Paytm Sets Margin Discipline: Drops Loss-Making Insurance Client, Targets AI Monetisation In Three Quarters

Paytm is tightening its focus on profitability, walking away from a large insurance merchant that was weighing on contribution margins while doubling down on higher-quality merchants and artificial intelligence (AI) investments that could begin generating revenue over the next three quarters.

Speaking during the company's earnings call, Founder and Chief Executive Officer Vijay Shekhar Sharma said Paytm had concluded its contract with a large insurance company as it prioritises merchants that contribute more meaningfully to its business.

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The decision reflects a sharper emphasis on the quality of gross merchandise value (GMV), rather than growth at any cost. Madhur Deora, President and Group Chief Financial Officer, said the insurance merchant had been a drag on contribution margins and generated negative contribution.

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Paytm is also looking to expand its Soundbox merchant base, with a greater emphasis on creditworthy businesses. Sharma said the company expects its number of net active monthly merchants to increase, adding that around 10 million of its 15 million merchants are good-quality customers.

While Paytm is investing heavily in AI, technology and infrastructure, the company expects monetisation to take time. Sharma said it would take at least three quarters for AI-related revenues to begin showing up.

The company believes AI is already helping improve customer acquisition costs (CAC), with Sharma attributing better acquisition efficiency to the use of the technology. Paytm also plans to spend more on customer acquisition as it pursues further growth in its user base.

Deora said the recent increase in technology and infrastructure expenses was largely driven by one-time costs, including the migration and consolidation of two technology stacks. Some migration work remains unfinished, meaning these costs may not decline in the December quarter.

Sharma said most of the increase in cloud costs was linked to the migration process, while Deora indicated that indirect expenses were not expected to rise at an accelerating pace.

Paytm Cloud Technologies could also be used for seed investments, Deora said, although the company continues to apply margin thresholds when evaluating enterprise customers.

On UPI monetisation, Deora said the impact of the merchant discount rate (MDR) framework would become clearer only after its implementation in the December quarter. He does not expect changes in the transaction mix to materially alter UPI GMV, adding that the framework would not change the applicable rates.

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Deora also pointed to potential tailwinds for the business, while cautioning that the isolated impact of deferred loss guarantee (DLG) arrangements could weigh on EBITDA. However, he said Paytm did not expect EBITDA margins to decline going forward.

Sharma said the company aims to capture a one-third share of its target market, arguing that the industry had yet to see sufficiently strong products and technology. Paytm expects user growth to sustain as it continues investing in customer acquisition and improving the quality of its merchant network.

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