Paytm: The Indian fintech start-up Rockstar is facing a serious crisis

  • By Archana Shukla
  • BBC business correspondent

February 12, 2024

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The payment app Paytm is used by millions of people

A small grocery store in India’s financial capital Mumbai has started asking customers to pay in cash amid uncertainty over the survival of the popular digital payment service it has been using.

India’s central bank has asked Paytm – the company that revolutionized digital payments in the country – to stop all services offered by its banking division, also known as wallet service, due to “persistent non-compliance” with its rules. The department supports Swift payments through the Paytm app, which has more than 330 million users.

The Reserve Bank of India (RBI) has reportedly accused Paytm of financial crimes including falsifying customer information and money laundering.

It asked the company to stop accepting deposits into people’s Paytm bank accounts or wallets from March 1, although customers would be allowed to continue making payments until the balance in their accounts runs out.

Meanwhile, Paytm has denied the allegations. In a statement, the company said that “the Paytm app remains fully functional and our services are not affected.”

The app can continue to facilitate quick payments between non-Paytm bank accounts as an intermediary, but cannot accept direct deposits.

This would have a significant impact on the company’s wallet business. The Paytm wallet is almost like a bank account where people can accept deposits, keep money and make payments – all done by scanning a QR code or using mobile numbers as identity.

People can also transfer money from their wallet to their account at other banks and vice versa.

Not surprisingly, the regulators’ crackdown was a blow to thousands of small business owners who relied on the app for quick and easy transactions.

It has also put Paytm in a dire situation as investors withdrew billions of rupees after the company’s shares started falling due to the order.

Industry experts believe the move could be a harbinger of the payments bank losing its license in the next few weeks – further increasing investor nervousness.

On Thursday, RBI Governor Shaktikanta Das said Paytm has been given sufficient time to rectify lapses.

“The RBI’s action is always proportionate to the seriousness of the violation and serves to ensure system stability and protect consumer interests. Action will be taken when regulated entities fail to take effective action,” Mr Das said.

A Paytm spokesperson told the BBC that the company was taking the RBI directive “very seriously”.

“We respect the RBI’s decision and are working diligently to address the concerns raised,” the spokesperson added.

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Thousands of shop owners use the Paytm app

Paytm founder Vijay Shekhar Sharma, once dubbed India’s youngest billionaire, is in big trouble. It motivates employees, reassures investors and convinces traders. Mr. Sharma met RBI officials and reportedly even approached the country’s finance minister for help.

This is not the first time Paytm has run into trouble with banking regulators. Since 2018, the RBI has pulled up the company at least four times in a series of blunders.

Srinath Sridharan, a financial expert, says the central bank’s concerns are serious.

“The RBI has utilized provisions of a law that gives the regulator the power to decide in public interest. This shows the seriousness of the situation. Paytm has lost the trust of the regulator,” he said.

Paytm was launched in 2010 and gained popularity after India banned high-denomination banknotes in 2016, which sucked cash out of circulation and boosted online transactions.

People started using the app for a range of transactions including buying household goods, paying tuk-tuk drivers and even electricity bills. Paytm has seen major investments from Japanese technology investor SoftBank and counted Warren Buffett and China’s Alibaba among its early investors.

Payments bank Paytm – which is at the center of the current regulatory storm – received its banking license in 2017.

The bank can accept deposits of up to 200,000 rupees ($2,411; £1,907) but cannot lend money; It offers digital banking services and fixed-term deposits and sells liability insurance and loans.

The bank has 50 million accounts, including those of merchants that accept payments via the platform’s blue and white QR code stickers.

Mr. Sharma said his company is exploring third-party banks to provide back-end banking support for merchant accounts, whose transactions account for half of Paytm’s revenue.

However, this would mean that the margins earned on deposits and transactions would have to be shared with the partner bank and would put further strain on an already loss-making company – Paytm has lost almost 80% of its market value since its listing two years ago.

Additionally, the company may face challenges in finding a banking partner due to the regulatory difficulties it is currently facing.

Paytm has tried to reassure traders through calls and messages, but analysts say severe restrictions and uncertainty are likely to hurt the company’s customer loyalty.

Merchants have started switching from Paytm to other payment options. Banks, including state-owned State Bank of India (SBI), have already offered to help merchants make the transition with new QR codes and point-of-sale machines.

According to data from market research firm Sensor Tower, the Paytm app saw a 20% decline in downloads since the RBI verdict, while rival apps such as Google Pay and PhonePe saw a 50% increase in downloads, Reuters news agency reported.

The bigger battle to fight will be reputation, experts say.

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People use Paytm for a range of financial transactions

Experts say the company’s ongoing crisis has raised questions about the efficiency of the company’s board, which includes financial veterans and former RBI officials, and that the banking regulator may seek changes in the board’s leadership structure.

They also raised concerns about the founder’s controlling stake in both the parent company – One97 Communications, which houses the digital payments business – and the payments bank, saying the two do not operate at arm’s length.

It has also made waves among the country’s fintech and start-up companies – a group of founders have written to Prime Minister Narendra Modi, Finance Minister Nirmala Sitharaman and Mr Das demanding a rollback of sanctions against Paytm, calling it damaging for fintech ecosystem.

But Mr Das has clarified that the entire system need not be affected as it is a “particular institution”.

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