Macquarie on Paytm: No threat to business from RBI ban, small finance bank licence remains doubtful

An advertisement of Paytm, a digital wallet company, is pictured at a road side stall in Kolkata

After the Reserve Bank of India (RBI) issued a directive asking Paytm Payments Bank to stop onboarding new customers, Macquarie in its report on One97 Communications has said that the ban may not have a substantial impact on the listed fintech's business.

However, this directive could be a speedbump in Paytm's bank to convert its Payments Bank licence into a Small Finance Bank licence.

"We do not expect the impact on business for Paytm from this ban to be substantial, since Paytm has already onboarded a very large customer base onto the payments bank. However, we would expect a significant impact on Paytm’s brand and customer loyalty going forward," the report read.

An industry source supported Macquarie's views saying, "This is not a huge impact on business as the transaction volumes are not dependent on new customers. But this comes at a bad time as it reflects a lack of confidence from the regulator. That will not work in favour at a time when Paytm is planning to seek a new licence."

According to Macquarie, the recent developments substantially reduce Paytm’s chances of upgrading to a small finance bank licence. The company is due to apply for the licence in May 2022, after the Payments Bank completes five years.

Moneycontrol had reported on March 9 that Paytm is likely to approach the regulator in June for the Small Finance Bank licence. However, that will now depend on when RBI lifts this ban.

Paytm Payments Bank's share in the business

Paytm Payments Bank houses all key products offered by Paytm including Unified Payments Interface (UPI) payments where it enjoys a 16 percent share in monthly volumes, as well as the Paytm wallet which has over 330 million accounts.

"A ban on onboarding of customers by Paytm Payments Bank is effectively a ban onboarding of customers for Paytm, in our view," the report said.

Besides, Paytm also has a strong linkage with the Payments Bank and 33 percent of Paytm's revenue in FY21 was derived from the Payments Bank, as per the company's Red Herring Prospectus (RHP) filed ahead of listing last year.

Structural issue for fintechs

Macquarie also sees this as being reflective of structural compliance issues in high-growth fintech start-ups which are planning on entering the regulated banking space.

Case in point,  Paytm Payments Bank had received a show-cause notice in July 2021 from RBI for submitting false information with respect to transfer of its Bharat Bill Payment business to the payments bank. RBI had then imposed a monetary penalty of Rs 1 crore on the company in October 2021 in relation to this.

What the RBI directive said

In its directive, the RBI said the action was based on 'certain material supervisory concerns observed in the bank.' It is not immediately clear what are the exact reasons that invited the RBI action.

The bank has also been directed to appoint an IT audit firm to conduct a comprehensive System Audit of its IT system, the RBI said in a release.

"Onboarding of new customers by Paytm Payments Bank Ltd will be subject to specific permission to be granted by RBI after reviewing report of the IT auditors. This action is based on certain material supervisory concerns observed in the bank," the RBI said.