The PayTm Debacle; Payments Bank Faces Shutdown, Customers Brace For Impact Amidst RBI Directive, Loss Ranging Between Rs 300 To 500 Crore

Paytm Payments Bank has been instructed by the Reserve Bank of India (RBI) to cease all banking services by the end of February.

The directive includes halting activities such as deposit acceptance and payment processing across all platforms, including Unified Payments Interface (UPI), IMPS, and Aadhaar-enabled payments, effective from February 29.

The regulatory action taken by the RBI marks an unusual move within the financial services sector and is poised to impact both users of the Paytm app and the broader merchant community reliant on its network for payment processing, salary disbursements, and other banking-related functions.

According to sources familiar with the matter, customers utilizing the Paytm application for UPI and wallet payments, where the linked bank account belongs to a different institution, should experience no disruption.

However, those directly using Paytm Payments Bank for transactions will need to cease operations by February 29.

While Paytm offers diverse products spanning travel, movie tickets, and more, these services are expected to remain unaffected by the RBI’s directive.

Nonetheless, industry insiders anticipate significant ramifications across various sectors, particularly for small enterprises reliant on Paytm for salary payments.

It’s worth noting that Paytm Payments Bank is partially owned by One 97 Communications, distinct from the entity owning the Paytm app.

In December alone, Paytm Fastags facilitated 57 million transactions, representing one of the highest volumes in the industry.

Despite its notable stock market debut over two years ago, Paytm has experienced a significant decline in its stock value, although recent trends indicate a recovery, with its stock closing at Rs 761 on January 31.

The company recorded total revenue of Rs 2,850 crore and a net loss of Rs 222 crore in the December quarter, boasting a market capitalization exceeding Rs 48,000 crore.

The Details Of The Directive
The RBI has instructed all nodal accounts held by One 97 and Paytm Payments Services to cease operations by the end of this month.

Additionally, Paytm Payments Bank is mandated to discontinue the acceptance of deposits, credit transactions, and top-ups in its wallets.

Customer onboarding for the bank has been prohibited since March 2022, and existing customers will no longer be able to add funds to their payments bank accounts.

To prevent consumer funds from being inaccessible, the RBI has permitted withdrawal and utilization until the existing credit balance is exhausted.

However, no fresh funds can be added after February 29.

Going In For An Overhaul
The regulatory action by the central bank reflects its track record of imposing stringent penalties; for instance, HDFC Bank was previously barred from issuing credit cards and launching new digital initiatives for a period of less than a year.

Similarly, Mastercard and American Express faced restrictions on issuing new cards due to data localization violations; however, the impact of the RBI’s directive on Paytm is notably expansive.

According to the RBI, all transactions initiated in nodal accounts of One 97 and Paytm Payments Services before February 29 must be settled by March 15, after which no further transactions will be permitted.

Nodal accounts serve as specialized accounts designed to receive payments from various bank accounts and transfer them to merchants. They are utilized for both online and offline merchant payments, facilitating fund tracking, fraud prevention, and payout services.

“This is sure to disrupt Paytm’s payment services for both online and offline merchants,” stated a senior banker affiliated with a Mumbai-based private sector bank. “While they may eventually settle directly in another bank account, it will undoubtedly cause significant disruptions.”

One 97, the majority owner of Paytm, holds a 49% stake in Paytm Payments Bank, with founder Vijay Shekhar Sharma owning the remainder. Paytm had highlighted its reliance on the bank for many services in its IPO prospectus filed in 2021.

The company had disclosed in its public listing documents that many payment channels, including the wallet, Paytm UPI, NACH, Fastag, and fixed deposits, are provided on the app through agreements with the bank. This suggests that the order’s impact would extend to wallet customers as well, potentially requiring Paytm to shift backend services for its wallet offerings to other banks.

However, it should be noted that regulatory action on January 31 did not come unexpectedly, Paytm Payments Bank has been barred from adding new customers since March 11, 2022.

In its latest directive, the RBI cited a comprehensive external audit of Paytm that revealed “persistent non-compliances and continued material supervisory concerns in the bank.”

The bank had previously received a showcause notice from the regulator on July 29, 2021, regarding the transfer of the bill payments unit from Paytm to the bank, resulting in a Rs 1 crore fine imposed by the RBI.

The fintech giant has encountered various regulatory hurdles on its journey to becoming a full-stack financial services provider, and despite its aspirations to launch an insurance business, its application for a general insurance license remains pending.

Additionally, the company failed to obtain a payment aggregator license, unlike its rivals Razorpay and Cashfree, which received approval in December last year.

Observers had previously attributed these setbacks to Chinese shareholding in the company. However, China’s Alibaba has since divested its entire stake in the payments company.

The RBI’s stringent stance on data localization may have contributed to its action against Paytm, potentially due to concerns regarding data storage and access.

The Massive Loss
Paytm has stated that the recent directive from the Reserve Bank of India (RBI) could potentially result in a significant impact on its annual earnings, estimating a potential Ebitda (earnings before interest, taxes, depreciation, and amortization) loss ranging between Rs 300 to 500 crore.

According to statements released, despite this setback, the company remains committed to enhancing its profitability,

In a filing submitted to the stock exchanges during late hours, One97 Communications (OCL), the parent company of Paytm, revealed its plans to transition most of its business relationships away from Paytm Payments Bank in order to sustain its service offerings.

The company stressed its intention to collaborate solely with other banks in the future, signalling a strategic shift in its operational approach, and a strategic realignment effectively positions Paytm as a payment and financial services application that will provide banking services in partnership with other regulated entities.

The company intends to continue its merchant payment business, a crucial revenue stream, by operating through third-party banks, as mentioned in the filings.

The transition process poses significant operational challenges for Paytm, necessitating the relocation of all nodal accounts from the bank and establishing new partnerships with alternate banks.

This operational overhaul mirrors the swift action taken by competitors, such as PhonePe, which swiftly shifted its payment services to ICICI Bank when Yes Bank faced RBI restrictions in 2020.

Despite the reassurance regarding the continuity of credit disbursal and wealth management operations, industry insiders foresee a potential erosion of customer trust in Paytm due to the perceived impact on its brand image.

How will customers be impacted?
As of the specified date, customers of Paytm Payments Bank will encounter limitations on various essential transactions.

Deposits, credit transactions, and top-ups into customer accounts, prepaid instruments, wallets, FASTags, or National Common Mobility Cards will no longer be permitted.

However, customers retain the ability to withdraw funds from their accounts. Yet, certain services such as fund transfers and UPI facilities will cease to be available.

The directive from the central bank extends to halting all deposits and top-ups in customer accounts, prepaid instruments, wallets, FASTags, and other related services.

Impact on PayTM App and UPI Channel Usage
Users can continue utilizing the PayTM app and the UPI channel without encountering restrictions. It’s important to note that the PayTM app is owned by the parent company and is not directly associated with PayTM Payments Bank.

Linked Accounts with PayTM Payments Bank
Remitter’s Account: Remitters can smoothly withdraw or transfer funds from their wallet or PayTM Payments Bank account via the app without facing any restrictions.

Beneficiary’s Account: Beneficiaries linked to PayTM Payments Bank can receive credits until February 29, 2024. However, post this date, withdrawals or fund transfers from their wallet or account are permitted, but no further credits or top-ups into PayTM Payments Bank account or wallet are allowed from March 1, 2024.

Commencement of RBI’s Action
Effective Date: The RBI’s directive, prohibiting further credits or top-ups into PayTM Payments Bank account or wallet, will become effective from March 1, 2024, onwards.

Status of Previous RBI Action (March 11, 2022)
Ongoing Business Restriction: The business restriction imposed on March 11, 2022, prohibiting PayTM Payments Bank from onboarding new customers, remains in effect. The recent action announced on January 31, 2024, serves as an additional measure, not a replacement.

Prepaid Instruments, FASTag, NCMC Transit Cards, etc.
Balances in prepaid instruments, FASTags, NCMC transit cards, etc., can be utilized, withdrawn, or transferred without restrictions. However, any top-ups or additional credits into these accounts are only permitted until February 29, 2024.

The Viewpoint

There are concerns regarding why regulatory action was not initiated earlier, especially considering the significant scale of operations of Paytm and the potential adverse impact on its customers.

The delay in regulatory intervention raises questions about the effectiveness of oversight mechanisms and the timeliness of addressing potential risks within the financial ecosystem.

Customers rely heavily on fintech platforms like Paytm for their everyday financial transactions. With millions of users and a wide array of services, any disruption or adverse event within such platforms can have far-reaching consequences for customers, potentially leading to financial losses, inconvenience, and erosion of trust.

The fact that regulatory action is being taken now, at a time when Paytm’s operations have grown significantly, raises concerns about why these issues were not addressed sooner.

Customers rightfully expect regulatory authorities to proactively monitor and address risks within the financial sector to protect their interests.

Regulatory frameworks need to evolve in tandem with the rapid growth and innovation in the fintech industry, with a strong focus on safeguarding customer interests and maintaining the financial system’s integrity.