Tough times ahead for Paytm Payments Bank as RBI refuses to offer any concessions

Paytm founder Vijay Shekhar Sharma met finance minister Nirmala Sitharaman on Tuesday. The FM, during their 10-minute meeting, told the Paytm founder the ministry will not intervene as te RBI is looking into the matter.

One97 Communications, which runs Paytm, may have to start preparing for life without its payments bank business post February 29, 2024 after the Reserve Bank of India refused to offer any concessions sought by Vijay Shekhar Sharma during his meeting with the central bank officials. According to a couple of sources familiar with the matter, the regulator refused to help Paytm Payments Bank Limited (PPBL) in any manner, including in the process of migration of accounts to other banks or extending the deadline beyond February 29, 2024.

“Sharma was told that PPBL has to speak with banks and National Payments Corporation of India (NPCI), which runs the popular mobile payments platform Unified Payments Interface (UPI), on its own and the RBI will not nudge banks to take this up," a source familiar with the development said.

However, with the compliance issues that the central bank has flagged, not many banks are keen on onboarding PPBL customers. Moneycontrol had reported on February 5 that most top banks that work actively with fintechs were not keen on taking up the project without the blessings of the RBI .

Paytm has more than 3 crore merchants on its platform, of which around 20 percent, or around 60 lakh, use PPBL as their settlement account. Also, for most of the UPI addresses on the Paytm app, the sponsor bank – technically called payment service provider (PSP bank) -- is PPBL, which reflects in the virtual payment address (VPA) as "@ paytm".

Paytm now will have to migrate all these accounts to third-party banks before February 29 for the UPI payments to work seamlessly. UPI accounts for more than 90 percent of the gross merchandise value (GMV) on Paytm.

“Not only has RBI refused to entertain Paytm requests now, the regulator is unlikely to meet Sharma again in the near future for further discussions. According to the regulator, PPBL was given enough time to comply and failed to do so even after multiple warnings,” said a second person aware of the matter.

According to the sources, PPBL officials met RBI twice in January, 2024 alone before the central bank decided to take these drastic steps after it found that PPBL statements never reflected in its actions.

Staring at crisis

Sharma had little luck in Delhi on February 6. The Paytm founder met Minister of Finance Nirmala Sitharaman at around 4:30 in the evening. The finance secretary was also present at the meeting. According to sources, the finance minister told him that the regulator is looking at the matter, adding that the RBI has been investigating for 1.5 years and has waited patiently before taking any action, and they can’t take any action. The meeting lasted all of 10 minutes.

The savings accounts of PPBL cannot be migrated as under the existing regulations the Know Your Customer (KYC) has to be done for the 60 lakh savings account afresh, which is not an easy task for any bank. To complicate matters, the regulator has flagged KYC issues at PPBL for more than four years now.

A third source involved in the discussions between Paytm and the banks said that even for migrating the @ paytm UPI handles, it would take any PSP bank at least three months for the process to make sure that these have @apl, @ybl, @okicici or @oksbi addresses.

This is extremely important as Paytm is the largest beneficiary bank in the UPI ecosystem by some distance. A beneficiary bank is the institution that has the most inbound transactions or more credits than debits. Any status quo is likely to create a major disruption in the offline 'scan and pay' method, which has been quite popular over the last three years.

If the VPA changes, the QR code will also change. Paytm has installed more than 1 crore soundbox devices with QR codes printed on top for merchants and many of these are @ paytm handles; the company will now have to reconfigure the QR codes on these devices. However, before that can happen, it has to find a bank willing to do this.

With RBI refusing to offer any concessions, it is unlikely that the NPCI will approach the regulator on behalf of Paytm.

Plan B for Paytm

While banks might not be interested in the savings accounts of PPBL, where there are KYC issues, the @ paytm still offers a decent business opportunity and banks are likely to be willing to be PSP banks. Here again, the biggest problem is to change the PSP bank integration, and at this scale of around 4 crore, it will take three months, say fintech executives at the UPI division of these banks.

The best possible option for Paytm in this scenario will be to convince its users - merchants as well as customers - to initiate the process within the Paytm app to link their UPI to another bank account they already have.

Every UPI app has an option to add more than one bank account simultaneously. Since PPBL were banned from onboarding new customers for almost two years, Paytm works with other banks as PSPs. So, if a customer adds or links another bank account to their Paytm app as their UPI bank, it is quite seamless and the customers will get @ ybl, @ apl @oksbi and so on.

“But the biggest hit for Paytm is the brand image and credibility. Most merchants and consumers likely are using two UPI apps. Rather than switching the bank account within Paytm app, they would rather shift loyalties to another app like Google Pay or PhonePe,” said a senior banker involved in discussions with Paytm on the matter.

Paytm has a huge foot-on-street army of salespeople and if they could convince the customers and merchants to do so, it could limit the loss and survive this incident to live another day.