Paytm, India’s fintech giant facing financial headwinds, has announced a strategic shift in its insurance business. In a bid to streamline operations and conserve capital, Paytm General Insurance Ltd (PGIL) has withdrawn its application for a general insurance license with the Insurance Regulatory and Development Authority of India (IRDAI). This decision signifies a departure from the company’s previous ambition of establishing itself as a full-fledged general insurance provider in the country.
Instead, Paytm will now focus on a distribution-only model for its general insurance offerings, catering to its consumers, small merchants, and SMEs.
The transition to a distribution-only model means that Paytm will act as an intermediary, selling insurance products on behalf of other providers rather than creating and managing policies itself. This changes Paytm’s role from an insurer to a broker, impacting how it generates revenue from its insurance business.
Paytm Insurance Distribution Model
Paytm Insurance Broking Private Limited (PIBPL), a wholly owned subsidiary of One 97 Communications Limited (OCL), aims to offer an extensive array of small-ticket insurance solutions across various categories. These include health, life, motor, shop, and gadgets, along with coverage for cyber fraud losses and job loss.
Leveraging its core strength in payment distribution, PIBPL aims to revolutionize the insurance landscape, making essential coverage more accessible and affordable for all.
To bolster its insurance distribution segment, Paytm has forged strategic partnerships with industry-leading insurance providers, including Digit, Acko, ICICI Lombard, New India, Bajaj Allianz, Tata AIG, Aditya Birla Health, and Universal Sompo.
By adopting an insurance distribution-focused approach, Paytm is poised to enhance its market presence and deliver value-added solutions to its diverse customer base.
In May 2022, the board of directors greenlit the increase of One 97 Communications’ stake in PGIL from 49% to 74% and the subsequent application for a general insurance license. CEO Vijay Shekhar Sharma’s VSS Holdings Pvt Ltd retained the remaining stake. This strategic move followed Paytm’s withdrawal from its two-year bid to acquire Raheja QBE General Insurance.
Reason Behind Pivoting Insurance Business
Paytm’s decision to pivot its insurance business comes amidst financial challenges stemming from regulatory actions against Paytm Payments Bank Limited (PPBL).
Withdrawing the general insurance license application frees up Rs 950 crore in earmarked investment for PGIL. This capital conservation is crucial for One97 Communications, which has been grappling with financial difficulties after the RBI’s action against its PPBL unit. This move underscores Paytm’s commitment to adaptability and resilience in the face of evolving market dynamics.
In Q4 FY24, Paytm’s net loss soared 228% YoY to ₹550 crore, while revenue declined 3% to ₹2,267 crore. The company’s revenue from payments and financial services declined double-digit during the March quarter. This was mainly due to the lower loan distribution. Despite facing significant challenges, particularly following the RBI ban, the company’s robust performance in the first three quarters of the fiscal year contributed positively to its overall annual performance.
Expert Opinions
Similar to its insurance strategy, Paytm’s loan business strategy, which also focuses on distribution, has received varied assessments from brokerages. Bernstein cautioned that a permanent shift to distribution-only loans could result in “a much weaker model.” They believe that Paytm would function more as a loan distribution agent rather than a partner, adding significant value as a loan service provider.
Emkay highlighted another concern, suggesting that lower loan disbursements and moderation in lending rates might disrupt the company’s strategy of monetizing its payment business. This disruption could potentially lead to decreased revenues from loan-related activities, affecting the company’s financial health.
On a more optimistic note, Citi viewed Paytm’s focus on marketing efficiencies and developing new distribution-monetized revenue streams positively. They believe these steps are in the right direction, as they could help mitigate regulatory risks and enhance profitability.
Now, it would be interesting to see how Paytm’s insurance distribution model will help the fintech company to navigate financial challenges while expanding its insurance offerings to a broader Indian market.
