The Reserve Bank of India (RBI) has implied that a sponsor bank will be allowed to step in to manage Paytm's transactions, in the FAQs released on February 16.
A payment processor app — as a third-party application provider (TPAP) — needs a sponsor bank to access the UPI infrastructure. Until now, Paytm had Paytm Payments Bank (PPB). With the central bank cracking down on the bank, there was heightened uncertainty around Paytm's future. This latest communication from RBI should settle that to a large extent.
The sponsor bank can step in provided the National Payments Corporation of India (NPCI) gives its approval.
Market sources told Moneycontrol that the bank names are likely to be announced next week. The stock was up 5 percent today.
The RBI released FAQs suggest developments along this line in point number 21. This answered a question that a merchant could have.
Question: I am a merchant and I accept payments using a Paytm QR code, Paytm soundbox or Paytm POS terminal, linked to another bank account (not with Paytm Payments Bank). Can I continue to use this setup even after March 15, 2024?
Answer: Yes. If your receipt and transfer of funds are linked to any bank account other than Paytm Payments Bank, you can continue to use this arrangement even after March 15, 2024.
This implies that a sponsor bank can step in to manage Paytm's nodal account, which is just an escrow account that accepts payments made to its merchant partners.
Why sponsor bank is crucial
UPI operates a three-tiered ecosystem. The first is NPCI, which owns the pipe that transfers money. The second is the group of PSP or sponsor banks that give users QR codes/UPI IDs to access this pipeline. The third layer consists of third-party providers such as Google Pay or Amazon Pay.
As of now, Paytm has PPB as its sponsor bank. Amazon Pay has Axis Bank, Yes Bank and RBL Bank as its sponsor banks, and Google Pay has Axis Bank, HDFC Bank, ICICI Bank and State Bank of India as its sponsors.
Paytm to partner with Axis Bank for settlement of merchant payments
Before PPB, Paytm used the pre-paid instrument licence that was issued for its wallet. When PPB was given its banking licence, Paytm surrendered its pre-paid instrument licence and brought its wallet business under PPB.
If PPB loses its licence, Paytm will need another sponsor bank, which will be held responsible for Paytm’s actions. There was concern that banks maybe reluctant to step in, considering the RBI's flagging Paytm's poor compliance with Know-Your-Customer norms.
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