024. They're also interested in seeing how the business dynamics change as Paytm Payments Bank shifts its operations to other banks.

Changes for Paytm UPI Users?

For Paytm UPI users, changes are coming, new users signing up for UPI on the Paytm app will now get handles backed by above mention banks instead of Paytm Payments Bank. Yes Bank and Axis Bank have already launched handles like @ptyes and @ptaxis respectively. Yes Bank also handling the migration of existing @paytm handles for now. This means that all users with @paytm accounts will now have their UPI transactions routed through YES Bank. Currently, Paytm has about 90 million UPI users using @paytm handles.

SBI and HDFC Bank are expected to join the platform soon with handles like @ptsbi and @pthdfc, respectively, as payment service provider (PSP) banks. Paytm holds around 11% of UPI transactions, processing over 3B beneficiary transactions and about 1.6 billion outgoing transactions.

To Summarize

The approval to operate as a TPAP for UPI marks a big moment for Paytm, positioning it to compete effectively in the digital payments landscape. While regulatory challenges have impacted its performance, investor sentiment is buoyed by the prospect of operational improvements and revenue traction. Paytm's strategic partnerships and focus on customer retention will be closely monitored as it navigates towards sustainable growth in the market.

Meanwhile, NPCI has suggested that Paytm swiftly transfer all existing handles and mandates to new PSP banks. A PSP bank assists customers in signing up for UPI, linking their bank accounts to their UPI IDs through its app or another service.