One 97 Communications Ltd

NSE:PAYTM

Earnings Call Transcript 2023-Q1

[Operator]

Thank you for joining, and a warm welcome to Paytm's earnings call to discuss its financial results for the quarter ending June 30, 2022. From Paytm's management team, we are today joined by Mr. Vijay Shekhar Sharma, Founder and CEO; Mr. Madhur Deora, President and Group CFO; Mr. Bhavesh Gupta, CEO, Lending and Head of Off-line Payments; and Mr. Anuj Mittal, Vice President, Investor Relations.

Before we begin, a few customary announcements for all attendees. This earnings call is not meant -- is meant for the 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, we request you to kindly drop off the call at this point.

The information to be presented and discussed on this earnings call shall not be recorded, reproduced 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 [indiscernible]. Kindly utilize the recent feature on your Zoom dashboard. [Operator Instructions]

The presentation, a replay of this earnings call and a transcript will be made available on the company's website subsequently.

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

[Vijay Sharma, executive]

Thank you. Hello, and welcome, everyone. [Foreign Language]. We have done great amount of deferred on focusing on simplifying communication and business KPIs. If you see here, we have actually stated that our core business is to acquire payment customers and issued loans. Everything else helps to amplify either in acquiring payment customers or amplifying ability and capabilities of disbursing loans.

In our Payment business, as you see, we acquired consumers who, in turn, work with merchants, in other words, make payments to the merchant and merchants in turn give commerce services to the consumers. This business model where we have more than 75 million monthly transacting users as of June 2022, and merchants, 28 million merchants allow us to create a brand distribution and silent technology that allows us to create an incredible loan distribution and collections business.

Yes, our business model in credit remains and focus remains in distributing and creation collections. As you can see for consumers, we have postpaid and personal loans and incidentally cobranded credit card and for merchants, we have Merchant Cash Advance loan. So when you look at our business and you look at majority of revenue and focus of company is about acquiring customers for payments and distributing loans.

Here is a revenue line item on the payments. It's an important thing. I took a time to build this slide especially, describing that how do we earn in payments business. And it's an interesting business because our margins are expected to grow further. So we wanted to clarify next level that how should you look at our payments business and how do we internally look at our payments business.

These are the key components of our payment business where merchants use ATM app to collect payments. So various utility merchants and credit card, rent, et cetera, BPS, all those services are here where merchants are using ATM app to collectibles.

Here, merchant, obviously, will pay us certain key instrument MDR. We have started to charge platform fees to select customers based on their instrument or their kind of use case they're using. And this experiment has been very successful. If you notice, our payments [ established ] with the consumers have had as high as 73% year-on-year revenue growth. And we incidentally call this line item as Payments Services to Consumers.

When the merchant is using Paytm app to collect payments merchant is also using Paytm app to sell, upsell their services. We call it enabling commerce business where merchants can sell deals, tickets or take advertising. And this is a business that we showcased under commerce and cloud services. The same business have shown incredible growth year-on-year, as you can see, INR 331 crores, 61% year-on-year revenue. We believe that this is a business which was hit by COVID over the period of time. We'll continue to grow and find out new use cases where we enable different commerce services for merchants on our Paytm app.

Now here, the merchant is using Paytm app capabilities on our platform, right? Merchants have their own shops, apps, websites and there they collect payments using ATMs platform, services and abilities. We call these services as payment services to the merchant. Here, merchant pays are subscription fee typically for a device. In additional for a device, they are also going to pay us for different, different services that we enable for them. For example, like let's say, they don't pay a subscription for enabling ForEx pay, they're going to enable subscription fee for certain amount of reconciliation service that will put up here. So merchant base subscription fees for using our services.

It's an important thing that Soundbox comes and the critical important revenue of UPI-led monetization comes under this because we believe that merchants who are accepting payments on UPI need services, so merchant payments of subscription fee makes a key focus area for the company.

Second is merchant pays MDR for MDR-bearing instruments like card, wallet, postpaid, et cetera, here. And third is that government of India in their Digital India mission have subvented the UPI merchant fees. So technically, UPI has the MDR, which government is actually paying, and the payment typically comes towards the Q3 or Q4. So we show it at that point of time in our earnings. Incidentally, all payment instruments, UPI, wallet, card or postpaid or net banking, et cetera, everything bears small or large fees to the merchant. And in addition to that, because those fees margins are very small, we have started to find out services that merchant is ready to pay subscription o.

It's exactly what our long-term vision will be. Here, on the right side, I've tried showing the model case for different merchants. Let's say, an entry-level merchant typically a roadside hawker uses Paytm QR. Now Paytm enables all bank UPI apps. In addition, wallet postpaid, in other words, the payment instruments, PPIs, different instruments also. So this is where our differentiation also comes to the merchant.

And in this case, typically, we will get incentive from government on UPI payments this merchant receives. These incentives are published, and we would, if needed, be able to showcase a notification on demand basis. You could go Google and say that MIT Ministry of Information and technology incentives for UPI payments [ zero MDR ] announcement where the merchants are not to be charged, government is going to pay us the money. So this is where we make money using the UPI-based payments and many times, merchants are paying for a little bit fees on wallet and postpaid also.

This merchant, we upgrade to a subscription merchants where these merchants take a Soundbox. Soundbox is one of those business, which we could figure out as a requirement on the ground and build it, and it is taking off very, very well among our IoT or device business is incredibly growing.

If the merchant goes to the next level, where he has to take, let's say, card payments, so then comes the card payments device, and it includes, obviously, the Soundbox [indiscernible] like this, so he pays a subscription and pays MDR also for different instruments.

This EDC device or card device that we call here is also our gateway to enable buy now, pay later from other providers like EMI. So from banks and NBFCs. So this merchant here is also for a customer for us to driving EMI payment from merchants, and we get higher margin on this. So these are more value customers for higher value customer than Soundbox customers as you can see.

Then comes these omnichannel online merchants. These are the plastic online e-commerce companies, where they give us -- they take our API and SDKs and give us MDR.

And finally, like I told you, the submerchants don't use their side only or in addition to that, they use our app, and this is where we enable consumer payment, which is what we title as consumer payment because customer is using Paytm app. Incidentally, this is also a merchant payment. The merchant is eventually taking payment on Paytm app.

So this stack that you're seeing are different kind of merchants that we have on our system and revenue models are clear where we leverage distribution of Paytm app to grow number 1 and 2, which is payments services to consumer and commerce and cloud service, and we use the sales team to distribute and expand our merchant payments service, which incidentally, year-on-year grew again incredibly well, INR 557 crores, 67% year-on-year. And stand-alone basis, all these 3 line items have our attention of technology and product development, and we continue to expand different services on this side.

I'll talk about the second part of the revenue, which is the loan disbursement and collection. We call it loan distribution collection business. Classically, we have been declaring and talking about it that in our credit business, our scope is loan sourcing and cross-selling, meaning if a customer has come to take a loan on Paytm app, we also cross-sell him another type of loan from the same lender surprisingly. So we don't do cross-sell of another lender.

So if you want, let's say -- you've got a known personal loan from lender A, you will be cross-sold the loan only from lender A. So we call it loan sourcing and cross-sell fee. This was that both us and our lender partners continue to deeply engage and get overall LTV of a loan business in partnership with the lender.

Again, I'm reiterating that our cross-sell revenues also work in a way that if the customer goes on their platform and takes it, we still get the -- our part of sourcing and cross-sell fee here. So this is loan cross-selling and sourcing fees that we account for.

Second part is that we help them collect service, the loan, meaning we would build in places on Paytm app. We would have disbursement collection services, and we will have full effort on bringing collections. As we told that we get certain revenue on the portfolio performance that we are collecting. I also want to share the fact that the point #2 that we do, we do it not just for the loan that are sort store-picking platform. We also do it for the loans that are not necessarily sourced on better platforms. For example, like a lender could be distributing or disbursing loans by themselves, they can still use Paytm service for servicing and collections. So that is why we call this in 2 parts, business model and the part 2 of the revenue, by the bonus sort of on a pool basis.

Incidentally, our business had issued and disburse loans, as you know, more than a year back. Portfolios are maturing. So we are starting to get certain bonus part of the servicing and inflection fees. ATMs, businesses about loan sourcing and collections as we said here.

My colleague, Bhavesh, in due course would talk about, here I have brought it as a summary that our 3 products. Personal loans, merchant loans and postpaid for our consumers are our primary 3 products. We do not treat credit card as a loan because eventually, our role is only as a branding and assigning, acquiring a customer. We do get over the graded money, and that is shown in commerce and cloud business because cloud advertising comes together, just so that you know this.

So here are the loans that we work in partnership with our lenders. Personal loan ticket size, which is around INR 100,000, INR 1 lakh is about a 1-year product and merchant loan, where the ticket size is INR 40,000 -- is about the kind of 1-year product.

Incidentally, these are in tune with our approach 2 by 2. We say less than 2 lakh or not more than 2 lakh, not more than 2 years, so that these are high, I would say, frequency and high speed, disbursement and collection products takes an incredible amount of comfort to our credit partners, and you will hear more from how the quarter has been for these services as we have assigned the numbers -- announced the numbers already.

Postpaid is a monthly billing. So there is no topic about the customer is obviously the month. Postpaid continues to grow our ticket size, if you notice that one for a time, we used to have it in few thousands. It's reached now 4,000, which incidentally means that customers' acceptance of postpaid, which is at different, different places, is increasing and customers are finding it useful and spending more and more using postpaid product here.

Our total disbursement, as you can see here, which we anyway have announced also, is about quarter, INR 1,344 crores. Obviously, it was a very miniscule based on year-on-year basis. So it's dramatically large percentages.

At the same paradigm, we believe that key KPIs remain our disbursement dollar value size and incidentally, the performance of the portfolio of our partner though we don't have access to the portfolio performance. But based on the data they shared with us, based on the servicing and collection retail revenue invoicing that we do, here, we are showing that how our business is performing in the last few quarters. Last quarterly, this is the kind of bounce rate that you see, 11% to 12%, 11.5% to 12.5%.

Much in one in the daily products, so daily installment collections. So there is no bounce concept here and Postpaid remains again, 11% to 13%. Here, our expected credit loss remains sub-5%. Here, 55.5% and 1.1% to 1.3%. More details and exact -- further detailed numbers are part of our presentations. This is my summary of telling you how our revenue model of loan disbursement and collection works out.

Now I will hand over the call to my colleague Madhur, who would give you much detail insights about the business. We remain bullish on the customer demand here. As you can see, our usage of platform and monetization, and we believe that we would very comfortably be able to achieve the time line that we have informed to the stock exchange that we would be able to achieve breakeven before EBITDA cost in next September quarter.

Okay, to Madhur.

[Madhur Deora, executive]

Thank you, Vijay. It's a great pleasure to be able to report the results of all the hard work the team has done this quarter. This quarter, we saw a very strong improvement in revenue and profitability. Just a few financial highlights to begin with. Our revenue from operations was about INR 1,680 crores, up 89% year-on-year, 9% quarter-on-quarter. So would double-click on that in a moment.

Our contribution profit, a record high of course, INR 726 crores, 43% of revenue. Last quarter, this number was 35% of revenue. Our contribution profit growth has been at 200%, so roughly 3x year-on-year and our -- and has grown 35% even compared to the previous quarter.

Our EBITDA before ESOP cost is now at INR 275 crores. This is a INR 93 crore improvement from the previous quarter. A quarter ago, we said we were at INR 368 crores, and we said we are going to hit EBITDA breakeven in 6 quarters. So compared to that, we are ahead of plan in that sense.

Operational highlights. As Vijay mentioned, value of loans disbursed INR 5,554 crores. We are run rating now close to INR 24,000 crores. And it is about -- well, call it 9x year-on-year increase. But interestingly, even on a larger base, on a quarter-on-quarter basis, we grew 56% this quarter. So we have a substantial ramp-up in the business.

On payments devices, which is a key part of our strategy, as you know, we have 3.8 million devices now deployed. 2.8 million of these have been added in the last 12 months, and nearly 1 million has been added in the last 3 months alone. So there's a significant scale-up of the size of deployment in the market as well.

A little bit more about operating metrics. On the left-hand side, our average monthly transacting users grew about 49%. This -- the last quarter, this number was in the low 40s. So we are seeing some amount of acceleration there. UPI, that customer acquisition is working really well for us.

Our GMV basically doubled year-on-year, so 101% to INR 3 lakh crores. Our GMV from MDR bearing wins grew 52%. We'll talk a little bit more about this right at the end. And our payments devices, like I mentioned earlier, grew by about 2.8 million on a year-on-year basis.

This is our payment services revenue. This grew 69% year-on-year and our net payments margin, which we define as payments revenue minus payment processing cost, that grew from -- to 35% from 17% a year ago.

Our Payment Services to Consumer, which is this part has been, as you can see, increasing steadily. It has been basically supported by MTU growth and a huge amount of activity that we see on the Paytm app for bill payments and top-ups. Our Payment Services to Merchants on year-on-year basis grew 67% to INR 557 crores. This, as Vijay mentioned, is for collecting payments on merchants' own app, website or shops or stores. There were a few drivers here that I want to call out. Clearly, the thing that continues to grow for us is our subscription revenue as we deploy more and more devices.

March 2022 quarter was flattish because of the seasonality impact, as we had mentioned in the previous call. We did do -- and I wanted to call this out for everyone's attention. We did do some account level rationalization among online merchants, as a part of our focus on profitable GMV. This had a revenue impact of about INR 29 crores in this quarter. So we did take a onetime step starting middle of April to rationalize certain accounts, which we didn't, which we were not making money on effectively. And I should also call out that in this quarter, we did not have any API incentive recorded.

The update there is that while the government has announced the incentive for the next year. We don't have the final notification from [indiscernible]. And our policy is that we record this only after we get the final notification from [ May ]. So this quarter, we recorded no revenues for UPI incentive.

On the next page, I wanted to double click on the net payment margin. which, as I mentioned on the previous page, has grown from 17% to 35%. This is one of the most impressive things that the team has done, which is really focused on unit economics and really focus on profitability. There are 2 sides of this coin. The first is to drive higher revenue, of course, from higher MTU as well as from subscription revenue. The other side of the coin is to work with our bank partners to have substantial reduction in payment processing costs. So we negotiate better processing rates, and we make sure that our routing is as optimized as it can be to get as much benefit out of this net payments margin.

Like I mentioned earlier, we did some account level rationalization in the online merchant business that also contributed a little bit to the improvement in net payments margin.

In summary, our net payments margin has gone from INR 108 crores a year ago to INR 382 crores that is a substantial improvement, which, obviously, flows straight down to the contribution margin and down to the EBITDA.

I'll hand over to Bhavesh to talk about letting, and I'll come back and talk about the rest of [ the year ].

[Bhavesh Gupta, executive]

Thank you, Madhur. good afternoon, everyone. Financial services revenue, as you can see here, has grown from INR 55 crores to INR 71 crores. It's important to mention that the INR 271 crores also includes revenue generated from noncredit activity, and add by that number continues to be small. So INR 271 crores has a predominant share of credit activities, and that number continues to grow.

The good news for us, it is on a quarter-on-quarter basis. We are seeing the value of roll disburse grow. Now if you can notice from March to June '22, we've grown by more than 50%. And now we are run rating at a level that we could end the year at about INR 24,000 crores of low disbursed to Paytm platform.

Important here again is the number of loans also continue to grow, and the ticket size also is now starting to grow. It just gives us an indication that what we are seeing -- that there is a more upsell happening both for person-owned customers and merchant-owned customers. And we're also seeing limit enhancement happening to our Postpaid customers because our lending partners getting more comfortable by giving them more higher limits, which is a spend limit to Postpaid customers, and that is jumping up the ticket size per user on Postpaid. And we do see that this trend may continue quarter-on-quarter, and we could see tickets as this continue to move on.

Just it's a bit of a deep dive. The growth has not just been a single product growth. The growth has come from all the 3 products. And both the engines on the consumer side, which is postpaid and personal loans are and intertwined to each other because personal loans predominantly is coming on the back of customers who are maturing at Postpaid with us. So if you are a Postpaid customer, and you mature more than 6 months on the platform, you are more likely to get an approval from the lender for a personal loan. More Postpaid loans have been given through our platform.

It directly is adding to the persons being given on the platform. So as you can see, the personal growth from March to this June quarter has been very substantial, and we've grown relatively on the back of a very strong growth, which came in a quarter before. We're not seeing any let down in these numbers. Postpaid continues to keep growing in spite of the fact that we had seen some slowdown in new acquisition, but we are again seeing the new acquisition back, which was the lull month that we had for 1 month in the quarter.

Merchant loan is a product that we see come back very, very strongly. As you can understand, last year same time, it was materially impacted by COVID. And also through the year, we had COVID in back all merchant loans. This is the first quarter, I would say, maybe about 5 months. We're seeing there is no impact of COVID. Markets are open. Shops are open. GMV's growing very, very nicely and up. And hence, we are seeing merchant loan grow from INR 565 crores to INR 827 crores. So the trend suggests to us even in the month of July that this trend is continuing to be very positive, and we'll continue to see this growth continue, maybe at the same momentum or a bit better momentum, especially on merchant on a personal side.

This is the -- a bit rundown on the portfolio. This is the indication that we get being a collection partner to our lending partners. These numbers have remained broadly at a similar range. We haven't seen any deterioration of the portfolio. When I say that we're going to use our deterioration, there is no material change in the way the lender expected the portfolio to behave versus the way the portfolio is behaving.

So if you look at the bounce rates for our personal business, though the personal loan growth has been so massive and significant, the bounced rate have continued to be same or a similar range, maybe 11% to 12% as same as for postpaid. We have seen much better bucket resolution now in postpaid. It is now inching 90-plus bucket on the dilution while we've given you the range of 89 to 92.

Merchant loan, again, we're seeing much better resolution because markets have opened up completely. We've seen only 1% deterioration in Postpaid if we were to look at the last quarter. We were ranging between 82% to 85%. Now we are ranging in 81% to 83%. We do believe that this is going to be back to the same level of even 82%, 85%.

ECLs have remained exactly similar, the 4.5% to 5%, and 5% to 5.5%. I want to call out very clearly here that these ECL numbers are what the lender sees on a quarter-to-quarter basis as a model that they have built for their accounting standards. The actual credit losses are lower at the lowest range. So when we say the personal loan ECL with a 4.5% to 5%, actually, we are seeing a net credit loss, which is up 4%; Merchant net credit loss up 5%; and postpaid net debt loss up 1%.

So the book is performing very healthy, and that's the reason we're seeing new lenders getting added, and we are also seeing the existing lenders expanding their appetite to do more loans. Back to you, Madhur.

[Madhur Deora, executive]

Thanks, Bhavesh. I want to touch upon commerce and cloud revenues. Our commerce revenues, which is in light blue at the bottom, performed very strongly last quarter. It is up 168% on a year-on-year basis. But importantly, on a quarter-on-quarter basis, it was up 35%. Our travel merchants sold more tickets on our platform, largely because of the resurge in demand.

As I had mentioned briefly in the last quarter, we did see a mini Omicron wave in January and early February. So the demand came back very strongly after that for our travel merchants. And also our entertainment merchants had a seasonally strong quarter with big movie releases. So that contributed to the strong growth in commerce business.

On our cloud business, while we have grown 30% or 29% on a year-on-year basis, we are down quarter-on-quarter and did want to call out that advertising not just for us, I think it's an industry-wide phenomenon, is seeing some headwinds due to reduced marketing spend, particularly from consumer Internet companies. So while we're confident that we'll recover the advertising revenue more and more, this quarter did see some meaningful headwinds. We are seeing also strong traction in credit card distribution and expect it to continue going forward and contribute to growth of the cloud revenue business.

I want to touch about contribution margin. We talked about net payments margin earlier. That plus other things have resulted and our contribution margin remaining on a very strong upward trajectory. So we have gone from 27% of revenues a year ago to 43% of revenues now. This is ahead of our expectations in terms of our execution.

We have tripled our contribution margin from about INR 245 crores a year ago to INR 726 crores now. Like I mentioned, the key drivers for this is, number one, the significant improvement that we saw in net payment margin, but also the fact that financial services has grown from 6% of total revenue to 16% of total revenue and Financial Services is a higher-margin business for us. And also, commerce revenues have grown 34% on a quarter-on-quarter basis, which has resulted in contribution margin going from 35% to 43%. Our other costs such cash backs and incentives and other direct costs have remained broadly flat over this period.

Finally, on EBITDA. Strong message or strong performance this quarter. We have improved by INR 93 crores on a quarter-on-quarter basis. We are, on the one hand, focusing on cost rationalization, but we are going to continue to invest on growth just like we have done in the past quarter and in this quarter.

Our increase in marketing spend will really stand out to you. That was almost entirely due to seasonal sponsorship spend as a result of [ IPO ]. On employee costs, we did have a 10% quarter-on-quarter increase, and that was because of appraisals as well as select investments in our sales team as well as our technology team. Our software, cloud and data center expenses as well as other indirect expenses have declined as a percentage of our revenue.

What we saw is that our contribution profit grew 35% quarter-on-quarter. Our indirect expenses only grew 10% quarter-on-quarter. As a result of that, we have a 25% improvement in EBITDA losses and a INR 93 crore improvement. Our EBITDA loss is now at 16% of revenue compared to 37% of revenue a year ago. So that is a significant improvement of 21% from where we were a year ago.

And finally, key trends in our business. Just to summarize, continued strong growth in users and merchants. The government incentives have now made UPI P2M GMV profitable. And we actually believe that non-UPI/GMV, which is something that we started to disclose in December, is not really a relevant metric to focus on going forward. Our loan disbursals while they have hit INR 24,000 crores of run rate, like Bhavesh mentioned, has ample opportunity to increase penetration going forward. Our growing payments business is giving us significant engagement and monetization of merchants. Our contribution margin has gone up dramatically.

We continue to invest in sales and technology, but we do believe that our indirect expenses will continue to reduce as a percentage of revenues, and we are prioritizing payment services and then paying our resource allocation.

That's all I had. And with that, I'll hand it back to the moderator for Q&A.

[Vijay Sharma, executive]

Yes. But you said a very key point about UPI GMV requirement on non-UPI/GMV requirement. We want to reiterate that UPI and merchant payment GMV, effectively started to become profitable on a line item basis. So we believe that overall, GMV that we announced is actually where the revenue could be accounted for. Obviously, it is not coming every quarter. It will come in a lump-sum basis somewhere. So we would showcase that [indiscernible]. Back [indiscernible].

[Operator]

[Operator Instructions] With that, the first question of the session is from Mr. Vijit Jain from Citi.

[Vijit Jain, analyst]

Congratulations for that great set of numbers, some strong improvement in contribution and adjusted EBITDA margin there. My question is on the payment processing charges. And clearly, this quarter, a lot of the improvement is driven by your gross profits improving. So what -- is it just the negotiations driving those payment processing charges down? Because even if I use the non-MDR/GMV base, it does look like that number went down 7 or 8 basis points Q-on-Q?

And the second question is related to payments is when government is encouraging UPI monetization, are you referring to those lump-sum payments that government mix only? Or is there any anything around the convenience fee platform fees, et cetera, that you're starting to charge on the consumer side?

[Madhur Deora, executive]

Maybe I'll take the one hand over to Bhavesh for the second one. So we did maybe obviously, when you're looking at payment crossing costs, there are a couple of different ways to look at it, whether it's revenue minus payment cost or as a percentage. But if I could just point out that our absolute payment processing charges went down this quarter by about INR 80 crores from INR 774 crores to INR 694 crores. So maybe I'll use that to explain to be able to answer your question.

And I think there are probably 3 major factors there. One is, like you mentioned, negotiations with banks to reduce the rates that we pay to them, whether it's for credit card or other instruments. The second is, like I mentioned, we did take out account rationalization for certain online merchants who were negative impact for us effectively. So while we lost INR 29 crores of revenue, we were able to shed off slightly more than that in terms of payment processing costs.

And the third, which is an ongoing trend is that when customers add money using UPI to Paytm wallet and so on, it costs us less money. So UPI in that sense also helps us reduce the loading cost for one of the revenue-generating instruments, which is wallet. So those 3 factors would be sort of the primary factors why despite an increase in GMV of about 18-odd percent and despite increase in MDR bearing GMV there as well, we were able to actually reduce in absolute terms of PG processing costs.

[Bhavesh Gupta, executive]

And on the UPI question. Last year, the government came out with the mandate that they will reimburse the MDR applicable on Paytm interactions on UPI [indiscernible] cards. And this year, they have further reinitiated that conversation by passing in the budget that [indiscernible] is going to further announce the amount. We believe the amount would minimally be the same amount that they did last year for the industry, if not more.

And that's the reason, our belief on the fact that UPI Paytm is now becoming technically an MDR-bearing GMV. While the MDR is being subsided with the government, it becomes highly profitable for Paytm, we being one of the brand by people out there in the market and off-line payments on Paytm, and also an online payments are began.

The second part of UPI is very interesting, which is the UPI is further monetized best as through our devices strategy. Soundbox basically meets the merchant become technically primary for Paytm. So not only we make money through UPI Paytm GMV, which is, as we said, we adding subvented to subsidize on MDR by the government, we also start getting far more take on the Soundbox because the GMV starts getting incrementally accreted to Paytm. And we obviously made subscription revenues and eventually the merchant lending book, which gets generated through this to national history for our lending partners.

To your other question about have we started to charge customers on a convenience fee, et cetera. We were always charging customers for certain use cases on our platform convenience fee, which is like admin to wallet using credit card, which we've been doing for many quarters in the past. We've also started to now charge certain use cases, platform fee, where we believe Paytm provides significant advantage and value-add to consumers in the form of bill reminders, assurance of payment happening to the billers in time, et cetera, et cetera. And we have not seen any inertia in consumers making that convenience fee platform to us. So that has become a fairly decent revenue item for Paytm.

[Vijit Jain, analyst]

Got it. My next question is, in general, recently, the RBA, obviously, set the stage for introduction of credit cards on UPI. And at the same time, we've seen some developments around restriction of credit line on prepaid cards. So your broader sense on what the regulators thinking here. And a related question to that would be just the progress on the [ RA IT ] audit for you guys. And I'll jump back to after that.

[Bhavesh Gupta, executive]

See, the credit or the credit card being used, which is the NPC card, UPI credit card instrument on UPI rail is a welcome move. We think any development happening in this place, it expands the acceptance of rail instruments, is always going to benefit the industrials and all. At this point in time, it is still premature because the semantics have been sending well down. And as they become more publicly available, one would be in a position to give you an opinion. But we welcome this move because it expands the market.

With regards to the PPI conversation, I think there are -- not very well interconnected. That was an arbitrage, which was being used by certain nonbank PPA issuers in loading credit image on PPA instrument, which was very clearly called out that it is not allowed.

What the regulator has done has removed any level of misinterpretation or [indiscernible] in the minds of operators by clearly calling out that you cannot create a prepaid instrument product as a credit instrument product for which you need a license. And they've opened the licensing also to NBFCs in the same spirit. What was your other question, sorry, I missed that. You had another follow-up point that you...

[Vijit Jain, analyst]

We wanted to know about are they [ audited ] and [indiscernible]?

[Bhavesh Gupta, executive]

Sorry, my bad. Yes. So the early audit is continuing. The auditors are currently in the process of conducting the audit. It is a time point process that we mentioned in our last quarterly release also. We do believe that, that process is, as we understand from our medium payment bank colleagues, is progressing in a good manner. And over a period of time, we'll have more information to share. But currently, the order is progressing very well.

[Operator]

The next question is from Mr. Sachin Salgaonkar from Bank of America.

[Sachin Salgaonkar, analyst]

Congratulations with a good set of numbers. A couple of questions from me. First question is on Soundbox. Madhur, quite a few media article or rather advertisements by you guys is actually indicating that the Soundbox monthly rental has gone down to 0? So just wanted to understand how the monetization out here. And also, we are seeing some competition pick up in this space. the likes of BharatPe and PhonePe entering the space. So again, your thoughts out here?

[Madhur Deora, executive]

I think I had Bhavesh clear this -- get him to answer this one.

[Bhavesh Gupta, executive]

So Sachin, I just want to mention here is that Soundbox is innovation that we're very proud of, which we imported in the year 2020. As you can see the numbers, we've been market dominant in this space. And we do believe this is one of the innovations and products, which has allowed us to monetize UPI GMV and further augment it by the credit GMV that in this entire ecosystem producers, and which we are able to work with the lenders to give loan distribution.

Having said that, we have seen multiple attempts by various competitors in the market in the past to try and launch products in this place, albeit, not very successfully. We also, in the same belief that this market is so large that we will see certain competition come our way and will, obviously, expand the market. And we absolutely welcome that piece.

So because we believe our product is very, very superior, it's a Made in India product, we've been at this product for a very long period of time. It's a 3-month Soundbox that we positioned the market. It allows the merchant not only to get very competitive rentals, but also get access to our service network, which is very important in this space and also get credit.

Now to your specific question with regards to competition who's kind of launched and our belief or with regards to pricing. I think that pricing is more of a marketing thing that we keep doing. At this point in time, because of whatever competition sentiment is, that seems to have picked up and in a manner where everybody is thinking that every Soundbox has become 0. That's not the case. A very, very small percent of merchants are being given the offer from our perspective because we want to value those merchants.

And this is something that we keep doing. We've been doing it for the last many years, and we'll continue to do in the future. So we don't see any impact or any material impact, if I may say, on the subscription revenue of Soundbox. In fact, we would see a positive impact because the GMV that we generate through Soundbox will further go up. Our installation of Soundbox will further go up. And the outcome, the derivative, which is merchant lending will significantly go up. So we do believe this is only going to add to our bottom line versus having a debt to the bottom line.

[Sachin Salgaonkar, analyst]

Very clear, Bhavesh, out there. Second question is actually on the payment, the core payment business. The implied take rate appear to have gone down into the quarter. And I heard earlier comment from Madhur about some account rationalization. So just wanted to understand, maybe it's a Q-on-Q fluctuation, but I wanted to understand what's happening out here.

[Madhur Deora, executive]

Yes. So Sachin, I think our online merchant rationalization, some of the merchants that we rationalized were higher take rate. So that has some impact on it. There's some Q-on-Q fluctuation like you mentioned as well. And over time, we do think that the overall take rates may actually go down, right? What we focus on is basically a net payment margin and making sure that all -- nearly all of the GMV that we're doing should either be positive on net payment margin or it should have immediate upsell opportunities or both.

So that's sort of how we run our business. We don't really run our business on the basis of doing or not doing business just because it has certain take rates. And because you can end up making some suboptimal decisions that way, right? So in other words, if our take rate last quarter was 40 basis points, and we had some business that we could do profitably at 10 basis points, we would do it.

And there's some business that we could do only unprofitably at 1% take rate, we would not do it. So that's how we run our business. And there's a focus on unit economics rather than take rates, right?

And if you notice, we don't really calculate take rate and present that, although investors can calculate it. And the reason for that is we calculate and put out to investors the metrics that we think matter. And take rate is one that we actually don't calculate and put out there.

[Sachin Salgaonkar, analyst]

Makes sense, Madhur. Just a small follow-up out here. There is a phenomenal improvement in the net payments margin. You guys are now at 35%. Any thoughts on what could be the steady-state net payment margins?

[Madhur Deora, executive]

We would continue to try to improve this number. Having said that, if there was business to do at a slightly lower net payment margin, we would do that as well, right? So our threshold is that it should be positive on net payment margin. And as long as it's positive on net payment margin, we should be attracted to that business, especially if it had upsell opportunity, the batch to it.

[Sachin Salgaonkar, analyst]

Okay. So directionally, it may not go up going ahead, but it needs to be a net payment margin from your perspective?

[Madhur Deora, executive]

Yes. So all business that we do should be net payment margin-positive and/or have upsell opportunities attached to it.

[Operator]

The next question is from Mr. Karan Danthi from Jetha.

[Karan Danthi, analyst]

Congrats on great results. I had 2 questions. The first was [indiscernible] business. If you look at new [indiscernible] divided by loan disbursal, looks like the take rate, if I look at it that way, is went up, in stabilized now has I'd be curious as to whether that continues.

And then secondly, on market share, all external indicators suggest that there has been a change in the sense that we've stabilized market share vis–à–vis a year ago, at least, within the payments maybe you sort of GMV, whichever way you want to look at it. Could you maybe broaden out that sort of concept of market share in the merchant, sort of Soundbox and sort of device business and then also the lending business.

Is there some way to sort of think about how those market shares come out because theoretically, given your closed loop system and your early investments, you should have a higher market share in those areas than you do just in the regular sort of GMV or MTU, if you just look at it that way, so I'm just curious what those numbers would be.

[Madhur Deora, executive]

Bhavesh, do you want to start? And maybe I'll have...

[Bhavesh Gupta, executive]

Sure. So Karan, just a small note, mathematically, the INR 271 crore number divided, obviously, by the disbursal gives you a take rate. As we said in the commentary that while making the presentation that all of the INR 271 crores is not lending. Disproportionate share of that is credit. But having said that, we do believe the take rate is kind of stabilized at the level that we currently see, which is operating maybe close to 4% to 4.5%.

We are now starting to get some bit of collection incentives because we started to scale up the business materially same time last year, and that book is starting to mature and you start to get in the center. Going forward, I don't think that the incentives are the take rates for credit are going to significantly improve, while we could see a swing of 25 to 50 basis points on a quarter-to-quarter basis depending upon how the entire consumers performance behaves. Madhur, you want to take the market share question or this is the thing?

[Madhur Deora, executive]

Yes. So I think, Karan, I'm not sure I fully followed the market share question. But it is the case that in UPI, we are stable or gaining market share. And with respect to other instruments as well, in many of those instruments, we have very, very large market share.

I think the focus is how do we get merchants to -- help merchants to accept payments in every way that it matters, right? And when the merchant is accepting payments from customers, our technologies, our instruments and our solutions should try to add as much value in that process as possible. So whether the merchant is accepting payments using a QR code or a device, we should be there.

Whether they're accepting payments using -- whether a customer in that instance is being, using Paytm app or a third-party app to that merchant, we should be there as well. And obviously, on our consumer app, we continue to see massive trend. So that's sort of our focus.

But like I mentioned, if you look at the third-party data, on UPI P2M, we are growing share, which is our focus, like we did describe the entire pyramid was about P2M payments, and on wallets and Paytm Postpaid and so on, we continue to do very, very well.

[Bhavesh Gupta, executive]

And Karan, if your specific question was hinting towards devices, I think the Soundbox, while there is no public data available, but whatever is available, you can clearly see that we have disclosed that we are at 3 million-plus Soundboxes and growing. And hence, we do believe that market is disproportionate towards Paytm.

On the card machine side, there is some public data available, which suggests that on an incremental basis, we are taking 1/4 of the market, if not more, but there is no data available completely to suggest issuer-by-issuer devices on the card machine side, but I can just share with incremental basis, this is more developable.

[Karan Danthi, analyst]

Got it. And I can just squeeze in 1 more. Is merchant retention improving?

[Bhavesh Gupta, executive]

Yes, merchant retention is definitely improving. So we look at the static cohorts of merchant. When we look at on our base of the number of merchants that we have, 28 million, that number doesn't move by a few percent, every quarter. But we are seeing on our card machine side, much retention cohorts improving every quarter by about 1%. On Soundbox, it's stable between 85% to 86%.

[Operator]

The next question is from Mr. Manish Adukia from Goldman Sachs.

[Manish Adukia, analyst]

My first question is on the user growth. Clearly, in the quarter, you've caught out BMD growth has been very strong. And it doesn't look like the RBI banner, Paytm Bank in the month of March has had any impact on user growth. But when we look at the marketing spend in particularly cash backs and incentives, that seems to have gone up sharply as a percentage of sales on a quarter-on-quarter basis. So are you having to drive MTU growth or having to spend more on cash tax and incentives to drive user growth? Or is there some other dynamic players that's on cash [indiscernible]?

[Madhur Deora, executive]

Yes. So Manish, those points are not quite related. Our marketing spend were like we mentioned earlier, purely seasonal because we are, as you may know, one of the sponsors for IPL and this year, we also had a longer IPR, as you know. So we have some expense related to that.

Our cash back spend had partly to do with the comeback of our travel and entertainment ticketing businesses. So while those businesses are massively contribution profitable, there is a small amount of cash back associated with that revenue because they are a high-margin business, and we can fund a little bit of cash back and still make a lot of money on it. So those were the 2 primary drivers.

We have not changed our [ CACs ] in the last 3 or 4 quarters. In fact, the team is focused on directionally moving it downwards. So no, we have not pushed harder just to try to hit an MTU number. We feel comfortable at certain CAC levels, and we look to continue to optimize that rather than sort of throw in additional CAC just because -- I mean we did not face any headwinds in consumer acquisition. But even if we had, we would not take that strategy.

[Manish Adukia, analyst]

Understood. My second question is on the commerce and cloud business costs. Of course, the commerce business has seen a pretty sharp growth quarter-on-quarter. But when I compare the growth to some of the other listed peers in the movie, exhibition or travel space, looks like the growth was somewhat weaker than those peers. And even in the cloud business, while you did call out that consumer internet companies that spend less on advisement, but the revenues actually dipped quarter-on-quarter despite potentially a credit card business having scaled up or been scaling up quite well in the last few months. I'm just trying to understand if you have any more color to add for this kind of business.

[Madhur Deora, executive]

Yes. So commerce business is not entirely travel and entertainment. We do think we have very strong performance in travel and entertainment in flights, buses, trains and movie ticketing. I know for a fact that we gained share pretty much across the board in the reopen, if you will. So I think we have done as well, if not better than industry at an overall level.

The Commerce Services business also has sort of deals and gift vouchers and a few other businesses, which may be sort of distorting a number a little bit. Those weren't as impacted in Q4 of last year. So maybe that's the sort of like-for-like comparison which might be different.

Credit card did grow, but it is a relatively small part of that overall INR 200 crores of revenue that we made per quarter, roughly INR 200 crores in the cloud business. I think advertising, like I said, was lower compared to previous quarter, which was the primary reason for the decline.

[Manish Adukia, analyst]

I just have a very quick follow-up on one of the earlier questions on the payment processing costs. So now when you think about the payment costing cost, of course, a component of that is also Paytm Bank, you also called out are that the savings is resulting from 2 or 3 different factors of which just your negotiations with banks is one of them. So just trying to understand if the savings broadly spread out across different banks or could medium payments bank, let's say, be a disproportionate share of that or not really?

[Madhur Deora, executive]

It is not a disproportionate share. So the savings is spread out across our bank partners, because we take from Paytm Payments Bank to Paytm wallet, primarily. There's also net banking. And from third parties, we take things like credit card, debit card, net banking and so on so to spread out quite well across the key payment acquirers and payment issuers in the country.

[Operator]

The next question will be from Mr. Rahul Jain from Dolat Capital.

[Rahul Jain, analyst]

Yes. First of all, congratulations on very strong performance. Firstly, my question is what could be the contribution from this introduction of platform fee on Payments to Consumers? I'm assuming this is rolled out to all MTU -- will be rolled out to all MTU over time. So can you give -- when we would see the ideal potential for this to play out?

[Bhavesh Gupta, executive]

So Rahul, this is currently a very, very small percentage of revenue. Will we roll it out to the entire deal. I can't comment on that at this stage in time. Our belief that is wherever Paytm believes we are adding platform value to a use case. And we believe the customer would be willing to pay for the value that we bring on the -- referring to the customer a use case, we shall price it appropriately.

So it's a process, which we will see as we build more value on the platform and how much price the customer is able to pay for the platform. But yes, over a period of next couple of quarters, we do believe platform revenue or a platform fee could be a reasonable portion of the consumer fee that we generate for ourselves, but not very large fee if you're thinking this could become a few hundred crore or per quarter [indiscernible] number. No, that it won't be. It will still be relatively small.

[Rahul Jain, analyst]

Got it. Got it. Secondly, there was this comment that in the EMI servicing and collection fee business, we do it even for the people who we are now distributing loans for. So are these loans for the same NBFC partner, but not distributed by us? Or these are also done by NBFCs for whom we don't distribute at all?

[Bhavesh Gupta, executive]

So Rahul, it's both. The NBFCs that we work with currently, we surely understand that our ability to collect on the portfolio that we originate is very good and as they are, they offered their portfolio also on a case-to-case basis. But we also have independent players who leverage our platform for various elements of EMI servicing and collection for which we charge the more, and that is a part of the collection revenue that we're generating per day. And that number is currently small but we, obviously, believe that number can become materially over a period of time.

[Rahul Jain, analyst]

And what could be the ideal channel for this? Is it mostly outside the app or how we are efficient here?

[Bhavesh Gupta, executive]

So Rahul, this is actually completely on the app, our ability to have customer insight and overlay the customer insight for a lending partner for them to reach more intelligently and more contextually to their borrowers, through the Paytm app, is a value that we provide, and overlay on top of it through every other technology set, including multilingual bot calling, progressive dollars, et cetera, et cetera, that we build for our own collection stack, which we offer to these customers.

We don't go out looking for doing collections for customers, either in the harder buckets and/or for customers outside the Paytm app. Our entire bidding point is to leverage the customer insights that we have on tap and the technology stack that we built for our new business.

[Rahul Jain, analyst]

Got it. Got it. Just last one, if I can squeeze in, which is in this particular quarter, we see significant improvement in profitability despite the miss on the UPI incentive plus there was a wage hike. And so as I said -- and there was this marketing spend, which also bumped up in this quarter. So is it safer to assume if we maintain the kind of growth traction we have, we would see similar or even superior improvement in EBITDA in the subsequent quarter?

[Madhur Deora, executive]

Rahul, I don't want to specifically talk about next quarter yet. [ Time will come ] to talk about that. But I can say that I think that the business has significant tailwinds with respect to not just growth and revenue, but also in terms of profitability. So we are seeing for some of the reasons that you mentioned, despite being fully invested in areas that matter, we have been able to achieve this EBITDA performance, and that is what we'll continue to drive.

[Rahul Jain, analyst]

Yes. And just one clarificant on this INR 29 crore impact that we talked about in payment services to merchant, is this fully baked in the quarter or there was an exit impact which would -- we feel in the coming quarter as well?

[Madhur Deora, executive]

That's a good question. It is more or less a run rate impact, not every single rationalization happened on April 1, as you can imagine. But it is more or less a full quarter impact. Rahul, did that answer your question?

[Rahul Jain, analyst]

Yes. Yes, sorry, I missed the last 20 seconds. You said nothing -- everything didn't happen in the 1st April. I missed that.

[Madhur Deora, executive]

All I said, it's more or less a full quarter impact.

[Operator]

The next question is from Mr. Saurabh Kumar from JPMorgan

[Saurabh Kumar, analyst]

So the first question is on financial services. So Bhavesh, can you quantify what percentage incentive income percentage of the loans you would have indicated last year? What percentage of that loan have you started receiving as an incentive income in this quarter? And the second piece is, can you also talk about what are the volumes you're indicating in the credit card business? And have you launched EMIs? So that's the

[Bhavesh Gupta, executive]

The EMI business, Saurabh, right?

[Saurabh Kumar, analyst]

Yes.

[Bhavesh Gupta, executive]

Yes. So let me start with the third question. We have an EMI business. which is on pay and postpaid. But if your question is that are we doing EMI like some of our contemporaries do in the market as [indiscernible], et cetera. That product is currently in the bid. We hope to launch some time in this fiscal, so we haven't launched it in fiscal at this point in time.

To your question before this on credit cards. We've not disclosed credit card numbers, but I can confidently tell you that, that business is performing better than we expected, especially on the back of the recent partnership that we did with India's largest card issuer. And we are seeing massive momentum both on the new card issuance that we're doing, the spend per active card and the activation by itself on the overall issued portfolio. So we are very bullish on that business that, that business will start adding material revenue and overall EBITDA profitability to our cloud business on a quarter-on-quarter basis.

To your first question on the incentives on collection portfolio. So we don't necessarily calculate the incentive on the last year book, what had we got and what have been not got. But broadly, I can say to you is that what we see here is let's say, the last year book that we generated for personal loans and merchant [ phones ], what was the loss expectation that lenders had and what is the actual loss on a static [ pool ] basis that we've bought for them this time.

So the difference is our incentive. That number is ranging better than we expected. And if you're looking for a range, that number is between 100 basis point to 200 basis point of the disbursed value of last year on these 2 products.

[Saurabh Kumar, analyst]

Okay. That's very clear. The second is on the contribution margin. So if you do some incremental contribution analysis, the incremental contribution seems to be around 50%. So would it be fair to say, Madhur, that as we progress as our revenue grows, there is upside to this margin? Or are you guys happy at this 42%, 44% level because this was around the long-term levels you had indicated at the time of [indiscernible]?

[Madhur Deora, executive]

Yes. There are opportunities for us to improve this, particularly because of mix, even if net payment margins do not continue to improve from there. There are opportunities there as well. But even if you said net premium margins stay roughly at this level, can we improve contribution margin further?

Yes, there are levers for us to do that. Particularly growth of financial services being the most obvious one, which is high-margin, commerce business continuing to grow as well as recovery in advertising business. So we're able to do any or all of those 3, we should see [indiscernible] of potentially improving contribution margin. Perhaps not as sharply as we have over the last 2, 2.5 years. But could there be sort of gradual incremental improvements, yes, very much drive towards that.

[Saurabh Kumar, analyst]

Okay. And just one last question. On your staff cost, so from here on, we should expect a more moderation right in your indirect, especially the staff cost piece because I'm guessing most of the hiring would have rolled out that wage hikes would have been.

[Madhur Deora, executive]

Yes, we did say last quarter that we don't expect significant head count increases. I will say that given how well the Soundbox business is performing or the devices business overall, I should say, is performing, if our vision, the payments team wanted to do more in that area and that meant that we had to do 5% or 10% or 15% increase in the sales team, as long as we're performing really well as a company, and as long as the Soundbox as powerful the product as it is right now in terms of engagement and retention rates and so on, we would continue to invest.

So our objective is to be like profitable when we said and be profitable at scale. So we are going to drive scale and investments. And these things sort of interplay with each other. So if our revenue and contribution margins are doing really well, then we are going to continue to invest in areas where we are seeing that strong performance

[Operator]

The next question will be from Mr. Manish Shukla from Axis Capital.

[Manish Shukla, analyst]

First question, Bhavesh, what percentage of revenue from financial services would be credit?

[Bhavesh Gupta, executive]

We don't necessarily disclose that number, but you can see that it is disproportionately large.

[Madhur Deora, executive]

Manish, it should hover us between 70% and 80%.

[Vijay Sharma, executive]

Actually, Manish, if you notice, I -- in my presentation, called out that our businesses of payment as a method to acquire customers and credit disbursement. So if you notice, we are actively personally credit is the primary financial services here, but we already that is going to be more than [indiscernible].

[Manish Shukla, analyst]

Sure. And the point where I was coming from is, as you said, our annualizing INR 24,000 crores kind of disbursement number over the next 3 years. It could scale up to maybe more than INR 48,000 crores. How does the financial services take rate shift as you disburse more and more, right? How does that move?

[Bhavesh Gupta, executive]

So Manish, our business is very simple. We get an up-front revenue, which is I would say, 70%, 80% of the take rate that we so desire for our product. So that doesn't shift at all because the scale is not coming on the back of we expanding to more profitable cohorts. It is coming on the back of the fact that we have such a large MTU.

And it is needless to say that in spite of we delivering what we've delivered, Postpaid is 4% iteration to MTU, right? So there is still 96% of the customers who haven't yet been touched on postpaid, and this number on personal loans and merchant loans is lower -- less than 4%. So there's a massive road ahead for us, so we don't have to deviate from earning of upfront incentive.

The other piece is which is contingent to fulfill performance, that could swing 50 basis points here and there. So we don't see any material impact of the take rate that we are seeing today. My personal view is that it will only improve and not go down from where it stands today just because our collection incentive will kick in on the back of very large business that we're doing this year into the next year.

[Manish Shukla, analyst]

Sure. And as you scale this business up, do you see the necessity to increase the lending partnerships or you think your existing partners have enough appetite to disburse the kind of run rate which you can potentially do?

[Bhavesh Gupta, executive]

So we talked about 5 lenders and 3 credit card issuers currently within our portfolio of companies. All of them are AAA and large banks. They have a lot of balance sheet size and appetite to do so. But having said that, our belief is that we will continue to expand and adding more partners, and you can look forward to seeing some announcements in this regard this quarter and the next quarter.

[Manish Shukla, analyst]

Sure. And are you in a position to quantify the UPI P2M reimbursement that you got for FY '22?

[Bhavesh Gupta, executive]

So the percentage number is anyway available publicly, how much the government announced as a number. And as we just said, it is available if you were to Google that under [indiscernible]. And the number for this year hasn't been announced, but the last year number is available variable publicly.

[Operator]

The next question is Mr. Kunal Sha from ICICI.

[Kunal Shah, analyst]

Yes. So firstly, in terms of this entire negotiations with banks as well as account rationalization with certain online merchants. So are we largely done through this? Or it is maybe an ongoing exercise and we should see the benefit flowing through? So we would be in terms of the journey, with respect to the benefits that can kick in from here.

[Madhur Deora, executive]

So Kunal, it is an ongoing exercise. We had particular success this quarter, which is sort of ongoing in the sense that we didn't have a one-off this quarter. We had particular success on changing the rates with certain banks, if you will. So you should continue to expect that we'll be able to continuously drop the amount of payment processing costs that we have this quarter like we dropped it in absolute terms by INR 80 crores.

So that should be the expectation. But the way I'd say it is that the net payment margins uplift that we are seeing, we should be able to continue to maintain that. So yes -- so it is an [ online ] payment thing because there's a banking alliance team within Paytm, who constantly talks to banks about how we can work together and what win-win partnerships we're going to create. And as a result, we continue to sort of get better and better rates.

[Kunal Shah, analyst]

Sure. And besides that, also, when we look at payment services to merchants, in fact, the past 3 quarters, even if we have to add INR 29-odd crores of the impact, it's been pretty steady. It's not going up. Obviously, we are seeing consumer services payment revenues are still up. But this line segment is actually not improving a lot on a quarter-on-quarter basis.

So maybe either the -- when we look at it in terms of the device is that's good, but maybe I think maybe the lower revenues that would be kicking in from there. So when should we see the momentum coming back with respect to this particular line item?

[Madhur Deora, executive]

Yes. I would just slightly disagree with that, Kunal, because if you look at where we were, for example, in Q2, right, the September quarter. This business had INR 400 crores of revenue. Currently, we have INR 557 crores of revenue, right? So there's clearly been a significant change from September '21 to June '22.

Perhaps what you're referring to is that in December quarter, we were already at INR 580-odd crores, but that was a seasonally strong quarter, right? As we all know, in festive season, you get a huge amount of online and offline demand coming through. March quarter sort of win that off because March quarter is, obviously, not festive.

And in this quarter, we had the account rationalization and the UPI incentive. But if you just look at it over a slightly longer period of time, and I'm taking September quarter, perhaps as a base, which was the pre-festive quarter, there has been, call it, a 40% increase in the 3-quarter period, which we think are substantial.

[Kunal Shah, analyst]

Sure. And as the base sets in, maybe December, just looking at the volumes, which we are doing, still maybe because of the lower take rates, lower MDRs or maybe a little lower subscription fee, would we see maybe the growth not significantly higher in Q3? So I agree what you're talking about from, say, September to June, that's an improvement, but as the base section even though like volumes are there. Are we sacrificing a bit in terms of the revenue pool?

[Madhur Deora, executive]

So I think there are a couple of things there. One is we are seeing growth in GMV and underlying revenue base in this business. If we were to compare normalized, let's say, Q3 versus Q3, I think we would see significant improvement just given the GMV and underlying revenue trends that we have in the business.

So we would see significant growth. Like I mentioned, the one thing which is different starting this quarter is that we have done the account level rationalization. So that amount of revenue, you probably need to take out of this. But other than that, we are seeing strong tailwinds in both the online and offline business.

[Operator]

And now the last question of the session is from Mr. Piran Engineer from CLSA.

[Piran Engineer, analyst]

Congrats on the quarter. Just want to hop a bit more on processing charges so that I get this pretty clear. Would you be able to disclose how much of it is paid to Paytm Payments Bank?

[Madhur Deora, executive]

I think that is publicly disclosed and we'll perhaps point you to that. But effectively, we paid to Paytm Payments Bank for wallet and net banking alone, and we paid to all other banks for credit card, including for adding money to Paytm board.

[Piran Engineer, analyst]

No, no. I mean there's a quantum -- like what percentage of your INR 700 crore quarterly charge would be to there?

[Madhur Deora, executive]

I don't have that handy, Piran. If we have publicly disclosed it, then we will point due to that separately. If we haven't publicly disclosed it, then I wouldn't be able to do that.

[Vijay Sharma, executive]

To calculate it here, Paytm Bank offers their customers wallet and a banking for which we've been. And if you notice, these prices and revenues would be somewhere in the related party disclosures, if not, specifically specified. But overall, if you notice, the total amount of customer base that we would take payments processing for our merchant for will implement bank does not constitute even, I'd say, a substantial number across all bank, total number of customers. So it's a customer issue, if you will. That should be [indiscernible] .

[Piran Engineer, analyst]

Okay. Okay. That makes sense. And then I get a point that you've negotiated with banks and you've done some account rationalization. But it's the first time we are seeing like a 6, 7 bps reduction payment processing changes. So at 23 bps, do you think it is sustainable? I know you don't look at it as bps of GMV, but still, if I were to not sure towards that, would 23 bps or so be sustainable?

[Vijay Sharma, executive]

There are more and more payment is going to come from UPI and UPI MDR that is now publicly announced and I could show you the MIT website, where UPI's MDR rate that commit is going to give that is there. You can expect that to be 50%, 60%, 70% over the period. So looking at our business model with it, based on net is not what we continue to repeat, and that is why one of the important factors I took time to explain was that merchants make them in for us.

But merchants don't make revenue only on MDR question way of looking at business of payments. If you look at Stride, Ayden or some of those companies, you actually would look at portal GMV and percentage of take rate. But that's the business to do planning with that. In India because we all are in a market where we need to expand, and we as Paytm and government and regulator, every one of us champions, the disbursement of payment or distribution of payment to find wide. We all have clearly found out our India model where instead of GMV and bps, it is about kind of extra services, subscription services, MDR, instead of MDR platform [indiscernible], et cetera, that we live by.

So I would say, that model is extremely western, not practically long-term applicable in India as based on the business that we are seeing it. What we can say is that our payments revenue and take rate will -- overall payment revenue and contribution instead of payment GMV and take rate. You should look at, is our payments are growing? What kind of contribution it is giving? That versus GMV, to be honest about it, we wanted to specify the UPI GMV, these are good metrics of how consumer is behaving. As far as business is concerned, it is about what is the payments revenue you made. And if you notice, like I remind you again, in the slide, I said, this is how we make payments revenue. And what is the take rate or contribution margin on that.

That's the better way because GMV-based growth will be dramatically higher over the chargeable or the bps that are chargeable because government of India, when it is paying, it's not going to pay 26 bps any which ways.

[Piran Engineer, analyst]

Yes. No, no, I get that. Okay...

[Madhur Deora, executive]

I think, obviously, I agree with everything that Vijay just said. But I think on your question of 23 bps and so on, what I would say is that there's no one-offs in there, right? So you should not feel like a 30 basis points came down to 23 basis points because of something that happened only in this quarter and will not happen in the future. So there is no such thing. This is a structural shift or the structural opportunities that we saw to go and reduce some of our processing costs. And obviously, we took those opportunities and move forward.

This number, which is purely an output number and not something that we focus on controlling or optimizing will depend on payment instruments, right? So if I could do tons of more credit card business and even if it costs me more in terms of payment processing cost, that makes me that margin, I'll do it.

If I could do tons of UPI business where I would get some money from government and it won't cost me anything on the [ UPI ] cost, I would do that as well. So as a result, we don't go out and try to drive specific instrument mix. What we try to do is try to offer all types of payment solutions to our consumers and merchants, and then they decide and then we choose to do business which is profitable.

[Piran Engineer, analyst]

Yes. No, no, no. Madhur, I get that. What I'm trying to really think is that if you all have negotiated say 3, 4 bps lower with banks, what are the margins that banks make that they can afford to give you all 3, 4 bps more?

[Bhavesh Gupta, executive]

Let me answer that question to you differently. See, what is happening at a systemic level, is that the networks, which drive credit card usage. So the charge is credit card predominantly. Everything else, as you can imagine, is other free of rates. Systemically, 2 things have started to happen. Over the last quarter and this quarter, it was more amplified, that even the networks we master are generating more schemes for issuers to charge lower interchange.

So if there was a merchant category core, which was operating at 125, 150, they've introduced schemes in which they're saying, we would like smaller merchants who accept credit cards. We would like them to be given an interchange, which is much, much lower. And automatically, the rate drops. So they're also trying to fight this particular battle, which is moving to more low charge instruments, and protecting their instrument. And hence, the overall systemic charges coming on. It's just not about a negotiation. It is also the instrument charges pursue networks are also low. There is enough profit pool on volume, which is available and Paytm arguably being the largest credit card processor in the country between online, offline and on-app payments is able to command that negotiated price, better MCC price and overall incentives leading to this reduction that you're seeing, which will be sequentially reduce for a period of time is what Madhur is trying to say.

[Piran Engineer, analyst]

So if I swipe my credit card and pay on Uber and you all are the payment gateway, the interchange that you all paid to the credit card issue is also part of this payment processing cost?

[Bhavesh Gupta, executive]

Yes. Yes, in MDR because it depends upon if I'm the acquirer or on the issuer, but there is an overall cost of the card processing itself is going down. Of course, many, many use cases, like utilities, like small merchants, et cetera. The overall processing cost is going down by the network. So as a percentage, if I was saying earlier, 1.75% MDR that itself has come down to 1%. So on a percentage basis, it's looking much better.

[Madhur Deora, executive]

So Piran, what you said is exactly right that if you, in your example, we have a price with Uber and then we negotiate price with banks. But that price that we negotiated with banks is called MDR not interchange.

[Piran Engineer, analyst]

Got it. Okay. That makes sense. And Bhavesh, just a clarification from what you had said earlier, this discounted rates on Soundbox given that your competitors have launched it at cheap prices. And you will also have to sort of been somewhat in line with the market. This will only be for incremental merchants or these 3 million merchants who have been already given Soundboxes and they were charged INR 125 earlier, maybe you already reduce it to INR [ 75 ] to be competitive. How should we think about like incremental merchants being given discounted rate versus existing merchants also being driven?

[Bhavesh Gupta, executive]

I just want to clarify, that's a part of our sales strategy, and I do want to talk more about it, who should be given. But I can tell you that if 100 merchants are there in our portfolio, this cohort of merchant who could not -- who may not end up paying me a rental will be a very, very small percentage of customers, and link it to certain other behavior plus link it to their potential to take merchant credit.

So it's a very thoughtful strategy not linked to what market is doing today, but we continue to do. This time, we have obviously gone and advertised, obviously, the public [indiscernible]. But it does not change materially our rental per device that we're generating in Soundbox today or in the future.

[Operator]

Thank you. Thank you. With that, we come to an end of the Q&A session. The presentation discussed by the management today, a recording of this call and the transcript will be made available on the company website. For some of the questions we couldn't take and for any follow-up queries, please e-mail those to the company at [e-mail]. I now hand the call.

[Madhur Deora, executive]

On behalf of management team, I want to thank everyone for all your time, attention and engagement. We really appreciate it.

[Vijay Sharma, executive]

Thank you so much, everyone.

[Bhavesh Gupta, executive]

Thank you, everyone.