Paytm's Rs 10 Cr Fraud Unearthed

Paytm has unearthed an over Rs 10 crore fraud following a probe into a large percentage of cash back earned by small merchants, and de-listed hundreds of sellers apart from sacking many employees, its head Vijay Shekhar Sharma said.

Regarding the feasibility of businesses providing freebies, Sharma said the cashback model is sustainable.

The company, which reportedly engaged consultancy firm EY to conduct the audit, found out that some sellers were colluding with junior employees to earn the cashbacks, he added.

The overall size of the fraud is in “double digits”, which is “Rs 10 crore for sure”, and actions against the wrongdoers are being taken, he said. These include de-listing “hundreds” of sellers to ensure there are only brand sellers on the platform and not the “mom-and-pop shops”, he said adding that “tens” of employees have also been sacked.

While the number of sellers would reduce, such stringent actions will ensure a “better ecosystem” for the consumers, he said.

Some employees of the Alibaba-backed company allegedly worked with third-party vendors and created fake orders to siphon off cashback offers, according to reports.

On the criticism of the cashback model making the business unfeasible, Sharma on Tuesday said the business is “sustainable” but profitability may be some time away as it is spending more on on-boarding users and merchants currently.

“Paytm is actually net concluding positive, net of cashback, marketing promotions operating costs,” he said, adding that it would not be profitable till its user base reaches 500 million from 300 million and merchant base swells to 40 million from the current 12 million.

The list of detractors of such model includes Aditya Puri, who led HDFC Bank to become the largest private sector lender in India.

In February 2017, he had said the companies that hold on to customers through cashbacks are loss-making and have “no future”.

“I think wallets have no future. There is not enough margin in the payments business for the wallets to have a future,” Puri said and also mentioned Paytm, which reported over Rs 1,500 crore of losses in 2016, to illustrate.

Sharma also said a platform like Paytm earns both through the merchant discount rate paid for processing transactions and may get up to 15 percent of the cover charge when a transaction like movie ticket sale happens, making it comfortable to offer the cashbacks.

Meanwhile, in what can be seen as a turnaround in his position, Sharma said players like Facebook-controlled WhatsApp are welcome on the payments landscape.

Sharma said his earlier opposition was when companies were not willing to comply with the Indian laws.

Similarly, on the e-commerce front, where its larger rivals Amazon and Flipkart have been complaining about a shift in laws which makes their position difficult, Sharma said any non-compliant entity should not have it easy.

“Law of the land remains fixed, people were escaping these. They were asked to stringently follow. They should have had known,” he said.

He hinted that the company is not on the lookout for any fresh capital when asked about valuations for the next round of funding, and added that it continues to carry a war chest of money necessary for two years of growth.