RBI paper on payment charges to have minimal impact on Paytm, says Goldman Sachs, reiterates Buy call

The Reserve Bank of India (RBI) earlier this week released a discussion paper on charges across various payment systems. With the move, the central bank is seeking feedback from stakeholders, after which the RBI would look to streamline the framework of charges for different instruments. The same is unlikely to have a major impact on Paytm, according to Goldman Sachs. “Based on our reading of the paper, since Paytm (One 97 Communications) is an intermediary and not a bank, we estimate the net impact (revenue less payment processing cost) of any potential changes to likely be minimal on the company,” they said. The global brokerage firm has reiterated its ‘Buy’ call on the scrip.

What the discussion paper says

The RBI discussion paper categorises payment systems into two buckets, (i) fund transfer payment system (largely known as peer-to-peer) and, (ii) merchant payment system (known as peer-to-merchant or P2M). Analysts at Goldman Sachs said that RBI has in the paper noted that payment service charges should retain incentives for both users and service providers and that there is limited justification for a free service. With the paper, RBI has also sought views on whether any regulatory intervention is required at all for payment charges, or if such charges could be determined by supply-demand. The Central Bank has, however, not issued guidelines.

RBI has sought feedback on whether it should bring MDRs to zero for all debit cards, regulate credit card charges, and if UPI payments should be charged via MDRs, among other things.

Will it hit Paytm?

“… per our sensitivity analysis, if card (credit and debit) Merchant Discount Rates (MDRs) are lowered by c.50%, cumulative annual EBITDA impact on Paytm could be less than Rs 1 billion in FY24E, or less than 1% of margin impact (on current revenue estimates); similarly net impact from wallets, while higher vs cards, is also unlikely to be material per our math,” Goldman Sachs said. The brokerage firm forecasts Rs 49 billion in non-rental payments revenue in FY24 for Paytm.

RBI has also raised the question of whether the interchange (amount receivable by the issuer) needs to be regulated. While any downward pressure on interchange could also result in a potential reduction in the share of MDR to acquirers and networks, such an impact is likely to be limited since their respective shares in the MDR, especially in credit cards, is quite small to start with,” analysts said.

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It was also noted that any reduction in take rates on Paytm wallet could see the company levy a convenience fee for debit cards which would offset any damage done.

Target price

Goldman Sachs has retained its target price of Rs 1,100 per share on Paytm with a ‘Buy’ call. This translated to an upside of 42%. “ Key risks to our thesis include: Increase in competitive intensity, regulatory changes, slower than expected adoption of digital payments, potential disruption in partnerships, potential risks to lending volumes as well as take rates due to tighter financial conditions, slower-than-expected scale-up of commerce, cloud and financial service revenues, sub-optimal capital allocation and lock-up expiry,” Goldman Sachs said.