Paytm: What led to the downfall?

Kakali Das

On January 31^st of this year, the RBI effectively halted Paytm Payments Bank from conducting all of its core operations, leading to a 20% crash in the company’s stock. As a result, the company’s valuation plummeted by $2.5 billion.

Once hailed as a poster child for the startup industry, Paytm, which was once valued at $16 billion, is now grappling with regulatory scrutiny and potentially dire consequences.

Vijay Shekhar Sharma, the founder and CEO of Paytm, has stepped down from his role as part-time non-executive chairman and board member of Paytm Payments Bank Limited (PPBL), nearly a month following the Reserve Bank of India’s (RBI) regulatory measures against the bank.

Paytm: What led to the downfall? — Vijay Shekhar Sharma, the founder and CEO of Paytm

One97 Communications Limited, the parent company of Paytm, has announced that PPBL has restructured its board, stating that Sharma’s resignation will “enable this transition”.

Is Paytm guilty of significant wrongdoing, or is the RBI exhibiting a stance against innovation and business advancement?

To comprehend this business, it’s crucial to recognize that Paytm comprises two components: the payments app, akin to Google Pay or PhonePe. Essentially, users store their funds in a non-Paytm bank account and conduct transactions through the app. This business remains unaffected.

However, Paytm encountered issues with its banking venture – the Paytm Payments Bank. The RBI has imposed restrictions on the bank, preventing it from accepting new deposits, engaging in credit transactions, or facilitating top-ups. Essentially, it is unable to conduct any business. As a consolation to customers, the RBI has granted time until March 15^th to utilize or withdraw funds from their accounts.

While the RBI hasn’t revoked Paytm Payments Bank’s license, it has effectively crippled its entire business.

The rationale behind the RBI’s actions remains unclear. The RBI has reiterated that persistent non-compliance and significant supervisory concerns regarding the bank’s operations prompted its decision.

A Reuters report cited government officials expressing concerns raised by the Enforcement Directorate (ED). However, the company has refuted any allegations of being under investigation by the ED for potential money laundering issues.

The RBI’s move was met with widespread shock and concern from the startup industry, founders, and the entire ecosystem.

Many criticized the RBI’s action as being anti-innovation, suggesting that its stringent measures could stifle creativity and hinder the development of new business models. They argued that the RBI’s tough stance on business was inhibiting disruption, a sentiment that was fundamentally surprising to many.

Despite the surprise surrounding the RBI’s recent action and questions regarding its severity, it’s worth noting that over the past seven years of the bank’s existence, it has incurred five penalties from the RBI.

However, the RBI has not disclosed the specific reasons for these penalties or the underlying issues faced by the bank, consistently citing persistent non-compliance.

Media reports, particularly one from CNBC TV 18, have cited sources and outlined various issues within the bank.

The company secured its banking license in January 2017. However, in June 2018, the RBI halted the onboarding of new accounts due to breaches in day-end balances and non-compliance with KYC guidelines.

According to CNBC TV 18, in October 2021, the RBI discovered that the bank had provided false information and imposed a fine of ₹1,00,00,000.

Subsequently, the RBI highlighted persistent issues such as the absence of KYC details, PAN card violations, and dormant accounts. CNBC TV 18 reported that out of 35,00,00,000 wallets, 31,00,00,000 are inactive. Additionally, the RBI found instances where a single PAN was linked to 100 or even 1000 customers. Some transactions exceeded regulatory limits, reaching crores of rupees.

In March 2022, the RBI prohibited the company from onboarding new customers due to non-compliance with KYC norms. Law enforcement agencies like the ED have frozen accounts and wallets in hundreds of thousands of cases. Many accounts lack sufficient details and are under scrutiny for potential involvement in money laundering.

In October 2023, the bank was fined ₹5.39 billion for its failure to comply with regulations. In an interview with CNBC TV 18, former executive director of the RBI, Deepali Pant Joshi, remarked that Paytm’s compliance issues had been brewing since October 2023.

Despite the significant penalty, Paytm exhibited a nonchalant attitude towards the reasons behind it. Despite numerous violations and communications with the RBI, Paytm persisted in its operations without addressing these issues.

Paytm1 — Vijay Shekhar Sharma, the founder and CEO of Paytm

Why is the startup industry so taken aback by the RBI’s decision to finally take action?

There were also concerns regarding the separation between the ownership of Paytm Payments Bank and its parent company, One97 Communications, which is a part of RBI regulations.

Now, where does the company go from here? With 90 million wallet users and 58 million fast tag users, Paytm holds a significant position in the market. However, the bank will need to migrate its users to third-party banks. Paytm has announced plans to transition its customers to these alternative banks. However, the process may be delayed as these banks await RBI approval to associate with Paytm.

There’s also the issue of disruption for retail customers. Around 15% of Paytm’s merchants, those who use QR codes, will need to be migrated. This entails issuing new QR codes and transaction IDs, particularly for those using physical stickers and scanners. It’s a significant undertaking requiring substantial effort.

Paytm shares have reportedly plummeted by 41% in February alone due to the repeated regulatory actions from the RBI. One97 Communications Limited has stated that it is taking immediate steps to ensure compliance with the RBI.

However, rumors circulated by various media outlets, including prominent newspapers, suggested that Mukesh Ambani’s Jio and HDFC Bank were in talks to acquire Paytm’s wallet business. Subsequently, sources from Paytm and an official statement from Jio Financial have refuted these claims, stating that such an acquisition is not in the works.

However, it’s essential to note that Paytm is not a small company, having reached a peak valuation of $16 billion. Vijay Shekhar Sharma is considered a poster boy of the startup industry. It’s worth remembering that the startup industry is built on the ethos of disrupting traditional businesses. As Mark Zuckerberg famously stated, “move fast and break things.” Could it be that this very large company was moving too fast in pursuit of innovation?

While striving for innovation, founders should not overlook the fact that by adhering to the “move fast and break things” mantra, they often end up disregarding regulations, ultimately impacting ordinary individuals who entrust them with their hard-earned money.

The Indian fintech industry, encompassing financial technology and money transactions via apps, is projected to reach a value of $150 billion by next year. This substantial sum reflects the rapid pace of innovation and disruption within the sector. From offering small loans on apps to facilitating betting in gaming environments like fantasy cricket, and managing investments, the industry is witnessing a diverse range of activities.

At this juncture, should the RBI and all regulators be scrutinizing the industry more closely, considering its rapid advancement in disrupting traditional norms, especially when dealing with real money from real people?

05-03-2024

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