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Should Alibaba-Backed Paytm Worry About the Facebook-Jio Deal?

I recently wrote about Facebook buying a stake in Reliance Jio, an Indian telecoms operator. Then there’s also how Alibaba fueled India’s mobile payments revolution.

Interestingly enough, Facebook Inc (NASDAQ: FB) is about to challenge Paytm’s dominance in mobile payments in India.

So should Paytm, which is backed by Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988), be worried about Facebook’s latest foray into India?

Why Facebook invested in Jio

To understand how Facebook can pose a threat to Paytm, we need to understand the dynamics of Facebook’s US$5.7 billion investment in Jio.

Jio, which started operations in 2016, has become India’s biggest telecoms company with around 400 million subscribers.

Facebook-owned WhatsApp is the biggest messaging platform in India with over 400 million subscribers. The deal between Facebook and Jio will help Facebook cement its position in India while helping Jio grow its portfolio of digital services.

Enter the new dragon

WhatsApp is launching its own payments service in India that could undermine Alibaba-backed Paytm’s market-leading position.

First, the deal could make WhatsApp Pay the default payment option for Jio subscribers. Jio continues to add millions of subscribers every month.

At the same time, other telecoms operators in India are struggling with their finances. This could lead to consolidation in the industry with Jio firmly in control. As it continues to dominate the industry, so will WhatsApp Pay. That’s not a good sign for Paytm.

Jio’s e-commerce ambitions

Reliance Jio is going big on e-commerce. Instead of following the traditional e-commerce model like Amazon and Walmart-owned Flipkart, Jio is planning to connect small brick-and-mortar stores with its platform.

Jio has entered into an agreement to use WhatsApp as the platform to make it happen. It makes sense. With so many Indians connected via WhatsApp, this will be a gamechanger. As WhatsApp becomes a viable e-commerce platform for JioMart, WhatsApp Pay will become the default payment option.

Meanwhile, Paytm’s own e-commerce venture, Paytm Mall, is struggling. As a result of JioMart’s ascent and Paytm Mall’s troubles, we may see a decline in the use of Paytm.

Rising competition 

It’s not just Jio that Paytm is fighting with. Flipkart has its own wallet, PhonePe, which is surging ahead. Google Pay, owned by Alphabet Inc (NASDAQ: GOOGL) is ruling the Unified Payment Interface (UPI) transactions.

In fiscal year 2018-19 (From April to March), Google Pay accounted for 59% of UPI transactions while PhonePe took 26% share. Paytm was a distant third with just a 7% share. Paypal Holdings Inc (NASDAQ: PYPL) is also flexing its muscles in India. Amazon.com Inc (NASDAQ: AMZN) also has its own wallet.

With UPI being the norm, Paytm may see other players like Google Pay and WhatsApp Pay eating into its market share.

Capital worries 

With competition intensifying, Paytm may need more capital to dominate mobile payments in India. Alibaba holds 40% of the company.

However, recent changes in India’s capital inflow rules have made it hard for Chinese companies to invest in India. Thus, raising further capital from its key investor may become tough for Paytm.

Foolish takeaway

Alibaba-backed Paytm ruled the mobile payments revolution in India in the past decade.

Despite this, things are changing with rising competition and the entry of a new player. It will be interesting to see how Paytm manages to deal with the challenges.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Mayur Sontakke doesn't own shares of any of the companies mentioned.