Without RBI migration approval, Paytm's UPI business faces an existential crisis

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Without the blessings from the Reserve Bank of India, there is a risk that all UPI transactions on the Paytm app may not go through from February 29.

This is because Paytm's UPI function is powered by Paytm Payments Bank Limited (PPBL), which is the sole PSP (payment service provider) bank on the Paytm platform.

A PSP is a bank that helps the UPI app to connect with the banking channel. Only banks can act as PSPs.

Paytm's vast majority of transactions and around 75 percent of gross merchandise value (GMV) come out of its customers using the popular Unified Payments Interface (UPI) for transactions on its app. One 97 Communications Limited (OCL), which runs the Paytm brand, as a UPI app has no relationship with any other commercial banks as of now.

In simpler words, all the UPI handles in Paytm app use PPBL as the PSP bank. If PPBL's banking activities stop after February 29, it cannot act as a PSP or a settlement bank for the UPI transactions happening on the platform, which necessarily means Paytm app cannot facilitate UPI transactions. PSP is treated as a banking service unless RBI makes an exception to this reading.

The RBI circular on PPBL on January 31 said, "No other banking services, other than those referred in (ii) above, 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 exceptions in the second clause are about withdrawal and utilisation of balance by customers and do not include the PSP function.

"We will work under the guidance of the regulator, because some of those changes, if we have to now start acquiring or issuing handles for other banks, just like other consumer tech companies do, will need guidance from Reserve Bank of India, and the conversations have started as to how, what is the best way to make sure that the customers are least inconvenienced and the business can continue to proceed forward," Bhavesh Gupta, COO and group president of Paytm said in an investor concall on February 1.

While RBI stopped PPBL from onboarding new customers for savings bank accounts, it never stopped PPBL, which acts as a PSP, from issuing new UPI handles as a PSP bank.

Moneycontrol had reported on February 7 that RBI refused to offer any concessions including the extension of the deadline beyond February 29 for the migration process or nudge banks to take up the process. Because of regulatory concerns, banks are not keen to take up PPBL-related business.

PPBL has issued around 245 million UPI handles as per Moneycontrol sources out of which around 90 million are monthly active users.

On February 8, RBI said that it would issue an FAQ on the Paytm crisis. This will probably make it clear whether the PSP banking service can continue after February 29.

The other potential option

Paytm cannot partner with a commercial bank, which can act as a PSP bank, and issue new UPI handles because the company does not have the approval from National Payments Corporation of India (NPCI), which runs UPI, to operate as a Third Party Application Provider (TPAP). Since Paytm had a bank of its own, PPBL, it did not need to be a TPAP. UPI apps such as Google Pay, PhonePe, Cred and Amazon Pay are all TPAPs.

Even assuming that OCL gets TPAP licence expedited from NPCI to avoid disruption of UPI transactions, the customer data of all the existing @ paytm handles reside with PPBL and cannot be transferred to the new PSP bank like an Axis Bank or a Yes Bank that Paytm onboards, which means customers who use Paytm will be using the app as they are using it for the first time.

"There is no precedence to something like this and if this has to happen, RBI has to come out with a new mandate to make this happen. While NPCI governs UPI, the rules are laid out by RBI. The approval for this has to come from RBI, which it has not," says a senior banking executive, who works closely with RBI.

In the case of the secondary scenario of Paytm acquiring a TPAP, its existing users will not be able to access any transaction history on the Paytm app. It will be like they are signing on a brand new UPI app. They will have to register on the app, send an SMS to do the device binding process and then link their bank account on the Paytm app.

"Device binding data is with PPBL, which is not transferrable as per the current regulation," said the banking executive quoted earlier adding that the migration even if the regulator approves will take months to complete. Till then, RBI will have to permit PPBL to do PSP as a banking service beyond the current deadline of February 29. There has not been any word on this yet.

"There will be discussion on how do we move the existing merchants who are accepting UPI to any other bank or banks. So that discussion will involve discussions with the regulator, NPCI, et cetera, whether it can be a one-time moment or a case-to-case movement. So we have had some discussions, but obviously, they are yet to be concluded formally, and it will take maybe a couple of days more when we have more direction on how we make the migration," Gupta, told analysts in the investor concall on February 1.

According to a couple of sources, while there have been discussions on how to address customer concerns, the regulator has not said anything about whether it will permit this migration to happen other than the fact that it had mentioned that it will not inconvenience the customers.

Meanwhile, a source close to the regulator said that since most users in the country are likely to have multiple payment apps installed and registered, they are likely to switch to another one and customers will not be inconvenienced in any manner.

On February 9, the board of OCL has formed a panel headed by N. Damodaran, a former chairman of India’s markets regulator, to advise PPBL on compliance and regulation a day after the banking regulator criticised the lender for repeated non-compliance with rules. This could likely give the central bank confidence that PPBL is taking compliance seriously.