Moving Paytm Payments Bank accounts to other banks likely to be a difficult task

The bigger task for Paytm will be to convince its millions of merchants to stop using their PPB accounts once they move their balance in their accounts.

Paytm's parent company, One97 Communication, said in a statement to the exchanges that it will transfer all Paytm Payments Bank (PPB) accounts to other banks, ensuring a seamless process for all stakeholders. This decision follows the imposition of wide-ranging restrictions by the central bank on the payments bank, a move that is expected to be advantageous for its counterparts in the industry.

PPB is owned by One97 Communications (49 percent), the listed entity, and its founder Vijay Shekhar Sharma (51 percent), who plays a significant role in the company's growth and prospects. PPB houses all the key products offered by Paytm, including wallets, UPI, and deposit accounts. All of Paytm's 330 million-plus wallet accounts, as well as 150 million-plus UPI handles, are housed in PPB.

However, this is not an easy task given that PPB is the largest beneficiary bank in the Unified Payments Interface ecosystem. A beneficiary bank is the institution that has the most inbound transactions or more credits than debits.

In December 2023, PPB recorded 2.8 billion transactions out of the 12 billion transactions, constituting a quarter of all transactions on the UPI platform during the month. The next most significant beneficiaries were Yes Bank, with 2.2 billion transactions, and the State Bank of India (SBI), with 1.2 billion transactions. PhonePe holds the majority of its UPI accounts with Yes Bank.

UPI merchants are more likely to experience a higher volume of inbound transactions than outbound transactions in a day. This explains why Paytm stands as the largest beneficiary bank in the ecosystem, given that a significant number of merchants use Paytm. This is notable, despite Paytm holding only a 13 percent market share in overall transactions. In contrast, PhonePe and Google Pay collectively hold more than 79 percent of the UPI market, with PhonePe holding a 47 percent share and Google Pay with a 32 percent share.

Retaining all its customers going to be difficult

"OCL (One97 Communication), as a payments company, works with various banks (not just Paytm Payments Bank), on various payments products. OCL started to work with other banks since starting of the embargo. We now will accelerate the plans and completely move to other bank partners. Going forward, OCL will be working only with other banks, and not with Paytm Payments Bank Limited. The next phase of OCL's journey is to continue to expand its payments and financial services business, only in partnerships with other banks," Paytm said in a statement to exchanges.

“When you ask these merchants to move their account from PPB to another bank, Paytm will likely lose the credibility and confidence of these merchants,” said a senior executive with a large fintech firm adding that some of these merchants are likely to move to PhonePe and Google Pay.

Investment banking firm Macquarie in a note to investors said that this could have a significant impact on Paytm.

“Given the severe restrictions imposed on PPBL, we believe it significantly hampers Paytm's ability to retain customers in its ecosystem, and accordingly restricts it from selling payment products and loan products. We think revenue and profitability implications in the medium to long term could be significant and remain a key item to monitor,” it said.

The onerous task of migration

“The shifting of nodal account will solve the problem. They are likely to hold discussions with RBI to do this without disruption to the UPI platform,” said a senior official who has business with NPCI, which runs UPI.

A nodal account is like an interim escrow account where the collections are pooled before sending to merchants. Money has to be held by a bank and this nodal account can likely be migrated to a scheduled commercial bank.

However, the bigger task for Paytm will be to convince its millions of merchants to stop using their PPB accounts once they move their balance in their accounts.

“They will have to convince every single merchant to link another bank account to their UPI address instead of the PPB account. This will also likely change the QR codes. Now they will have to issue new QR codes, paste the new QR codes on the millions of soundbox devices wherever it is linked to PPB. This is a logistical nightmare,” said a fintech consultant with one of the big four audit firms.

Paytm’s strength has always been its strong relationship with merchants and the myriad of products and services it could offer with the in-house banking backend provided by PPB.

All the services such as wallets, FASTags and PPB generated a lot of payments commission for the company and this will likely result in Rs 300 to Rs 500 crore worth of EBITDA loss, the company said in a statement to the exchanges.

“The bigger issue is Paytm has not been on the good books of the regulator and going forward, their lending partners also could possibly re-look at the relationships in our view,” the Macquarie note said.

"Key impact can be on lending business (+20 percent of revenues) if lending partners limit business due to operational/ governance risks," said investment banking firm Jefferies also said in a note to investors yesterday.