Author - Aditya Rawat, MBA, Coventry University, UK (Ex. Deloitte, MOODY's Research, and HCL-British Telecom)
Note: The views expressed in this blog are of the author and do not relate to any organization or person.
‘PayTM Karo’ is a tagline that is deeply intertwined with over 90 million Indians who use PayTM services almost every day. Right from buying ‘Coriander’ and ‘Chillis’ from vegetable sellers to buying an Apple iPhone or booking international holiday packages, PayTM is being used by Indians to fulfill most of 'Maslow's Hierarchy of Needs’ and has become a new mode of payment in India within a short span.
PayTM has made a giant leap in digitizing the cash-based economy. The company's meteoric ascent can be directly attributed to the 2016 demonetization wave. In the annals of India's digital revolution, Paytm is positioned as the poster child of this transformative era. With cash becoming a scarce commodity, the digital wallet quickly gained traction, offering a convenient and accessible alternative to traditional currency. Paytm capitalized on the momentum generated by the Indian government's move of Demonetization in 2016. As high-denomination currency notes of Rs. 500 and Rs. 1000 were invalidated, millions of Indians sought refuge in digital transactions, and Paytm, armed with its user-friendly digital wallet, swiftly rose to become a household name. Paytm's success during this period was instrumental in solidifying its position as a key player in India's burgeoning fintech landscape.
The Launch of PayTM Payments Bank
PayTM inaugurated Paytm Payments Bank in 2017. The Bank section on the Paytm app went live the same year. Paytm Payments Bank boasts 30 crore wallets and 3 crore bank accounts, with 10 crore KYC customers and an additional 4 lakh users monthly. It leads in FASTag issuance with over 80 lakh units, being the largest issuer. Paytm Payments Bank offers various services like IMPS, NEFT, RTGS, UPI, FASTag, and Netbanking.
As the years unfolded, Paytm started encountering a series of challenges with PayTM Payment Bank that gradually eroded its once-unassailable position. The recent RBI regulation against the PayTM Payments Bank has opened up pandora's box of problems for the fintech giant.
In this article, we will delve into the major reasons which have forced RBI to go tough on PayTM Payment Bank -
The RBI Regulation Against PayTM Payments Bank Ltd
Paytm Payments Bank is now facing a tough time following a directive from the Reserve Bank of India (RBI). The RBI's action, issued last week, prohibits Paytm Payments Bank from accepting further deposits, conducting credit transactions, or allowing top-ups on customer accounts, prepaid instruments, and cards for toll payments after February 29.
Paytm Payments Bank, an associate of One97 Communications Limited (OCL), began operations in 2017 and offers digital banking services such as savings and current accounts, fixed deposits, and various transactional services. The recent RBI intervention stemmed from concerns related to money laundering and questionable transactions, including non-KYC-compliant accounts and the use of single PANs for multiple accounts. As a result of the RBI's directive, Paytm Wallet users can continue transactions until February 29 but cannot add money thereafter. The same restriction applies to PPBL accounts, FASTag, and National Common Mobility Card services linked to Paytm Wallet. The directive has prompted a significant drop in One97 Communications' shares, with a 40% decline over two days, eroding the company's market capitalization by ₹17,378.41 crore.
In response, Paytm's management stated that discussions with the RBI are underway to comply with the directive. While users have alternative wallet options, Paytm emphasizes that its financial services, such as loan distribution, insurance, and equity broking, are distinct from PPBL and remain unaffected. Paytm's offline merchant payment services, like Paytm QR and card machines, are expected to continue without disruption, despite an anticipated impact of Rs. 300-500 crore on the company's annual operational profit.
Here are the 7 reasons behind RBI's tough stance on PayTM Payments Bank:
1. Millions of Fake Accounts Created without KYC
The downfall of Paytm Payment Bank was exacerbated by the proliferation of fake accounts, ultimately leading to the intervention of the Reserve Bank of India (RBI) with stringent measures. The surge in fraudulent accounts not only compromised the integrity of Paytm's financial ecosystem but also raised concerns about the security and authenticity of transactions within the payment bank.
As the number of fake accounts grew, the RBI, in its commitment to maintaining the stability of the financial sector, took decisive action by imposing strict regulations. These measures aimed at curbing the creation of fraudulent accounts and reinforcing the security protocols within the banking system. The prevalence of fake accounts not only eroded the trust of users but also prompted the need for a comprehensive overhaul of Paytm Payment Bank's operational and security framework to regain regulatory compliance and restore confidence in its services.
2. Non-compliance with Regulatory Frameworks
One significant challenge for Paytm emerged in the form of its negotiation attempts with various banks for services such as UPI, wallet, and merchant transactions. Regulatory entities, particularly the Reserve Bank of India (RBI), intensified scrutiny on partnerships with banks and Non-Banking Financial Companies (NBFCs). The recent acquisition of ZestMoney by DMI Finance serves as a vivid illustration of the impact of the RBI's stringent review on lending platforms.
In its pursuit of expansion and innovation, Paytm found itself at odds with regulatory authorities on multiple occasions. The RBI's stringent guidelines, designed to ensure financial stability and consumer protection, often clashed with Paytm's ambitious growth strategies. Reports of non-compliance with Know Your Customer (KYC) norms and other regulatory lapses tarnished the company's reputation, leading to a gradual erosion of consumer trust. The journey was marred by controversies related to regulatory compliance, with the RBI issuing notices to the company for violating KYC norms. This not only resulted in fines but also raised concerns about the platform's security and integrity, further diminishing user trust.
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3. Challenges with PPI Partner
Flush with success, Paytm set its sights on a grander ambition: transforming into a payment bank. However, this transition was riddled with complexities, as payment banks operate under stringent regulatory frameworks set by the RBI. The journey from a digital wallet to a full-fledged bank required meticulous planning, adherence to regulatory norms, and substantial investment in infrastructure. The Paytm Payments Bank, with its Prepaid Payment Instrument (PPI) license and associated wallet service, served as a revenue moat for Paytm. However, with the need to bring in a PPI partner for a new wallet service, Paytm lost this advantage. While the company asserts that commercial terms will remain largely unchanged, the shift may impact Paytm's Merchant Discount Rate (MDR) revenue.
PayTM was in talks with the 3 leading banks in India to set up nodal accounts for wallets, emphasizing the need for partnerships that can support the required scale and velocity of migration, and on Feb 16, 2024, has moved its nodal account to Axis Bank fromPaytmPayments Bank to maintain seamless merchant settlements. Despite the potential loss of the moat, Paytm remains optimistic about its technological prowess and customer acquisition capabilities.
4. Paytm Agent Network Complexities
Paytm's strategy of expanding its reach through a vast network of agents brought unforeseen challenges. Some agents, in their pursuit of meeting targets or maximizing profits, resorted to hiring sub-agents on 1/4th or 1/3rd of their salary. For example - If a PayTM agent is earning Rs. 40,000 per month, instead of working himself, he hired another agent to work on his behalf at a salary of Rs. 15,000 to do his job while earning Rs. 25,000 per month working somewhere else. This complex web of agents operating within the Paytm ecosystem led to operational difficulties and resulted in the misselling of cards and several other fraudulent activities.
5. Chinese Investors and Geopolitical Tensions
Paytm's association with Chinese investors, particularly Ant Financial, SoftBank, and Alibaba Group raised concerns about data security. Alibaba and Ant Financialhave put about Rs 7,043 crore ($851 million) in Paytm since 2015. This is the largest investment by a Chinese entity in an Indian unicorn. Most of the stake was held through Ant. Post-IPO, Ant Financial holds a 23% stake in Paytm while SoftBank and Alibaba hold 16% and 6% stakes respectively.
The Indian government, wary of potential threats, implemented stricter regulations on foreign investments in the wake of rising geopolitical tensions. SoftBank's involvement in Paytm made the company susceptible to increased scrutiny, impacting its reputation and growth prospects.
6. Fears of Bad Loans
The migration of merchant QR codes and Point of Sale (PoS) devices to new bank partners posed a significant challenge, especially for the 60,000 merchants relying on daily settlements through Paytm Payments Bank accounts. This transition raised concerns about bad loans and collection hurdles, adding complexity to the process of migrating users to other banks and ensuring compliance with KYC regulations.
7. Operational Glitches
In 2019, Paytm Payments Bank encountered operational glitches that resulted in customers being unable to access their accounts and make transactions. The widespread disruptions caused frustration among users and highlighted vulnerabilities in the bank's technology infrastructure. For a financial institution heavily reliant on digital platforms, such technical shortcomings can be detrimental to customer confidence and the overall user experience.
The Impact on the Stakeholders
In response to the crisis it faced, Paytm has outlined a comprehensive strategy for redemption, strategically designed to address the multifaceted challenges that have surfaced. As the company navigates through the intricacies of regulatory scrutiny, one of its primary strategies involves forging strategic alliances with other banks.
