One97 Communications Ltd (PAYTM) Q2 2022 Earnings Call Transcript

One97 Communications Ltd (NSE:PAYTM) Q2 2022 earnings call dated Nov. 27, 2021.

Corporate Participants:

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Madhur Deora — President & Group Chief Executive Officer

Bhavesh Gupta — Chief Executive Officer, Lending

Analysts:

Bhavik Dave — Nippon AMC — Analyst

Jayant Kharote — Credit Suisse — Analyst

Gaurav Kochar — Mirae Asset — Analyst

Saurav Kumar — JPMorgan — Analyst

Vijit Jain — Citi — Analyst

Nilanjan Karfa — Nomura — Analyst

Chandrasekhar Sridhar — Fidelity — Analyst

Anish Rai — UBS — Analyst

Sameer Bhise — Axis Capital — Analyst

Nitin Aggarwal — Motilal Oswal Securities — Analyst

Viral Shah — Centrum — Analyst

Presentation:

Operator

Thank you, and a warm welcome to Paytm’s Inaugural Earnings Call Post Listing to discuss its Financial Results for the Quarter and Half-Year Ended September 30, 2021. From Paytm’s management team, we are today joined by Mr. Vijay Shekhar Sharma, Founder and CEO; Mr. Madhur Deora, President and Group CFO; and Mr. Bhavesh Gupta, CEO, Lending.

Before we begin, a few announcements for all attendees. This earnings call is meant for existing shareholders of Paytm for potential investors and research analysts to discuss the company’s financial results. This call is not for media personnel. If any media representatives are attending this call, request you to kindly drop off the call at this juncture. The information to be presented and discussed on this earnings call should not be recorded, reproduced, copied or distributed in any manner whatsoever by any of the attendees.

Statements or comments made on this earnings call may include forward-looking statements. Actual events or results may differ materially from those anticipated in such forward-looking statements. Finally, this earnings call is scheduled for 75 minutes. It will have a presentation by the management followed by Q&A.

Kindly utilize the raise hand feature on your Zoom dashboard if you seek to ask a question. We would unmute your line and take questions in the respective sequence of raised hands within the schedule time. Please ensure your name is visible as first name, last name, followed by your organization name in brackets for us to be able to identify you before we ask your questions. The presentation, a replay of this earnings call and a transcript will be made available on the company website subsequently.

With this, I would like to request Mr. Vijay Shekhar Sharma to kindly initiate this earnings call.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Thank you so much. Hello, everyone. Good evening from New Delhi. It is my pleasure to welcome you to our first earning call, post IPO. It gives me immense pleasure to see our company’s results of September quarter. We have expanded our payment platform, strong growth driven by non-UPI and UPI payments is clearly visible in overall GMV growth on our platform. We have started to call out non-UPI GMV so that we can call out direct revenue made using Payments business out there along with few other revenue line items in Payment businesses. I’m very happy to say that our focus on monetization has clearly been demonstrated in strong revenue growth that we are posting year-on-year in this quarter. Clearly our platform leverage can be seen in increased contribution margin, better EBITDA margin and continued growth in all key KPIs out there.

I’m very pleased to announce that my team and I are super, super energized, excited to see the opportunity what we see in front of Paytm, what we see in front of us. We are fully committed to head down and execute and deliver great results quarter-on-quarter, year-on-year forward out there.

I am joined by my colleagues Madhur and Bhavesh here and I will now want Madhur to share our September quarter report card in detail with you. Thank you.

Madhur Deora — President & Group Chief Executive Officer

I hope everyone can see the presentation. Thank you very much for joining our earnings call on a Saturday, and good morning, good afternoon, good evening wherever you are. So we just talk about our quarter ending September 2021. We did put out a release this morning, so many of you may have had a chance to achieve that already at this time. Just to remind everyone, our mission is to bring 0.5 billion Indians to the mainstream economy through technology led financial services. This is our September quarter in numbers. So our revenue from operations grew to INR10.9 billion or INR1,090 crores. This was up 64% year-on-year. This was driven by 52% growth in non-UPI GMV. I wanted to call out here that this is consecutive quarters that the company has delivered over 60% revenue growth on a year-on-year basis. So we had 62% revenue growth in quarter one and we now have 64% revenue growth in quarter two. This was combined with contribution profit hitting a record high of INR2.6 billion or INR260 crores in the last quarter. This was up nearly 600% on an year-on-year basis. Clearly this is a very large growth in contribution profit, almost I would describe it as a step change. And margin has increased from 5.7% in Q2 of last year to 24% of revenues in Q2 of this year. I will give a little bit more commentary about this as we go along.

Our EBITDA losses were INR4.3 billion or INR430 crores. This as a percentage of revenue is 39% versus 64% in the same quarter in the previous year. So we have seen some improvements in EBITDA as a percent of revenue. This has been driven in addition to the increase in contribution profit been driven by the reduction in indirect costs as a percent of revenue from 70% to 63%. I should point out that the continued — the company continues to make investments and in some cases increased investments and technology as well as merchant base expansion. And we have been able to achieve reduction of EBITDA as a percent of revenue, despite and along with these investments. Our focus would be to continue to make investments in areas that create long-term expansion of profit pools.

And finally, as Vijay mentioned, GMV which is an indication of platform growth reached INR2 trillion or INR2 lakh crores. This is up 107% year-on-year. Many of you will recall that in June quarter as well we grew more than 100% year-on-year. So this two consecutive quarters of platform growth of more than 100% and this is really a function of users and merchants growing on the platform as well as increased engagement on the platform.

So just going through this in a little bit of detail. Our revenue growth, as I mentioned earlier was 64% up year-on-year. In our financials we break this up into Payments and Financial Services revenue, which grew by 69% year-on-year from INR5 billion to INR8.4 billion. This was driven as I mentioned earlier by 52% year-on-year growth in non-UPI GMV, also our increase in revenue from financial services and others. So we have a revenue line that we have disclosed as Financial Services and Other, that grew by over 3 times year-on-year. And we also saw an acceleration of device deployment amongst our merchant and we’ll talk a little bit more about this as we go along.

Our Commerce and Cloud service business revenue grew by 47% from INR1.7 billion or INR170 crores one year ago to INR2.4 billion or INR240 crores. There were two primary drivers of that. One is rapid growth in our advertising revenue. It’s a business that we launched a couple of years ago, which is disclosed in our Cloud line and continued recovery in Commerce business as you may recall, we have a large Commerce business around ticketing and that was heavily impacted due to COVID as you would understand, and that is starting to recover and that’s why we are seeing strong year-on-year growth as well as Q-on-Q growth.

Going back to GMV. As I mentioned, it grew 107% year-on-year. We did disclose October metrics last weekend, where you would have seen that in October this as accelerated to 130% year-on-year growth. Once again, non-UPI portion of this grew 52%. We should also point out that when our platform grows, we also have some merchants who do not pay us any MDR for payments. These are typically merchants who are accepting UPI or wallet payments using QR code. Even those merchants are being — many of them are being monetized by the company not directly through MDR, but indirectly through subscription revenues and merchant lending revenues. And our subscription and merchant lending revenues from this merchant base alone reached INR515 million in Q2 and that was around 5% of our revenue from operations. So this is very large funnel that we have build where we may not for that portion may not make MDR for payments, we are able to make revenues at significant margins from other services. As I mentioned earlier, GMV growth is accelerating in Q3 of FY ’22 and we have particularly strong performance in festive season. As you know in India, October sometimes early November is festive season. We had that last year obviously and we have it this year as well. So, like-for-like basis, we grew 131% and that continues in Q3.

Our monthly transacting users grew 33% year-on-year. We increased our average quarterly MTU in the last 12 months by 14.4 million, so there is significant increase and MTU just to remind everyone is monthly transacting users. These are users who have to come and do a transaction. So it’s not active users or somebody just visiting the app. What is also encouraging is that the engagement on our platform grew by 55% year-on-year. So we are seeing strong MTU increase and strong engagement increase, and we have achieved this while keeping our marketing expenses flat at 9% of revenues on a year-on-year basis. So this is not been accompanied by significant or drastic increases in marketing expenses relative to our overall scale.

Our device merchant base has expanded by 1 million in the last 12 months. We started this business a couple of years ago. A year ago September 2020 we were at 0.3 million devices, currently, we are at 1.4 million devices. And this is strategically important for us because device merchants continue to show higher retention and higher average spends, which are the primary indicators of loyalty on the platform. So they become very high quality behavior on our platform. One of the day — one of the things that I would share is that 4% of our device merchants have already taken a loan through our platform, this is a merchant loan program that we have with partners. This business is accelerating. You would have seen some recently announced bank partnerships for BOS, which is aimed at the enterprise segment and that is really giving us very strong momentum and tailwinds into that segment and over the next few quarters we’ll talk more and more about this.

Coming to our Lending business. The value of loans disbursed through our platforms has reached $1 billion annualized in October 2021. This is a business that we really started scaling up only about six quarters ago. As you can see our number of loans disbursed on the platform grew over 700% on an year-on-year basis. Our value of loans disbursed grew 5 — nearly 500% year-on-year. And as I mentioned earlier, our financial services and others revenue line has shown revenue growth of over 3 times on an year-on-year basis, and clearly as we will discuss later there is a huge runway here.

I just wanted to remind everyone that all of our products are fully digital end-to-end. The products that we have which is Paytm Postpaid, Personal Loans, Merchant Loans as well as Credit Cards. They are all fully digital and we do this in partnership and we do this in partnership only with Tier 1 partners, which are large banks and NBFCs and you would have seen a few announcements around that, of course if you go to our app, you can see who are lending partners are.

Our contribution profit grew nearly 600% year-on-year. It was 24% of revenue in this quarter, INR2.6 rupees as I mentioned earlier. I would just note that in the first two quarters of this year, so for the first half of this year, our contribution profit is already INR5 billion or roughly INR500 crores, and this is exceeded already the contribution profit that we made in the entirety of FY ’21 which was INR3.6 billion or INR360 crores. And the reason for this as we had mentioned in our meetings prior to IPO, is that we are seeing high margin monetization kicking in at scale. And I just want to give two examples, obviously there are many such businesses, but lending and advertising in particular are contributing significant amount of high margin monetization. In addition, our BG cost has reduced from 52 basis points of GMV to 34 basis points of GMV. So we continue to focus on driving more efficiencies in our Payments business and making sure that that business is improving its profitability profile.

Our indirect expenses as a percent of revenue has reduced from 70% in the same quarter last year to 63% in this quarter. This, as I mentioned earlier, is along with investments and people in marketing and in technology. So just to call out, that our marketing cost maintained — was maintained at 9% of revenue, even as we have increased MTU by 14.4 million in the last 12 months. And our employee expenses are actually lower as a percent of revenue, gone from 40% to 34%, even as we invest more in technology and more in merchant growth and devices growth. So we are able to improve the profile, financial profile of our business while continuing to make investments in areas that matter.

Just to give you a little bit of break up for our revenues, further breakup rather. So as I mentioned earlier, our Payments and Financial Services revenue grew by 69% year-on-year, 52% increase in non-UPI payment volume. As you noticed in our disclosures, we break this up into the Payments and Financial Services business into three components. Our Payment services to consumers grew 54% year-on-year. This is driven by increase in non-UPI payment usage on our consumer platforms. Our Payment services to merchants grew 64% year-on-year. This is growing due to growth in non-UPI GMV, particularly in payment gateway business and our device merchants. I should note that this business has reached a run rate of nearly INR16 billion of run rate revenues, which is greater than $200 million run rate.

Our Financial Services and Other business — Financial Services and Other line grew by 250% and went from 4% of our total revenues to roughly 8% of our total revenues due to growth in lending and wealth primarily. Our Commerce and Cloud business as we mentioned earlier, grew 47%. Our Cloud business grew due to rapid growth in advertising revenue and our Commerce business grew due to continued recovering ticketing revenues from the dip due to the second COVID wave in Q1.

Before we finish, I just wanted to summarize our key trends. The key trends in our business are — is that Payments is, there is growth in Payments revenue and profitability. This is due to growth of payments volume from non-UPI instruments including Paytm payment instruments that many of you’re familiar with, as where there is payment services to merchants. So, both on the consumer side as well as the merchant side, we are driving adoption of differentiated instruments. We are seeing recovery of high margin Commerce business and growth of Cloud business. We are seeing increase of Financial Services revenue driven by the huge ramp in lending for which we have disclosed a number of operating metrics as well as revenue trends.

In terms of our operating and financial performance, I just wanted to summarize some of the key trends. We are able to efficiently increase users merchants and GMV. This is what Vijay described as platform growth. We are seeing strong momentum in revenue and we expect that to continue with 64% growth year-on-year in this quarter. We have seen a step jump in contribution margin that we have achieved and there are clear trends and deal wins towards continued year-on-year improvements. Our indirect expenses as a percent of revenue is going down, even as we are making investments in the key areas which have long-term positive impact for us and we are very well funded for growth opportunities ahead.

And that’s all I had. Thank you very much. Maybe I’ll turn it back to the moderator.

Questions and Answers:

 

Operator

Thank you, Mr. Deora. We will now proceed to Q&A. [Operator Instructions] With that, I would ask the first question from Bhavik Dave at Nippon AMC.

Bhavik Dave — Nippon AMC — Analyst

Hi, am I audible?

Madhur Deora — President & Group Chief Executive Officer

Yes.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Yes.

Bhavik Dave — Nippon AMC — Analyst

Yes, hi. Thank you for the opportunity. Couple of questions. One is if you can break down the GMV into UPI and non-UPI absolute number. Second question is on the Financial Services side and we see a reasonable amount of growth on the revenue side. Just wanted to understand from INR1,200 crore disbursement that we have done during the quarter, what are the take rates like, because the take rate calculation — I’m sure the Financial Services is not only lending, it would be the insurance and wealth businesses as well. So from that perspective, if you could just break down that piece for us. That will be helpful. That’s about it. Thanks.

Madhur Deora — President & Group Chief Executive Officer

Your first question, Bhavik, we are not sharing — at the moment we are sharing all of this as the detailed disclosure being non-UPI GMV growth. We believe that non-UPI GMV growth is a direct contributor to Payments revenue, whereas both UPI as well as non-UPI GMV growth is a driver to number of the upsell revenues that we have talked about such as devices, Commerce, Cloud and Financial Services. So for the moment we would love for investors to focus on, if they’re trying to calculate payments revenue trajectory, we want them to have this additional information of non-UPI GMV growth.

Bhavik Dave — Nippon AMC — Analyst

Sure.

Madhur Deora — President & Group Chief Executive Officer

And to your second question, the Financial Services and Others does include, has a very large chunk of lending of course. The wealth and insurance businesses are somewhat smaller. It is hard to sort of put take rates because the revenue model is quite different. So for example in wealth, of course, you make money on equity trading, which is not sort of linked to GMV in that sense, it is linked to number of transactions and so on. But, so I wouldn’t, necessarily look at that revenue and divide that by one specific metric. But what I would say is that the growth that we are seeing in lending operating metrics does translate into growth of that particular line item which is Financial Services and Others. And you should be able to track that on a quarter-on-quarter basis going forward.

Bhavik Dave — Nippon AMC — Analyst

Sure. Sir one data point, if you could give us that the disbursement that we have done during the quarter, can you breakup between consumer and merchants. And also, which are the large partners that are on-boarding, right. Today we have I think Clix and Aditya Birla Capital as the two main lenders with us. Have the banks or the large bank partnerships that we have, have they gone live? Which are the products that they are doing currently or how do we think about it? If you could just share some details on those two things. Thank you.

Bhavesh Gupta — Chief Executive Officer, Lending

Bhavik, thank you for your question, Bhavik. So we have more than the two partners that you mentioned. As we mentioned earlier in Madhur’s presentation that we do business with Tier 1 banks and NBFCs. So on the card side, we do have Citibank, SBI and we recently announced HDFC while the card has just gone live in a pilot face and we hopefully will do more of that in the future. On the lending side, you rightly said Clix Capital and Aditya Birla we also have Fincorp and a few others, and there are many more partners that we are currently in conversation with to integrate and scale. So in — I can say that the portfolio of partners that we have today is reasonably sufficient for us to really manage to stream the growth and we are very confident of doing that.

Bhavik Dave — Nippon AMC — Analyst

And the breakup of that INR1,200 odd crores, merchants versus consumers?

Madhur Deora — President & Group Chief Executive Officer

Bhavik, we are not quite giving the breakup at this point. What I would say — what I would just point out, is that we also have roughly 100,000 credit cards in partnership with our card partners. We do not include the spends of those into our disbursal numbers. And so this only includes postpaid, personal loan and merchant loan. There is not a huge amount of difference. There is obviously each business have different take rates, but it is not — there is not a huge amount of difference in take rate between the three alliance of the think that we are doing.

Bhavik Dave — Nippon AMC — Analyst

Sure. That’s helpful. Thank you.

Operator

Thank you. Next question, Mr. Jayant Kharote from Credit Suisse. Hi, Jayant you can ask your question.

Jayant Kharote — Credit Suisse — Analyst

Yes, hi. Thank you for the opportunity. Sir, again dwelling a little bit on the Financial Services revenue. If you could give us some idea about how much is coming from lending and others non-lending? And then how do we sort of make sense of how much lending and scale up as a part of the mix?

Madhur Deora — President & Group Chief Executive Officer

I’ll probably turn to Bhavesh to answer, to give you a broad framework for the second part of the question and then maybe I can try to address the first part.

Bhavesh Gupta — Chief Executive Officer, Lending

So, thanks Madhur. So Jayant, as you can — I’m sure you’re aware of this piece that India is a very, very large [Indecipherable]. We being a two-sided ecosystem, have a wonderful opportunity as we see both on the consumer and the merchant side. What we have seen thus far, during the last 18 months that the adoption of credit products in our platform, namely, Paytm Postpaid, which is [Indecipherable] product, consumer credit, which is personal loan and merchant credit and recently launched credit card, the adoption is very, very high and the growth rate suggest that the scale-up can be fairly, fairly large from where we stand today. And I think it will be important for us to recognize that this opportunity itself in India and definitely the opportunity and the presence in this platform on Paytm will be fairly large and hence we have been excited to keep taking this opportunity forward from our perspective.

Madhur Deora — President & Group Chief Executive Officer

On the — in terms of the break-up, we have sort of outlined in the prospectus to some extent as well, which is that something like a majority of the Financial Services and Others revenue has to do with Lending. So, we’re seeing sort of that trend continue. But I wouldn’t — each of these lines of business is growing, whether it’s Lending or wealth and so on. So I would obviously believe that you have to analyze that, but we are currently sharing Financial Services and Others as a separate disclosure in the prospectus and in our quarterly financials going forward.

Jayant Kharote — Credit Suisse — Analyst

Sure. This helps. Thank you.

Madhur Deora — President & Group Chief Executive Officer

Thank you.

Operator

Thank you. Next question from Mr. Gaurav Kochar from Mirae Asset. Gaurav your line is unmuted. Gaurav you can unmute yourself.

Gaurav Kochar — Mirae Asset — Analyst

Yes, sorry. Am I audible?

Madhur Deora — President & Group Chief Executive Officer

Yes.

Gaurav Kochar — Mirae Asset — Analyst

Yes, hi. Good evening, everyone. Thanks for taking the question. Coming to the payment processing cost, if I look at that number as a percentage of overall payments revenue, that has moved up from 83% last quarter to 89%, and given the non-UPI revenue is up 52% — sorry, non-UPI GMV is up 52% and the overall GMV is up 107%, it’s safe to assume that the UPI GMV would have grown much, much higher than that. In that backdrop, what explains this rise in payment processing cost sequentially from 83% to 89%?

Madhur Deora — President & Group Chief Executive Officer

I don’t know if I followed every part of your question Gaurav, but we did have — yes, when you look at our GMV growth, our total GMV growth is higher than the non-UPI GMV growth. So you can make that correction. From quarter-to-quarter, there will be some volatility in terms of sort of payment instrument costs as a percentage of GMV and so on. And the reason for that is, it is a pretty complex outboard of the type of instrument that is being used as well as the type of merchant that it is being used at right? So what we focus on is as a percentage of GMV, we would just continue to bring that down. And part of that is like you have correctly referred is mix effect, but a significant chunk of that is also improvements that we continue to make. But some of those improvements maybe sort of flattish in one quarter, but a reduction in another quarter and so on. So if you look, I would just encourage you to look at that whichever, if you are taking it as a percentage of something, I just look at in [Indecipherable] look at it over a slightly longer period. I think on a year-on-year basis, it has dropped by about 20%.

Gaurav Kochar — Mirae Asset — Analyst

Yes, yes, I mean 98% and now it’s down to 89%. That’s Y-o-Y it’s down. Yes just wanted, now quarter-on-quarter basis it’s up slightly, but yes, you’re right, I mean one quarter can be — can have some…

Madhur Deora — President & Group Chief Executive Officer

But there is also some volatility and some mix effect issues with respect to June quarter being some sort of lots of COVID lockdowns, September quarter is not being like that December was obviously have festive, which means that there are slight differences in instrument usage and so on. So it’s a little bit hard to really draws trend lines in the Q-on-Q basis. So that’s why we would encourage folks to do that on a year-on-year basis.

Gaurav Kochar — Mirae Asset — Analyst

Sure. Fair enough. My next question is with regards to the non-UPI take rates. If you can disclose that number for this quarter or maybe Y-o-Y basis, where has that moved some directional and going forward, how should we look at the non-UPI take rates?

Madhur Deora — President & Group Chief Executive Officer

I think there hasn’t been any meaningful change in take rate of non-UPI. We had — of course this is also focus on effective or mix effect of cards, wallets and many other instruments that we use, which are non-UPI. But we haven’t seen any meaningful change.

Gaurav Kochar — Mirae Asset — Analyst

Okay, and the share of Commerce GMV — I’m sorry, the share of Commerce would have gone up because last year it was I mean the last year it was relatively weaker. So in that context on the non-commerce sort of non-UPI GMV, has there been moderation or it’s all the same?

Madhur Deora — President & Group Chief Executive Officer

When you say commerce would have gone up, I mean commerce doesn’t generate a huge amount of GMV for us in our scheme of things, right, because when we’re looking at sort of trillions of rupees of commerce revenues, sorry payment volumes in a quarter, obviously commerce is — commerce that happens in our platform is reasonably small. So I wouldn’t try to take out sort of commerce from that. The point on commerce is that, it is very, very high take rate and very high contribution margin. So growth of that results in obviously revenue growth and contribution margin tailwinds.

Gaurav Kochar — Mirae Asset — Analyst

Sure. So we should assume a flattish sort of non-UPI take rates going ahead at least for this year, remainder of this year?

Madhur Deora — President & Group Chief Executive Officer

That is the trend in the past, right.

Gaurav Kochar — Mirae Asset — Analyst

Sure. And just last question on the lending business. If I look at the ticket size, it’s — it has not moved? I mean, even on a Y-o-Y basis or on a sequential basis it’s there about 4,400. Any color on what kind of ticket size should we look at given that the customers do migrate to a higher limit going ahead based on usage and that there is some sort of upgradation that happens from a postpaid loan to a personal loan etc. So what kind of ticket size are we looking at? Is that the right metric to look at given that the penetration of number of users and the ticket size I think both of that matters in the context of Financial Services revenue. So what kind of ticket size are you internally sort of targeting, some color around what kind of ticket size should we look at?

Bhavesh Gupta — Chief Executive Officer, Lending

Gaurav, so the way to see this data is that if you look at the number of loans expansion has been very, very large. And that’s why the second lending [Phonetic] means that on an incremental basis, we have a higher ticket size. That’s the reason all the ticket sizes remains same. What our belief it is that the opportunity to give credit through our platform with the help of our lending partners is so large, that our focus is to expand the number of users who can get access to credit big consumers and merchants and ticket size is an outcome which you rightly pointed out as the book matures with our lending partners, ticket size is a natural accretion that we’ve see in our platform. So in a nutshell, we — our focus is to expand number of consumers and merchants who can get access to credit, right? Ticket size is an outcome that we have necessarily not changing, but we definitely see the ticket size will keep improving as it improved in the past and improved [Phonetic] business.

Gaurav Kochar — Mirae Asset — Analyst

Understood. And on the penetration part…

Madhur Deora — President & Group Chief Executive Officer

Just before that, Vijay do you want to add something to that as well.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Yes, I think Gaurav, one of the interesting thing I want to share with the experience of payments that it was tough to drive mobile payment for small tickets, because it was consumer habit kind of thing. Similarly, in this case, as you can see what Bhavesh was sharing is exactly what I would expand on to say that smaller ticket size and completing the whole recovery and disbursement, whole cycle of small ticket size makes the platform understand the nuances and spread of customer type and various other system platform insights. So it is important for us to grow user base with a smaller ticket size and obviously like you said, the customer comes back on the same platform and our relationship with our lenders is also like this that we are able to cross-sell or upsell another type of loan to the customer. So smaller ticket size is like, I would say performance metrics here, not like a limitation. It is easier to issue large and larger ticket size, if you will, but we are keeping it very, very focused on spread on number of customers, than ticket size, than total dollar value of the loans and so on so.

Madhur Deora — President & Group Chief Executive Officer

Vijay, I just wanted to add 10 seconds, just summarizing that point is that we do very strongly believe that if you get small ticket sizes right, doing larger ticket sizes is much easier than going the other way around, which is that you start doing large ticket sizes and then you have to often re-invent your business to be able to do smaller ticket sizes. So we love the trajectory and we’ve seen that in payments and I think a lot of financial services companies have seen that the reverse is a little bit harder or significantly harder.

Gaurav Kochar — Mirae Asset — Analyst

Sure, sure. That helps. And just lastly on the penetration, I mean if I look at number of MTU is 6.3 — 63 million as in October. What is the sort of penetration of financial services product and if internally if you would have identified what percentage of these MTUs would be eligible for financial services products be it wealth, insurance or lending, can you give some color around it, just to get what is the size of opportunity we are looking at over a medium term?

Madhur Deora — President & Group Chief Executive Officer

Maybe I’ll start and then hand it over to Bhavesh to talk specifically, maybe about different products as well. So on the consumer side, like you pointed out, we have 63 million monthly transacting users. We have roughly 2 times this numbers annual transacting users. But if you just take that monthly transacting users number, then our penetration on the lending side is roughly 2% on our PNPL product. It has grown dramatically over the last one year, but it is roughly 2% right now. If you look at, for example, our equity trading business that is less than 0.5%. It is significant numbers, a couple of hundred thousand users. But in the scheme of Paytm’s things and the one year we have gone to less than 0.5% penetration, fairly significant user numbers and then we sort of move on from there. Right, because obviously the market opportunity is very large. And I should point out that we are able to address a large percentage of our user base because the business model is that we do it with very little or no incremental CAC [Phonetic]. So when payments user needs venture lending or wealth or commerce or cloud or whatever it might be, there is almost no CAC to move that — incremental CAC to move that users payments through financial services. So that hopefully answers the penetration question also the question about ticket sizes right, if we had a huge amount of incremental CAC, we would potentially not to be able to do that, which is to address a large percentage of that base and be able to address it at all relevant ticket sizes. Bhavesh, you want to add something.

Bhavesh Gupta — Chief Executive Officer, Lending

Yes, I think, I’ll just add two sentence what Madhur just said. So Gaurav the way to look at this piece here is the demand for credit through our platform we have seen very high adoption of our consumers and merchants. The fact that we have great partners on our platform who would love to have our merchants and consumer get access with credit, gives us tremendous confidence that the current penetration itself is very low, but in absolute numbers Madhur said is, is giving us a very, very high penetration with regards to the scale of this business. It can continuously keep growing and we have a very large runway ahead of us and that is actually what makes us very, very excited about this business.

Gaurav Kochar — Mirae Asset — Analyst

Sure, sure. Perfect.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Gaurav I’m telling, I hate to do this, but I’m getting very nasty messages from the moderator because…

Gaurav Kochar — Mirae Asset — Analyst

Perfect. Thanks.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Restrict to one question. If you don’t mind.

Gaurav Kochar — Mirae Asset — Analyst

Absolutely. Thanks. Thanks a lot.

Madhur Deora — President & Group Chief Executive Officer

In order to come back to you as soon as we have worked through the queue.

Gaurav Kochar — Mirae Asset — Analyst

Sure, sure. Perfect. Thanks. All the best.

Operator

Thank you. [Operator Instructions] Next question from Mr. Saurav Kumar. Saurav your line is open.

Saurav Kumar — JPMorgan — Analyst

Hi, this is Saurav from JPMorgan. So Bhavesh, a question to you is essentially, what is the credit charge to what you’re seeing with your partner banks. If you can just quantify what you’re seeing this year versus how the portfolio was behaving last year? And the second related piece is essentially on the Reserve Bank paper, which has come out. I mean it has talked about FADGs potentially not being allowed and also user lending rates that’s on the digital apps have been charging. So how does that alter your competitive landscape, how do you read the ramifications of that paper? Thank you.

Bhavesh Gupta — Chief Executive Officer, Lending

Yes. Thank you for the question Saurav. So Saurav, the first questions answer may not be fully complete from our perspective, because we do not manage the portfolio of our lending partner, they do it themselves. We definitely help them in collections. But we have a fair understanding of how the portfolio is performing and what we understand from our partners’ is that they feel very comfortable with what they see. The important element to see this particular piece is that we are adding new partners to our platform. As you can see it from a growth of credit, we are expanding credit very, very rapidly. So very clearly one can assume that our lending partners are seeing a very healthy portfolio performance vis-a-vis the last we added even through COVID which is given them great confidence to continue to grow the business as far as Paytm platform credit business is concerned.

On your other questions about the recently introduced working through paper on digital credit, actually we find, it’s important for me to mention this piece, that is important that digital lending space gets further organized. This paper aims to really further organizes the entire theme. From our perspective, as we had mentioned earlier also in our road shows that we have always maintained that we are completely aligned with currently regulations that are prevalent in the country, which is digital lending guidelines of June 2020 and also the outsourcing guidelines. So from our model, we have always maintained alliance to what was available in present. The newer guidelines are actually aligned to what we do in our system. Actually what we see here is that if and when these guidelines get implemented, it will further strengthen the platform and the way Paytm has been doing business versus what many of the other industry players have been doing business especially towards FLDG and funding into fee base etc, etc, that we do not pursue and follow.

Saurav Kumar — JPMorgan — Analyst

Okay, thanks. Thanks Bhavesh. I’ll come back in the queue. Thank you.

Operator

Thank you, Saurav. Next question from Mr. Vijit Jain.

Vijit Jain — Citi — Analyst

Hi, thank you for the opportunity. This is Vijit Jain from Citi. Just on the payment gateway business, can you talk a little bit about, do you look at this business as e-commerce versus billing business? And how are you looking at this business beyond payments as to — as opportunity with the customer centers? Thank you.

Madhur Deora — President & Group Chief Executive Officer

Yes. Would you like to take that question? Or I can start. So I see Vijay unmuting.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

I think — thank you Vijit for this question where — if we look at it payment gateway business has an opportunity to bring small medium merchants and the large corporate, the advantage of Paytm’s payment instruments that is our primary use case and then we also give opportunity for other bank issued other partner issued instruments, what we’ve seen is clearly that the scale and the pricing that we are able to drive gives an advantage to everyone. I’m sure you know that Paytm is probably the largest, if not the largest, and one of the largest acquiring side partner for all payment networks, whether it is Visa, Master and PCI, MX, UPI or any other world [Phonetic] and that gives us a superior edge of scale of technology in pricing. And that advantage we are able to pass to our partners and that is why we continue to see large corporates including Flipkart and including many other big corporates, like large retailers, everybody using our platform and we are very happy with the way the expansion is going on, on our online payment gateway.

In fact Madhur just probably shared that we have much insight revenues of plus $200 million purely because of this fundamental advantage that we have and A plus B, meaning on Paytm app and off Paytm app, both combination continues to go — grow like you just saw the [Indecipherable] and volume.

Madhur Deora — President & Group Chief Executive Officer

And Vijit maybe I could just add in terms of couple of trends and recent developments. So the one huge advantage that we have is that it creates a really nice network effect, because there is Paytm payment instruments at very large scale that is one of the differentiators. I would say one of the differentiators of why a partner would want to work with us. And then they are able to see our technology, our rates and so on given the scale of our payment processing and over time, we are able to do many, many different types of payment for them whether it’s cards and UPI and non-UPI and Paytm payment instruments and so on. And that does give more use cases to our consumers to use Paytm payment instruments. So there is a fantastic network effect that gets created as a result of this.

Some of the recent trends that we’re seeing is that, there are even large merchants who are starting with Paytm right of the back with all payment instruments. Right. And in some cases exclusively actually and these are partners who would have been exclusive with the competitor for many years, if not over a decade, and they are just sort of switching lock stock and barrel to Paytm and I think the next big opportunity for us here is to continue our penetration in the mid-market and the start-up community. Our product is certainly very, very ready for us to make that additional push.

Vijit Jain — Citi — Analyst

Great, thanks for that. Madhur just one question from my side, if you can share the current user base on the postpaid product in terms of number of active users using that or any metrics around that, that will be great. And that’s my last question. Thank you.

Madhur Deora — President & Group Chief Executive Officer

I think what I would say is that in October, we’ve shared October data of number of loans disbursed. In terms of number of loans, vast majority of number of loans is postpaid. That split is very different when you come to value of loans, but in terms of number of loans vast majority, as you might expect is postpaid. So if you take a number, if you put a very high percentage to that number, that will probably give you the monthly active users on or at least October active users on postpaid.

Vijit Jain — Citi — Analyst

Great, thank you so much.

Madhur Deora — President & Group Chief Executive Officer

Thank you.

Operator

Thank you Vijit. Next question is from Nilanjan Karfa. Nilanjan, you can unmute your line.

Nilanjan Karfa — Nomura — Analyst

I hope, I’m audible. Just one question, I mean if I have to look at expenses, how would this split between the financial services and the cloud and other businesses? More specifically, if I have to, let’s say, look at two years back, when we are still not going that commerce business versus today when we are almost de-focusing, would it be fair to assume a very large percentage today of the process primarily or to the financial services only? And how would you think this number will look like let’s say another year or two years down the line?

Madhur Deora — President & Group Chief Executive Officer

I just want to maybe start with just making a small correction. There is no de-focus of the commerce business. The revenue split between commerce and payments and financial services has gone through some changes. Part of that reason has been because of COVID, because entertainment and travel obviously for periods of time was very deeply impacted in fact, and entertainment was shut down for a period of time and also because there are multiple parts of Paytm that are growing. Most recently, the financial services business and so on. Right. So there’ll be some sort of mix effects as a result — trends as a result of that. So, but you should not take that away as there are any kind of de-focus. Just to clarify, vast majority of our commerce revenues come from commerce of digital goods if you will such as entertainment ticketing, travel ticketing and so on, and that is been doing quite well for us.

In terms of costs attributable, we do very much run the company as a platform. So it is possible to allocate cost up to a point, but not entirely because then you start getting into debates off, if the customer came in through payments, which is vast majority of customers do, then should the payments business be charging commerce business some internal rate and so on and all of that. But putting those aside what we have indicated in our perspectives as well as in our presentations is that our commerce business — commerce and cloud business and our Financial Services business is very, very high margin monetization.

Nilanjan Karfa — Nomura — Analyst

And you are not letting the GMV into cloud and commerce at least for now?

Madhur Deora — President & Group Chief Executive Officer

The commerce — I mean just given the scale of Paytm as a platform, our own commerce is in terms of GMV is a very small percentage, right, because they’re are very, very large merchants, very, very large use cases that we, that we do payments for right. And if you look at our Commerce businesses, they have been selected to be number one digital categories. Number two, places where we can as a result make very high margin monetization. And we also have large number of users who are interested in using those categories, right. So for example if you are a payments user, the chances that you would use go to the movies once a month or once a quarter is fairly high. So we have not gone just sort of niche categories, but it’s not a big driver of our GMV, maybe I should put it that. So Commerce business is not a huge driver of our GMV. It is a very good driver of retention of consumers in our platform. It is an excellent driver of high margin monetization.

Nilanjan Karfa — Nomura — Analyst

Okay. That will be all right. I’ve further questions, I’ll come back. Thank you.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Nilanjan I’ll add that the commerce GMV is led by if you notice drama ticket, movie ticket, travel tickets and so on deals etc, which are small GMV and thanks to the lockdown much smaller than year-on-year. You could actually expect it in minute single-digits much smaller single-digits as GMV of Commerce business on Paytm app as a percentage of total loan origin.

Nilanjan Karfa — Nomura — Analyst

Yeah, yeah. Understood, thanks.

Operator

[Operator Instructions] The next question is from Mr. Chandrasekhar Sridhar. Mr. Sridhar you can unmute your line.

Chandrasekhar Sridhar — Fidelity — Analyst

Hi, good evening, this is Chandrasekhar from Fidelity. Just few — a couple of questions from my side. Just to be [Indecipherable] the GMV per MTU is about 11,000. Now, the average credit card user spends about INR10,000 a month. And this cohort of 30 million sort of 32 million unique users are actually at the higher end of sort of the spending curve. I’m just trying to understand — I’m trying to reconcile the two numbers given the demographics are little different and does that mean that there is a certain portion of GMV which has a certain level of double counting. That’s question number one. And second is that just quarter-on-quarter, and I can understand there is some level of volatility in the business on a quarterly basis. Our net payment revenues are actually down on a quarterly basis, after adjusting for — yes after the payment processing charges and after the promotional cash backs and incentives it seems that we are about breakeven this quarter. So maybe just some trajectory on how this plays out over the next two, three years. Thank you.

Madhur Deora — President & Group Chief Executive Officer

Chandra, I’m happy to sort of take some of these slightly more detailed questions offline as well. It’s — or I’ll sort of address these separately. I think this is a commerce business is clearly seeing strong recovery. I think just to go back to your first question, which is about the spends, the span of the type of use cases that a Paytm user does across sort of their daily lives — daily use cases such as bill payments or lifestyle use cases either on the Paytm app on our partner or with our merchant partners as well as the spend that they do in the offline world. There is many cases with a much bigger span than an average user would do using a credit card. So that may be sort of — I see the comparison that you’re trying to draw, but it may not be sort of like-for-like in that sense, because users are able to do — our objective is that user should be able to do nearly all use cases that that matter to them through digital payments, through our platforms right either on the issuing side or the acquiring side. So I wouldn’t — I see it with the comparison, but may not be sort of directly comparable in that sense. I don’t know if Bhavesh or Vijay you want to add something.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Yes, Chandrasekhar, I want to give you one of the very pleasant thing that I’ve seen that once a customer starts to use our platform, he starts to get into the used cases, which typically he would have not have been using credit card. While this number from your reference point of credit card looks larger, from our reference point of spend on payment platform using digital payments, which are driven by like bank account or wallet or postpaid etc are probably in the same range as it should be or it should grow further actually. We believe that it to grow further and between us the number that we have as a reference of our co-branded credit card user, it is not INR10,000. I mean it is significantly more than INR10,000 on our co-branded credit card per active card spend that we see. So this number per user is significantly less than the credit card here actually. So maybe the reference point of INR10,000 is something that we are not able to reach, where are you picking it reference from. And secondly, the number that we’re seeing is very, very clearly depiction of the depth of the customer and lock-in of the customer or retention of the customer. And as far as our core branded credit cards spend is concerned, it is significantly more than the number that you quoted here.

Chandrasekhar Sridhar — Fidelity — Analyst

I mean, I’m just quoting the industry data, which is that much and this is sort of the top end of the spending spectrum spends in average of INR10,000. So just curious to their conservative, but we could, take that later.

Madhur Deora — President & Group Chief Executive Officer

Chandra I think the key difference may be just a span of use cases that the person who is spending x thousand rupees in credit card, let’s say INR10,000 or INR15,000 on credit card, their monthly spend across all use cases of course significantly larger than that. Right. And what I think the way this will reconcile is that the Paytm has been able to bring all use cases for all users and I’m saying that slightly — I shouldn’t say sort of exaggerated by saying all, but the much greater span of use cases that users can use. So if they were not using credit card for a certain purpose, in many cases they still use paytm for that purpose, either it could be through cards or it could be through wallet or be through UPI and son on.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

One of the important things Mr. Sridhar we want to add is that we’ve seen credit card companies promoting adding money to the Paytm wallet is a feature because they want themselves to expand the use case of the money of credit card potentially out there. And that is also one of the interesting reason for our — non-UPI revenue to grow because many issuers of credit card and debit card want to increase the acceptability of that instrument. And that is possible using wallet as a method and it is an important to know that we’ve seen a tremendous number of banks, top tier banks, long tail banks all like pushing promotions on Paytm platform of spending cashback funded by them to add only to the wallet. And that probably is also probably the reason the acceptance network is behind the scene in the biggest reason for it. I am sure INR10,000 like you suggested is an average, is a clear indication that mobile payment will completely dwarf the credit card spends over the period, which it has when you see the retail payment overall dollar value anyways.

Chandrasekhar Sridhar — Fidelity — Analyst

Thank you. And just on the second one.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Could you repeat that second one?

Chandrasekhar Sridhar — Fidelity — Analyst

Yes, I just said that the net payment revenues were actually down from INR108 crores to about INR84 crores quarter’s. This is after industry which been processing charges and then after the cash that’s — which have seen given, it seems that the payment revenue is effectively just broken even for the quarter and so maybe give some trajectory on how we should think of things.

Madhur Deora — President & Group Chief Executive Officer

Chandra what I would suggest is that you do look primarily at year-on-year trends rather than quarter-on-quarter trends. A couple of reasons for that, because on quarter-on-quarter basis, of course, we will make — we will choose to make little bit more investments in one quarter versus another quarter. The second is the quarters that we are comparing also do have Q1 which was heavily COVID impacted where the mix of the business was quite different versus Q2 where, again, the mix was very different right, with respect to percentage of offline payments and percent of certain types of merchants and so on, right. So it is a little bit hard to compare any two quarters on a Q-on-Q basis, particularly — this particular Q1 versus Q2. On a year-on-year basis, the trend line is very strong for some of the sort of percentages and so on that you quoted which is translating into this contribution margin, right. So if you’re taking out payment instrument cost and you’re taking out cash back, we in fact take out those two bars as well as many other direct expenses and then come to the contribution margin. And that contribution margin is actually grown from 6% to 24% on a first half-to-first half basis just to take a slightly longer period, it has grown from 10% last year to 25.5% this year. So I would look at year-on-year trends as the primary way of evaluating efficiency on those lines, especially given the Q-on-Q is a harder comparison.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

I’ll add to one more thing Chandrasekhar here that your statemet on breakeven of payment, while we have not disclosed or are disclosing it like this, it is clear that some of the line item in our payment business are not just profit making but free cash flow generally. There is an important statement that I’m making here, that some of the line items in our payment business are not just profit generating but free cash flow generating. So it should be clear that our payment business, which is, and that is the big reason that we’ve called out non-UPI GMV in this quarter result that our revenues and contribution margins are clearly growing on the back of payment and financial services business where payment itself is the primary driver of that.

Chandrasekhar Sridhar — Fidelity — Analyst

Thank you very much.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. Next, we’d like to call Mr. Anish Rai. Anish your line is unmuted now.

Anish Rai — UBS — Analyst

Hi, good evening, everyone. So this is Anish from UBS. So a couple of questions, one from the — so one question would be related to the MTUs we have. So I just wanted to understand, so if we see some 60 million or odd — 60 million odd MTUs in a month, what would be — what would be the breakup of vintage of these users, I mean how many of these would be recently acquired? How many of these would be three years old on the platform or something? Or some color of that sort. And the other question would be related to merchants. So I would, if possible, would you — could you throw some color on the percent of GMV which comes from merchant which don’t pay any MDR. I mean, there would be a lot of intersection between UPI and QR codes — QR code based merchants who don’t pay any MDR. So I would just like to understand how that works and the other question for MTUs. Yes, that’s it, thanks.

Madhur Deora — President & Group Chief Executive Officer

So okay, what I would say MTU margins obviously very complicated to just to simplify it a little bit, what I would say is roughly in any period over 12 months, roughly 60% to 80% of our MTU are new and 20% to 40% are reactivated, over a 12-month period, right. So I think those are the sorts of trends that we normally see. Of course they are somewhat dependent on how the reactivation efforts are working and how well previous efforts are working. But over the long-term trend, right. Actually that data is a little bit more true for annual active users, on a monthly basis of course there are users who will come and there are users in a certain month and organically, come back and use us maybe use us in the next month but even if skip a month they will come back and use us in the month after. So on an annual active basis that trend has held up pretty well, which is 60% to 80% would be new and 20% to 40% would be reactivated.

And I think on your second question, our merchant base is sort north of 20 million as we put in the prospectus and growing. We do, like I said, we have over 1 million merchants who have devices, right, so those are merchants who generate us in the offline world those are merchants who generate us revenue including large format retail and so on. So I would look at the — start to look at the merchant funnel in that way that the merchants who — the merchants who pay us MDR because they want to accept all kinds of payments, those are online and offline. And there are merchants who are the sort of smaller merchants who may not pay us MDR but they pay us for devices and merchants that they get so on.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Yes. So, what Madhur had just said, Anish, it would be nice to see our merchant base [Indecipherable] into no MDR merchants or then second bucket would be MDR, which is Paytm non-UPI instrument led merchants like Shoppers Stop or Big Bazaar or any other ones which take credit card, Buy Now Pay Later, and Paytm Postpaid, wallet etc., etc. And then in the two merchant, the second merchant that you’re talking about are inevitably also paying for some of the subscription or platform fee also. So what we look at how much investors, one merchant base which makes money using payment itself as a line item of revenue. So second merchant base is a beautifully even more monetizable merchant base because that merchant base, even though he takes 0% MDR payment on the platform, but he does not have access to the credit in our credit partners banks and NBFCs are happy to extend credit, thanks to the payment rail that we create.

The advantage of payment rail is that they are not just able to disperse, but collect also from the collections every day that happen. So Anish, we earn on a zero MDR merchant disbursement and collection margins on our platform. And that makes that merchant who is a zero MDR merchant very useful for Paytm platform and equally and even more useful for our lending partner because these become over the period priority sector lending and whatnot. So Anish, we continue to acquire merchants on both buckets, one who pay us for payment service and that is why we are talking about non-UPI GMV there and that talks about the merchants would give us money for payment acceptance and platform, basically device subscriptions and various other things. And second bucket, even more useful because this is like you can guess tens of millions of merchants out there never have access to formal credit and financial institutions and partners are looking forward to a solution in a platform like us.

Remember two-sided platform is an edge here. If we were truly a bank we would have only seen the bank account of this customer and then we would have wild guess that what is this kind of money, no reason for and no predictability, while it is a payment platform where we also have a mapping consumer detail on our platform, we can say oh, Anish is paying the shop means that the shop must be a high value shop and oh we have seen other customers who are of high-value quality are paying the shop. So remember our merchant business is fabulous from two aspects, payments revenue and credits revenue.

Anish Rai — UBS — Analyst

Got it. Got it Vijay. Thanks.

Madhur Deora — President & Group Chief Executive Officer

Anish I just wanted to clarify my earlier comment on MTU, just to make sure it came out, right, which is, we have this annual transacting user base. Vast majority of them transact in the next year as well, right. And then the growth comes from largely sort of new users who come to our platform and in some cases, users who may have not used us in the previous year, but used us in the year before who come back due to some of the reactivation efforts that we do. But the core base going into any new year, is that, vast majority of our existing customers do transact the next year as well.

Anish Rai — UBS — Analyst

Right. So Madhur probably just let me put this in another way, so just a follow-up to what you just mentioned. So if I — so if my question is, so, say if we have X annual transacting users this year, what percentage could I assume that these user will transacting even the next year, I mean what would be the drop-off rates or something of that sort, if possible, for you guys to sort of disclose?

Madhur Deora — President & Group Chief Executive Officer

We haven’t quite shared that number, but it is the vast majority of those users.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Yes. I mean that is a good word Madhur is just using.

Madhur Deora — President & Group Chief Executive Officer

Regardless, yes, sorry go ahead.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Yes, I was saying that Madhur is using the correct word. Anish, you can expect that, if you remember, a few minutes back, we were answering your question how a customer is spending more money and that happens because the customer is actually living on this platform more number of times. So over the period, thanks to the number of used cases and the opportunities of multiple funding sources and services that we bring that customer remains on our platform, surprisingly the commerce business that has been discussed in this call is one of the reason that we started that it is a key use case for customer to retain and come back on our platform.

Anish Rai — UBS — Analyst

Great. Sure. Thanks.

Operator

Thank you. The next question from Mr. Sameer Bhise. Sameer, your line is unmuted.

Sameer Bhise — Axis Capital — Analyst

Yes, hi, thanks for the opportunity. Just looking at the number of sales employees, I see a sharp jump Y-o-Y probably that is also driving the merchant growth. What is the outlook here going ahead?

Madhur Deora — President & Group Chief Executive Officer

I think last year — the comparison of December and September and September is slightly tricky for two reasons. One is — for one primary reason, because the offline world just sort of came back a little bit later in Q2 last year whereas this year also, we had COVID impact and wave — in Q1, but by the time Q2 rolled around there’s plenty of opportunities for us to have [indecipherable] start selling devices and so on, right. And we will continue to invest in merchant growth. You would have seen Sameer from where you sort of digest all of this data, you will see that we’ve been able to reduce our employee expense as a percent of revenue despite increasing the sales force, right. So we have those levers in our business. We will continue to invest in merchant business, but we think we can do that while maintaining indirect expenses at a certain percentage of revenue and in fact decreasing it.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Yes, it’s an important thing to remember Sameer that as Paytm vantage point, we see a tremendous opportunity to grow payments as more to acquire consumer and merchant. We continue to invest in use cases at engineering professional team mates, so as you could see the number of employees, there are more and more engineers added to the system, because we’re building for what new use cases and other financial services that we are building. Secondly, on the merchant side like Madhur said, incredible large, strong growth ahead is possible clearly because more merchants are getting ready to accept digital payments.

Madhur Deora — President & Group Chief Executive Officer

I’ll just add Sameer that, just from accounting standard perspective, if we have insourced field employees then they show up in employee costs, if they are outsourced employees then they show up in other expenses as an outsourced costs. So depending on our specific strategy during those quarters, whether we are having those employees on role versus outsourced and there are some pros and cons of that you may see some slight differences, right. So you may not be able to model number of employees straight in to employee costs.

Sameer Bhise — Axis Capital — Analyst

Sure. But this is the same number which shows in the RHP as around 6,500 as of June. Is that the same trajectory or is there a slight change?

Madhur Deora — President & Group Chief Executive Officer

Yes, that’s right. Obviously, we have more disclosure around on board, off board…

Sameer Bhise — Axis Capital — Analyst

Yes, yes, absolutely.

Madhur Deora — President & Group Chief Executive Officer

So if that’s what you’re referring to, that’s right. And if you have further clarification, you could send us an email and we will just triangulate all the data and make sure you have good clarification.

Sameer Bhise — Axis Capital — Analyst

Sure, sure. Thank you and all the best.

Madhur Deora — President & Group Chief Executive Officer

Thank you, Sameer.

Operator

Thank you. It is also getting close towards the end of the scheduled time. So we’ll have time for two more questions. Next question from Mr. Nitin Aggarwal. Nitin, you can unmute the line. Hi, Nitin.

Madhur Deora — President & Group Chief Executive Officer

Nitin, if you’re speaking, we are unable to hear you.

Nitin Aggarwal — Motilal Oswal Securities — Analyst

Am I audible now?

Madhur Deora — President & Group Chief Executive Officer

Yes.

Nitin Aggarwal — Motilal Oswal Securities — Analyst

Yes. So thanks for doing the investor call and thanks for taking my question. So I have two questions. Firstly, on the wallet load pattern if you can like comment as to how that has been keeping pace with the overall non-UPI GMV growth? And as we have imposed charges also on the wallet load by credit card, so how has been the mix changed in terms of loading the wallet via credit card for past one year? So what does the mix come down to now?

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

The best part I can tell you Nitin is that our business of wallet year-on-year has been growing and credit card charges have moved — either moved the customer to other payment sources like UPI, like debit card, or net banking or made the customer comfortable enough to pay those charges. So the clarity here is that we want to continue to expand on wallet as a use case, because this is here and running as a revenue line item for us and it is year-on-year very decent growth. In fact, in many cases we see that customers who use wallet to add money like we just now few minutes back shared, the banks leverage wallet as a platform who gave their debit card and credit card user extended acquiring network of Paytm. So this is a strong growth and we are very happy with how wallet growth is showing up.

Madhur Deora — President & Group Chief Executive Officer

I just wanted to clarify, when Vijay said, it has moved users to other payment sources, other payment sources to add money to wallet. Right. So, users who — there are many users who have decided they want to continue using credit card and pay the charges, which were implemented in calendar ’20. And there are some users who have said they will move to another payment stores such as debit card, net banking, UPI and so on and not pay the charges and what that has done, is that the wallet take rate has been the same, wallet and that it has become more efficient from a loading cost perspective and some of that does reflect on the year-on-year contribution margin and year-on-year percentage of — payment cost as a percentage of GMV.

Nitin Aggarwal — Motilal Oswal Securities — Analyst

Thanks so much. And secondly, how do you really compare the productivity on the GMV contribution of merchants where you have installed merchant device like the sound box versus the one where you don’t have it and any approximations to — because we have say around 20 to 25 merchants in terms of sound boxes there is a huge expansion. So how much can we really close the gap between the two?

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Nitin, I can tell you that the merchant, who use sound box versus let’s say earlier that they were using static QR or plastic QR or paper QR. The one thing that happens there is that the transaction consolidates meaning no more multiple QR merchant and it sort of becomes nearly exclusive and clearly that would tell you that and then merchant become even more comfortable, because they are sure about the payment receiving. So we’ve seen the growth, which are I mean strong is the word. I mean, Madhur I leave you on…

Madhur Deora — President & Group Chief Executive Officer

So I wanted to maybe just make two or three points on that. So, one is like I said in the presentation device merchants and large percentage of them majority more than majority are sound box merchants. They do become significantly higher retention and also the volume of transaction goes up very, very meaningfully. And those are sort of two separate points I just wanted to be clear, and that is very efficient, it is dramatically better unit economics for us and dramatically better CAC to LTV for us, because you’re not going out and sort of managing churn, you’re managing a very different churn profile than you would without devices.

The second part to call out is this behavior that I mentioned which is higher retention and more spends which is higher royalty on the platform basically that is nearly sort of nearly perfect behavior for them to become eligible for merchant lending because one of the things that we should be clear about is that we don’t lend to merchants on thin file and they are publishing that if there is a follow-up on that. So it just accelerates the behavior of a merchant towards creating that effectively loyal behavior and thick file on Paytm so that they are able to — they become eligible for loans from our partners. So this is why I said strategically an important initiative for us. Nitin, I would refrain from giving forward-looking numbers on this, you have clearly seen the trends. We added 1 million in the last year, roughly 0.5 million just in the last few months. So clearly this is off — on a very strong trend and accelerating.

Nitin Aggarwal — Motilal Oswal Securities — Analyst

Thank you so much.

Operator

Thank you, Nitin. And now for the last question of this session. Mr. Viral Shah. Viral, we have unmuted your line, you can ask your question.

Viral Shah — Centrum — Analyst

Yes, thank you for giving me the opportunity to ask the question. Actually I had two questions. So the first one is, I know we have touched upon this near on Saurabh’s question, but wanted to understand more so from a medium to longer term perspective. Does the working committee report that has been put out alter the medium to longer term different profit pools that Paytm could have developed. So for example, an underwriting or basically underwriting decision needs to be made at the end of the banking partner right, probably say going down the line given the kind of scale and the base that Paytm would have generated it could have been one of the monetization channel for Paytm.

And another thing linked to it is, does it kind of see impact from the BNPL business materially because the — primarily the economics in the BNPL business comes from MDR and if you look at it one of the recommendation is that this kind of credit needs to go into the bank account of the user. So, on which the MDR is typically are not what it is on say wallet?

Bhavesh Gupta — Chief Executive Officer, Lending

So Viral, let me take both of your questions. From a — purely from a model perspective, it’s important to understand that the working committee as I mentioned earlier to Saurabh’s question, we currently practice what largely has been recommended by the working committee because we’ve been following the current let down guidelines of June 2020 digital lending guidance etc. So from a purely from an implementation of working group, I think it will be very positive for our business model and it will further amplify what we have believed in building the credit business at Paytm and obviously it will remove some of the so-called smaller players who have been doing all kinds of things I think in the ecosystem which may not be helping the digital ecosystem to prosper.

Now, clearly from an economics perspective, there are two things to really remember in our model. Our lending business is aligned with our payments business. So, as Madhur had mentioned that we do thick files, what we mean by thick files here is, we are not going and soliciting customers just for credit. So credit is a byproduct of what the customer or merchant does on our platform, more transactions they do, their apprehended to get credit through our lending partner increases and more credit they consume, we believe the stickiness of the platform be the consumer or the merchant increases. So it’s kind of a flywheel and that’s a flywheel we are currently focused on. So it’s just not the way to look at this business to make money from a element of a lending business. But in the total of flywheel we make money also on payments and also on credit and vice versa.

Viral Shah — Centrum — Analyst

Yes, sorry, if I may just interject, apologies for that, but just my question was not more so from how the business is currently. But what it could potentially be. See, for example, given the kind of data that you have over a period of time, you could have actually say provided the underwriting tools or the data that you have, you could have provided a score like we have say for example Kakao Bank in Korea does or many of this neo banks do, you create a score and based on which the lenders uses those scores to lend to customers. Does this kind of take away those kind of profit pools, because now the lenders would be required to may be document the underwriting at the process that they have at their end. And secondly, actually have you like in terms of your interaction that you have with your partners, have you seen some indications of them having to now reevaluate say their clients or the arrangements that they typically have not just with you, but generally.

Bhavesh Gupta — Chief Executive Officer, Lending

Yes. So Viral, to the second question, we don’t know about the other partners, but from a Paytm perspective, we continue to have very, very strong support from our partners in growing. So there has been no let down in terms of scale of business. If you are indicating this is the working group committee the answer is no. To your previous question, I think we — our focus is always to build a legitimate business. Legitimate business means that we would like to protect what is the right product for the customers and their interest and hence our belief has been that what Paytm offers is technology, what Paytm offers is a very, very unparallel opportunity to distribute credit to a very large segment of customers and also what Paytm offers is ability to collect using our digital tools, digital platforms and the merchant ecosystem. So I think this is our strength. We would like to play to our strength. And I think there are enough and more revenue pools in our strength in medium to long term which we like to exploit.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Viral to what Bhavesh had just now said, it is important to note that our lending partners clearly see not just the technology and like you said, let’s say, we could build some scores or certainly we could give them and that would help them. They see two important line item, which is the disbursement and collection as even more critical KPIs than just let’s say helping underwriting if you will. The reason I want to tell you Viral is, if they go on open Internet, the cost of acquiring customer on open Internet for NBFCs and banks is dramatically higher because there are many aggregator platforms and the methods that open Internet users that the CAC remains way, way, way higher off the margin that they create.

I mean, I would not hesitate to say that nearly all the margin they could have made would have gone in CAC, if they would have chosen to scale on open Internet. And the reason is, like I said that there are number of aggregators who sort of hijack the traffic plus even the financial institutions don’t have wherewithal of even deployed third-party agencies to acquire customers of that grade. Companies inevitably seek multiple channels and the advantage of Paytm is like imagine a Diwali Mela and I ask a financial institution partner, bank partner, NBFC to say please open your stall here. And then the customers who may have been invited in Diwali Mela are available to you.

Paytm’s approach is this that come over, we have a customer base on the Paytm app, who in workflow could have a conversion towards your product. This approach, does not cost them increased cost of customer acquisition, if they go on loan disbursed platforms like you know Money [Phonetic] Bazaar kind of products where there are just enlisted products, they also loose their own traffic to those platform. Surprisingly in our case it does not happen, because we don’t fight with them to acquire their own customer instead we offer potentially their customer or new customers on our platform that can be serving them. So Viral, important to note is that Paytm’s credit business is not zero some to bank or NBFCs customer acquisition strategy on Internet, it is actually adding to that as a key important channel, number one.

Number two, the ability, like you said the data and nuances of the system and abilities that we can help them with technology makes them percentage hit rate, much better than if this customer was coming from open Internet and hit rate stands for that their credit policy would happily accept this customer with the nuances that they get to know once the customer is taking an application using our platform. In other words, they have a high quality lead issue. Now once you disburse this loan and you know that we are talking about small ticket loans, we are talking about large number of loans. It is even more important for financial institutional bank who collect this. That is where the Paytm plays even more important role, and you can imagine for a merchant, they probably will not have wherewithal to collect unless it is deeply integrated with the thick file that we are discussing, sound box customer merchant, that there is a large number of payment incoming and from that we are deducting daily, weekly, monthly whatever the interest is.

So Viral while it is nice to think of Kakao-based business model where we could just throw very little and get advantage of that value, but it is far more fulfilling for our partner and us to deliver in these three buckets. Number one, disbursement. Number two, technology platform and number three, collection. And the best part like Bhavesh said in the beginning, are they also has called out but please don’t go in FLDG or loan guaranteed way because that is a credit agencies work and we work complementary, that is why the scale, that is why the margin growth and revenue growth. We are very, very — we are seeing very, very strong demand Viral. I mean, number of queue of partners on joining Paytm platform for credit is so much that internally, Bhavesh and me were working on adding more number of engineers only on adding integration partners if you will. Hope you get that.

Bhavesh Gupta — Chief Executive Officer, Lending

Viral, to your other question BNPL, I think small clarification. So there are two parts in the working group which at least has come out publicly. One part of it is that they have observed that there are lot of disbursements which other fintechs had been doing apparently as per their observation in two prepaid instruments, namely adding a wallet or a plastic card which Paytm anyway doesn’t do, which is what they made an observation that that will not be the big case which should be further allowed and should that disbursement happen in bank account.

In case of Paytm postpaid and especially BNPL, the lending partner disbursal directed the merchant and hence that is absolutely [indecipherable] use case, because this is typically the way EMI financing happens on the ground, wherein I go to purchase a goods at a shop and the payment is being made by me for a loan that I’ve taken to buy that good from that shop. In this case that goods could be digital, goods could be physical and it is personally made directly to the merchants account. So I think there is, that clarification is important and hence the BNPL business that we run is absolutely in line with what has been recommended.

Viral Shah — Centrum — Analyst

Right. And just as a follow-up if I may. So how does the economics in this case work as to the bank disburses money directly into the bank account of the merchant, so does bank then deduct 2% or 1.8% that is typical MDR.

Madhur Deora — President & Group Chief Executive Officer

Yes. So the economics, I don’t want to dwell further. The broad level understanding here is that Paytm is also payments platform. So the MDR is earned by Paytm and then there is a component of interest and other fees which is shared between the two platforms.

Viral Shah — Centrum — Analyst

Okay. Thank you.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Thank you, Viral.

Madhur Deora — President & Group Chief Executive Officer

Thank you, Viral.

Operator

[Operator Closing Remarks]