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The Reserve Bank of India (RBI) had last month restricted the operations of Paytm Payments Bank Limited (PPBL), citing in the audit report “persistent non-compliance and continuing material supervisory concerns at the bank”. The RBI also asked the PPBL to stop accepting new customers and deposits, credit transactions or top-ups on customer accounts, wallets, FASTags.
Paytm shares have plunged over 40% in three trading sessions since the RBI announcement. During Thursday’s press conference, the RBI reiterated its stance on Paytm and emphasized that they had been given enough time to address the issue but failed.
Paytm founder Vijay Shekhar Sharma has sought the extension of the February 29 deadline, along with a transition plan, in the ongoing efforts to meet the requirements set by the RBI.
How does Paytm earn money?
Customers make in-app payments through Unified Payments Interface (UPI), net banking, credit cards and digital wallet. It earned 38% of its revenue from merchant payment processing in Q3FY24 and 21% from consumer payment processing, according to Moneycontrol.com.
Paytm also uses its customer base to sell other services like brokerage, movie and travel tickets, and cloud services. For merchants, the app offers small business loans or Paytm merchant services to increase sales with tickets and gift vouchers.
Analysts believe Paytm’s most profitable business includes cloud and merchant services.
How RBI restrictions will affect Paytm
The RBI guidelines for licensing payments banks say that the entities cannot directly carry out lending activities. The other issue has to do with the governance structure of the PPBL. Paytm owns 49% of PPBL and the rest is held by Vijay Shekhar Sharma. One97 Communication (OCL) initially argued that PPBL is independently managed by its management and board of directors.
News publication NDTV Profit recently learned that more than 1000 accounts were found to be linked with the same PAN to their accounts. Thus creating concerns about money laundering.
PPBL has 33 crore Paytm wallet accounts i.e. wallet money is kept in PPBL escrow account. This can no longer remain in PPB, according to Macquaire, cited by MoneyControl.com. If Paytm cannot find another bank to host it, customers will have to withdraw money from their wallets and will not be able to add more money. This can crash the wallet business, as mentioned on Moneycontrol.com.
Path to transition
It may still be the third-party app of UPI like Google Pay and Amazon Pay, but this will depend on the National Payments Corporation of India (NPCI) and Paytm finding a bank willing to host its nodal account.
If PPBL loses its license, it will need another sponsor bank, which will be responsible for Paytm’s actions, according to Moneycontrol.com.
It further said that it intends to expand third-party banking partnerships for merchant acquisition services (providing essential infrastructure to acquire merchants and help them access payments) with other banks.
According to The Hindu, President and Chief Operating Officer (COO) Bhavesh Gupta said the transition will take place in three stages. The first would be to find a partner bank interested in integrating with the necessary Paytm ecosystem. Second, evaluate the resulting business viability and finally facilitate account-to-account migration.