Opinion: What Investors May Soon Expect From IPO-Bound Paytm

India's biggest-ever initial public offering can't be chalked up solely to the zeitgeist. Like most markets, irrational exuberance and easy money will no doubt play a part in Paytm's upcoming $2.2 billion share sale. But above all, investors will be placing bets on what a 12-year-old, unprofitable fintech firm backed by SoftBank Group Corp. and Ant Group Co. could yet become.

As for what that might be, look toward South Korea. 

There, KakaoBank Corp., an affiliate of Ant-backed Kakao Pay Corp., is going public at the top of its indicated price range after institutions bid $2.25 trillion, more than 1,700 times the shares offered to them. Retail participation ends Tuesday.

Internet-based businesses are raising funds at a record pace, making use of the boost given by the pandemic to all things digital. Additionally, exposure to a Korean new-age virtual bank or an Indian fintech gives yield-starved global investors a hiding place from Beijing's unpredictable regulatory action against China's tech titans, including Ant. 

But there's more going on at KakaoBank, something that might also be relevant to Paytm. The tempo is being set by customers in their 20s and 30s who don't care much about banks as brick-and-mortar institutions but want to consume banking online like any other service, customized to their spending patterns and investment priorities.

When younger tenants approach the internet-only KakaoBank for loans to lease apartments - known in Korea as "jeonse" - they don't have to show up at a branch, which doesn't exist anyway. Face-to-face contact offers little additional information to the lender, given that 90% of the population is on KakaoTalk. From within the popular, 11-year-old messaging service - parent Kakao Corp.'s first big success - users can access the Kakao Pay wallet for cashless person-to-person and in-store payments.

That's a big advantage over traditional lenders that "lack a platform to attract customers and collect data from nonfinancial services, as well as incur higher costs to maintain physical branches," according to Moody's Investors Service. KakaoBank, which currently competes in 14% of the country's won-denominated debt market, will in 12 to 18 months start attacking 65% of the market, Moody's says. No wonder, then, that KakaoBank's post-IPO market value won't rank too far behind that of the largest retail lenders, KB Financial Group Inc. and Shinhan Financial Group Co.

In India, Paytm - shorthand for "pay through mobile" - has come some distance from its roots as a tool for people to recharge their pre-paid phone accounts and pay for Uber rides. The platform handled 4 trillion rupees ($54 billion) worth of payments to merchants last year, similar to Kakao Pay's 67 trillion won ($58 billion). It's KakaoBank's $20 billion deposits that make the difference. Paytm's banking unit doesn't even have $1 billion yet.

That's because Paytm only operates a so-called payments bank, which is barred from making loans, issuing credit cards or keeping more than 200,000 rupees in deposits per customer. (Until recently, the limit was half that amount.) Even then, Indians clearly see some value in their Paytm Payments Bank accounts. When you look at where digital money goes in India after it's transferred online, Paytm's bank is at the top of the heap in receiving funds. It had a higher market share last month than the State Bank of India, the country's largest lender. As the No. 1 issuer of tags for vehicles to pay tolls electronically, Paytm isn't doing too badly in originating transactions, either.

Now, if Paytm had an unrestricted banking license, it could in theory challenge traditional lenders the same way as KakaoBank in Korea.

India's online payment system has modernized at a remarkable speed, thanks partly to crashing data prices and growing smartphone usage. The digital wallet business has become much more competitive than five years ago, when Paytm ruled. Walmart Inc.'s PhonePe and Alphabet Inc.'s Google Pay wallets handled $35 billion and $28 billion in transactions last month, respectively. The Paytm app, which was used to transfer $6 billion, was a distant third. But it's accepted by small shopkeepers, even in minor cities and towns. That makes it nine-times bigger than Amazon Pay, and this at a time that Amazon.com Inc. runs one of India's two largest e-commerce marketplaces.

Everywhere, millennial and Generation Z customers have figured out banking for what it is: a big, fat wedding. 

Finding and screening borrowers, deciding credit limits, keeping customers engaged with easy online payments - from movie tickets to bus rides - and making them come back for buy-now-pay-later, insurance, and investments in mutual funds, gold and shares, are all things that can be done by a fintech firm - the wedding planner. A banking license is needed is when vows are exchanged. To make a loan, lesser lenders must raise funding or find a partner bank to officiate. But a licensed bank simply makes a loan and an equivalent deposit shows up on the liability side of its books in the customer's favor. As bank clients make payments to others, this liability circulates, greasing the wheels of commerce, and converting seamlessly back and forth into official money: cash. 

To unlock the value that comes from being an unfettered, deposit-taking bank, Paytm founder Vijay Shekhar Sharma doesn't need physical branches, a costly endeavor in a large country. He only has to lobby for a change in the license of the payments bank in which the IPO-bound firm has a 49% stake.Becoming what's known in India as a small-finance bank should be good enough for everything except big-ticket corporate loans. Eventually, Sharma could amalgamate all of Paytm's financial business with the bank after taking it public separately. India has allowed a couple of finance firms that went on to set up banks to carry out similar reverse mergers.

Jack Ma's Ant ran into regulatory troubles in China for creating credit without the requisite licenses. It remains to be seen if Ant-inspired lenders in Korea and India can execute Ma's vision of using big data as a substitute for collateral, but without falling afoul of the state. That's what investors in KakaoBank are counting on. Soon, they'll be hoping the same from Paytm. 

(Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.)   

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