Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT) have poured a ton of money into India to take advantage of the country's promising e-commerce prospects, but they have also encountered credible competition from homegrown players.

For instance, Mukesh Ambani-led Reliance is planning to go after Amazon's and Walmart's India business in a big way, and now, Alibaba (NYSE:BABA)-backed Paytm is all set to follow suit with a huge investment.

Paytm readies its war chest

Paytm is an Indian digital payments provider that was founded in 2010. The company has witnessed rapid growth since then, reporting that it had around 350 million registered users in June this year and is now valued at $16 billion. What's more, the company facilitated 5.5 billion transactions in fiscal 2019, and it plans to more than double that volume to 12 billion in the current fiscal year.

Representation of mobile e-commerce in the form of a cartoon.

Image Source: Getty Images.

The problem for Walmart and Amazon is that Paytm is not just an processor of digital payments. The company's Paytm Mall division allows consumers to buy a variety of goods such as groceries, clothing, appliances, and electronics, among others. More importantly, the company's online marketplace and digital payments services are available on the same mobile application.

So not only can Paytm users pay digitally, but they can also use its platform to buy items just as they would from either Amazon or Walmart-owned Flipkart. And what's more alarming for Amazon and Walmart is that Paytm Mall is growing at an impressive clip once again after taking a hit last year.

Paytm Mall's gross merchandise value (GMV) reportedly fell to $800 million in 2018 as compared to $1 billion in 2017. But things seem to have changed, as Paytm Mall is now targeting GMV of $2.1 billion in fiscal 2020, driven by a largely improved financial performance in fiscal 2019 that ended in March this year.

Paytm Mall's revenue in the recently concluded fiscal year was up 25%. It also reduced its losses to the tune of 34%. Paytm is now looking to step on the gas and has just announced a 10,000 crore-rupee (roughly $1.4 billion) investment plan for the next three years.

The company plans to use this money to expand its consumer offerings and also provide financial services to unbanked people in the country. This means that Paytm is now going after smaller Indian cities to power its next phase of growth. Earlier this year, a Paytm executive pointed out that the company is now expanding to tier 4 and tier 5 cities in India (smaller markets with populations of 5,000 to 20,000 people).

Paytm intends to acquire new customers and merchants in these smaller towns as a part of its investment plan, which will give it access to those Indian consumers who are new to the internet and smartphones. This would give Amazon and Walmart another headache, as Paytm Mall follows an online-to-offline (O2O) e-commerce model. The company relies on local retailers and merchants to deliver goods to consumers who make purchases on Paytm's mobile app. The local merchants sign up with Paytm Mall, after which they can list and sell their items on the platform.

Paytm claims that the O2O model has allowed it to reduce costs to the tune of 60% and also to speed up deliveries. But more importantly, it has been easy for Paytm Mall to scale up its merchant base thanks to the millions of people who are already registered with the company's payments platform. These users can simply sign up on Paytm Mall to become sellers, and the company will provide them with the necessary technology and other support.

Amazon and Walmart won't have it easy in India

Amazon and Walmart have invested billions of dollars in the Indian market, because e-commerce in the country is expected to become a $200 billion industry by 2026 thanks to the ongoing expansion of internet users. But these two retail giants are not the only ones gunning for a share of the pie.

Reliance Retail is already working on a hybrid e-commerce model to challenge its American rivals' hegemony in the Indian e-commerce space. Reliance's massive physical presence in India poses a significant threat, and Paytm will only add to the competition.

Amazon seems to have taken its foot off the pedal slightly in the region -- its investments in India's e-commerce space are down by a third as compared to 2018 levels. Moreover, Amazon and Walmart are facing regulatory pressures from the Indian government, which probably explains why the former has tempered its investments this year.

Amid all of this, Paytm's latest $1 billion push is going to make it more difficult for Amazon and Walmart to dominate India's e-commerce landscape, potentially hindering the growth prospects of these two stocks.