Paytm Dreams The AI Dream

Diversification seems to be the common thread running through India’s fintech ecosystem right now. Last week, we took a closer look at Groww’s expansion moves beyond its core business. This week, it’s Paytm’s turn, but the payments giant has a slightly different ambition. The company isn’t just diversifying within fintech; it’s betting that AI software could become its next growth engine.

Paytm, which already has one of the country’s largest merchant and business networks, now wants to sell AI products built in-house to those very customers, effectively making a push into enterprise AI software and tools.

“We definitely have decided that we will go to the merchants and the businesses with the solutions and services that we created, and we ourselves are the users of them,” Paytm founder and CEO Vijay Shekhar Sharma said during the company’s Q1 FY27 earnings call.

Before we unpack what this new AI bet could mean, let’s quickly look at the quarter.

One97 Communications, Paytm’s parent company, reported a 79% year-on-year jump in consolidated net profit to ₹220 Cr in the June quarter, driven by continued strength in payments, merchant subscriptions and financial services distribution. The company also posted its first-ever full-year profit of ₹552 Cr in FY26.

Revenue from operations rose 28% year-on-year to ₹2,448 Cr.

Cut to its AI plans. For Sharma, however, AI has been the next chapter for some time now. Even as Paytm was working its way back to profitability, it had been quietly building AI capabilities through Paytm ARMS, a merchant lifecycle insights platform or even Paytm Pi, which is the company’s in-house fraud detection platform.

According to the company, these tools have helped automate merchant onboarding, fraud detection, customer segmentation and pricing optimisation, while improving merchant retention and lifetime value.

Now that the turnaround appears largely behind it, Paytm is looking to build on those strengths. Instead of keeping these AI capabilities in-house, the company wants to package and sell them to merchants and enterprises, creating an entirely new business outside payments and financial services.

A New Business Outside Fintech

For the first time, Paytm has spelt out how it plans to monetise the AI capabilities it has been quietly building over the past few years. Rather than treating AI as another feature within its payments or lending businesses, the company is positioning it as an entirely new vertical that sits outside fintech.

While management stopped short of revealing specific product names or pricing, it did disclose that the business is no longer at the experimentation stage.

CEO Sharma said some of these products have already begun generating “a few lakhs” in revenue and expressed confidence that, within the next year, the business could become large enough to be reported as a separate revenue line under the company’s Commerce Cloud segment.

The focus, however, will remain firmly on enterprises rather than consumers. Responding to an analyst’s question, Sharma said the company has consciously decided against building consumer AI products, instead tailoring its offerings for businesses of different sizes.

“Small people, smaller businesses will take a different kind of service. Larger ones will take a different kind of product,” he said, indicating that Paytm sees opportunities across both SMEs and large enterprises that already use its payments and merchant ecosystem.

Paytm’s Selling The Tools It Built For Itself

Sharma revealed that the company has built its own AI stack by optimising a large language model into a smaller model designed for Indian languages and deploying it on Paytm’s own infrastructure, allowing it to reduce inference costs and improve response times. Those models are already embedded across several internal workflows, from collections and customer retention to merchant servicing and merchant acquisition.

One example Sharma shared was an in-house AI agent that determines which merchants field sales executives should visit, replacing manual planning with AI-driven recommendations. The company also uses AI for customer outreach and operational workflows that were previously handled through call centres or external software providers.

Having proven these tools internally, Paytm now wants to package them into commercial products. “Now here is the magical part. Once we’ve done it, we will sell it to outside people. Why should we not sell it?” Sharma exclaimed, suggesting the company believes its internal AI infrastructure can evolve into a software business in its own right.

CFO Madhur Deora echoed that view, saying AI is already helping the company “do more with less” through a growing number of internal applications and agents.

According to him, AI is not just lowering operating costs but also strengthening operating leverage, allowing indirect expenses to grow much more slowly than revenue while supporting the company’s medium-term profitability ambitions. In other words, Paytm sees AI playing a dual role: first as an efficiency engine inside the company, and eventually as a revenue-generating enterprise software business outside it.

 

The Next Piece Of The Puzzle

While AI dominated the headlines, Paytm’s core business delivered one of its strongest quarters since the RBI’s action on Paytm Payments Bank in early 2024. Revenue growth was broad-based across payments, merchant subscriptions and financial services, helping the company post a 79% jump in net profit.

Payments is the backbone of Paytm, contributing ₹1,384 Cr, or over 56% of revenue from operations during the quarter. Merchant subscription revenues also continued to rise on the back of increasing device deployments and higher software adoption among merchants.

Meanwhile, financial services has firmly established itself as Paytm’s second growth engine, with revenue climbing 45% year-on-year to ₹814 Cr, driven by merchant loans, personal loans, equity broking and wealth management.

Sharma and Deora also highlighted that consumer payment volumes are now growing at nearly twice the pace of the overall UPI market, enabling the company to gain market share, while daily active users and transaction volumes have surpassed the levels seen before the January 2024 regulatory disruption.

At the same time, Paytm is taking its first step towards rebuilding another piece of its consumer payments business. It has reapplied for a Prepaid Payment Instrument (PPI) wallet licence, which could revitalise Paytm completely after two years of this business being a deadweight. The company said a wallet would complement its existing payments offerings by giving consumers more payment choices. The fact that PPI wallet-to-UPI payments have an interchange fee associated with them perhaps explains Paytm’s enthusiasm about this potential approval.

Will Markets Buy The AI Story?

Paytm’s June quarter appears to have strengthened investor confidence, prompting a string of target price upgrades from brokerages.

Yet the stock slipped after the results. Analysts believe the rally prior to the results had already priced in much of the optimism, with technical indicators suggesting the stock is now entering a phase of consolidation rather than extending its sharp uptrend.

A common theme across brokerage notes was Paytm’s improving profitability. The confidence in achieving a 15-20% EBITDA margin over the next two to three years, supported by operating leverage and slower growth in indirect expenses, found resonance with analysts.

Paytm’s core business has seen accelerating volumes, consistent merchant device subscription additions, whether through Soundbox or other means, and growing retention, all supplemented by momentum in financial services, particularly merchant lending and wealth products.

Morgan Stanley expects EBITDA margins to reach about 19% by FY29. JPMorgan also highlighted strong margin expansion in the June quarter, attributing it to disciplined cost control. Goldman Sachs and Citi cited strong market share gains in payments, improving profitability and lower cloud infrastructure costs as key drivers.

However, there are some potential hurdles in the way. CLSA, for instance, flagged payment take rates being under pressure and noted that the durability of the current growth trajectory is yet to be established. It also warned that optimism around a potential return of UPI MDR may already be reflected in the stock price. That’s something retail investors may need to take note of.

Overall, the debate around Paytm appears to have shifted. Instead of questioning whether the company can sustain profitability, investors are now watching whether it can continue expanding its financial services business, commercialise its enterprise AI software bet and successfully bring the wallet back into its consumer payments ecosystem.

In the US, we have seen the AI buzzword act as a magic bullet for companies and their valuations, and thus far, this AI-fuelled boom has not landed in India. If investors back the Paytm AI narrative, we could be talking about an entirely different Paytm not so far in the future.

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[Edited by Nikhil Subramaniam]

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