If you’re an existing Paytm investor like us, you are crushed by the Paytm stocks tanking to an all-time low. Thanks to RBI!
But what happened? And what is next with Paytm?
A chain of events
The buildup started from RBI issuing a circular to Paytm Payments Bank— banning them from accepting any new monies into its Payments Bank accounts, digital wallets, and FASTags after March 15th, 2024.
Paytm started in 2010, as one of the first giants in the Indian Fintech space facilitating mobile recharges, with its parent company named One97 Communication. Next in 2014, it became a digital wallet platform, again the first of its kind. Thanks to demonetization in 2016, it started to ride on to exponential growth with everyone starting to pickup ‘Paytm Karo’. It went from 125 million wallet customers to 185 million in just three months.
But for Paytm to make it big, it could not just rely on its digital wallet platform. Soon after, RBI announced a new category of Payments bank and Paytm was the first to hop on and named it Paytm Payments Bank (PPB). In a few words, these banks work like small-scale banks (eg. with deposits of only up to ₹2 lacs) that cater to financial services and payments to low-income groups, small businesses, and migrant labor workers but cannot offer loans and credit cards.
Why was the Payments Bank approach taken by Paytm?
Two reasons:
To get a small finance bank license if they continue to operate smoothly for 5 years and venture into lending.
To have an underlying infrastructure control over its wallet & UPI business.
But seems like RBI has constantly frowned on the existence of this payment bank ever since Paytm Payments Bank started its operation in 2017!
June 2018: RBI identified a discrepancy and stopped new customer onboarding stating issues with the bank's KYC process and violations of licensing conditions. In January 2019, the RBI allowed the company to enroll new customers after requests.
October 2021: On this occasion, the RBI slapped a ₹1 crore penalty on Paytm Payments Bank for not providing factual and correct information and documents while licensing.
March 2022: RBI again stopped onboarding new customers due to 'persistent non-compliances' and ‘continued material supervisory concerns’ in the bank.
October 2023: RBI imposed a fine of ₹5.39 crore over non-compliance with its directions relating to licensing guidelines, enhancement of maximum balance at the end of the day, cyber security framework, and secure mobile banking applications, including UPI ecosystem.
But there was also a bigger concern, 49% of Paytm Payments Bank is owned by One97 Communications, and the remaining 51% is held by Paytm’s founder. And the RBI felt that there was no wall between the two entities — money and data flowed easily even when they shouldn’t. Hence, RBI started to pull Paytm’s leash via its payments bank.
Also, another big role in this entire circus was the major shareholding of Chinese companies in Paytm and the air around Paytm sharing PPB’s consumer data with these Chinese entities. This was in stark contrast to the data localization policy of RBI implemented pursuant to a circular dated April 6th, 2018. This policy mandated all the payment system operators in India to ensure that the data related to the customer, payment sensitive data, payment credentials, and transaction data are stored within India.
Now RBI being RBI, took this drastic step due to this constant non-adherence to guidelines and warnings! Soon after, Vijay Shekhar Sharma stepped down as the chairman of Paytm Payments Bank on 26th February 2024.
Will Paytm shut down completely?
Paytm is too large to fail! Being one of the pioneers in the Indian fintech space, Paytm will continue to exist. Ever since there has been so much frenzy around its existence, Paytm and Vijay Shekhar Sharma have continued to let their users know through front-page ads and countless tweets that they are not going anywhere.
Then what changes for it to exist?
While PPB will cease to operate for the time being, Paytm will now seek to obtain a TPAP(Third Party Application Provider) license. Earlier, the UPI transactions on the UPI app were routed through PPB which was registered with NPCI. Paytm’s ask for a fresh TPAP license is now being supported by RBI, requesting NPCI to consider providing it with the license.
What does it mean for their business?
In December 2023, PPB recorded 2.8 billion transactions out of the 12 billion transactions, making it the largest beneficiary bank in the UPI existence. Paytm’s play in the system was not just as a TPAP(similar to GooglePay & PhonePe), rather it controlled its user’s UPI journey via PPB. Especially merchants, wherein they would deploy their QR code in their shops, use their soundbox, and facilitate money flow via their PPB accounts.
But this crackdown on Paytm’s portfolio products may then lead to new issuance of every single payment instrument like QR codes, fast tags, and linkage of new accounts. Consequently, retaining all the customers will be hard considering the negative sentiment in the market and competitors ready to pounce on its distressed user base.
This has been a perfect opportunity for Paytm’s competitors to take a dig at its petty state. Pine Labs ran a campaign with the same motive. Alongside, Google went out to launch SoundPod, a direct competitor to Paytm Soundbox, which is Paytm’s one of the highest revenue contributors.
Bouncing back from here on will be a tough ride for Paytm, to continue to hold good in RBI's eyes while also rebuilding the trust of its user base.