RBI deals body blow to Paytm with crippling restrictions on its payments bank

Until now, it was business as usual for Paytm Payments Bank as the only restriction by the Reserve Bank of India was on onboarding new customers. On January 31, the central bank imposed wide-ranging restrictions on PPB, which will cripple its operations and is likely to impact mobile payments firm Paytm as well.

RBI has instructed that no more deposits or top-ups are allowed in Paytm Payments Bank account and the existing customers are allowed to withdraw their balances. This will effectively force all account holders to liquidate the balance and close the accounts. This will force these merchants to move out of Paytm itself and go for other UPI players overnight, which is not easy as merchant accounts and know your customer process is stricter. These restrictions take effect at the end of February.

"The Comprehensive System Audit report and subsequent compliance validation report of the external auditors revealed persistent non-compliances and continued material supervisory concerns in the bank, warranting further supervisory action," the RBI statement said.

RBI had issues with PPB for non-compliance on doing full know your customer (KYC) of PPB's customers, not doing full KYC of accounts older than one year, and keeping more money than allowed by the regulator in a payment bank account. "The regulator also had issues with several fintechs including Paytm on facilitating crypto transactions as well as not reporting high value suspicious transactions under the prevention of money laundering act(PMLA)," said a head of digital banking at a private sector bank.

"No further deposits or credit transactions or top-ups shall be allowed in any customer accounts, prepaid instruments, wallets, FASTags, NCMC cards, etc. after February 29, 2024, other than any interest, cashbacks, or refunds which may be credited anytime," the statement from RBI said. The other restrictions included banking services, like fund transfers (irrespective of name and nature of services like AEPS, IMPS, etc.), BBPOU and UPI facility should be provided by the bank after February 29, 2024, the RBI note added.

PPB powers several Paytm services

A lot of utility bill payments such as electricity or broadband made on Paytm are powered by the BBPOU run by the PPB. This could mean that bill payments could also fail. Some of the utility companies that are using the PPB's BBPOU could also see these companies unable to accept customer bill payments.

Bernstien Research in a note to investors said, "This for all practical purposes, the above notifications end the operations of Paytm payments bank. This is a definite negative development and adds to the already heavy regulatory overhang on the business."

Paytm's successful businesses such as FASTags, wallet, prepaid instruments such as vouchers are powered by Paytm Payments Bank at the backend. "Now the company will be forced to move everything to a bank and such a swift migration of this scale is not possible. This invalidates even the existing accounts. This will have far-reaching implications and will have to wait for the company to reveal more as to how it can address this," says a fintech consultant, who did not wish to be identified.

Paytm said that it is in the process of partnering with multiple commercial banks and will soon transfer these PPB accounts to other banks. This will ensure a seamless experience for customers without any disruption.

"The company offers acquiring services to merchants in partnership with several leading banks in the country and will continue to expand third-party bank partnerships. Paytm's offline merchant payment network offerings like Paytm QR, Paytm Soundbox, Paytm Card Machine, will continue as usual, where it can onboard new offline merchants as well," the company said in a statement.

PPB is owned by One97 Communications(49%), the listed entity, and its founder Vijay Shekhar Sharma (51%) and plays a huge role in the growth of the company and its 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.

Regulatory concerns could spook investors, partners

Paytm's payment gateway business has also been asked to stop onboarding new customers. The central bank's recent move to increase the credit risk weight for unsecured loans had forced Paytm to scale back its small ticket personal loans by 50 percent.

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

The regulatory overhang mentioned by the institutional investors is that Paytm's partners will lose faith in the company's ability to address regulatory concerns and compliance.

While it is not clear whether restricting the PPB from operating accounts will create chaos as the QR codes for making the scan and pay methods will also stop functioning. Paytm has around 40 million merchants on its platform and more than a quarter of the merchants are believed to be using the Payments Bank account as their primary account to use the Paytm services.

"If the accounts are made non-functional, this could disrupt a lot of UPI payments. What if one of the senders or beneficiaries is using Paytm Payments Bank. The payments will not go through," says a founder of a UPI payments app.

The Bernstein note says that while this will not have any immediate impact on their UPI payment business which accounts for 70% of GMV. However, the note added, "There is a slight risk to the payments margin (Payment processing margin) given some of the higher margin products (Wallets, FasTag etc.) are dependent on the Payments Bank entity (PPBL)."