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June 14, 2024

Paytm Payments Bank Faces Existential Crisis As RBI Clamps Down Over Compliance Failures

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Feb 5, 2024

The Reserve Bank of India (RBI) has barred Paytm Payments Bank from onboarding new customers and directed it to appoint an IT audit firm to conduct a comprehensive system audit, in the wake of “material supervisory concerns” observed in the bank. This has lead to an existential crisis for Paytm’s payments bank business.

RBI Finds Serious Lapses in Paytm Payments Bank’s Operations

As per sources quoted in top news reports, the RBI found several serious lapses in Paytm Payments Bank’s operations during its recent reviews. Some of the major concerns highlighted were:

  • Over 1 lakh accounts of Paytm Payments Bank having common Permanent Account Numbers (PANs): As per an RBI directive, payments banks cannot have more than one account per PAN. But Paytm Payments Bank was found violating this norm at a massive scale.

  • Failure to check KYC details of accounts before onboarding: There were many accounts where KYC documents were not checked properly before allowing transactions. Sources said more than 20% of the accounts had this issue.

  • Suspicious flows between wallets, bank accounts and merchants: Large sums were found moving between various entities in ways that seemed structured specifically to bypass regulatory scrutiny.

  • Under-reporting of frauds and cyber incidents: As per sources, Paytm Payments Bank did not report several frauds and cybersecurity incidents on its platform correctly to the RBI.

The RBI started reviewing Paytm Payments Bank’s operations in early 2022. But despite several warnings over 7 months, the bank failed to fix these issues satisfactorily as per the regulator. This finally led the RBI to impose harsh actions preventing onboarding of new customers.

Paytm Claims Most Issues Fixed, Seeks Time from RBI

Paytm has claimed that barring the issue around common PAN numbers, most other lapses highlighted have already been fixed. Regarding accounts with common PANs, it said the issue is legacy from the time Paytm wallet business was converted into a payments bank. It has requested RBI for six more months to completely migrate its wallet customers to bank accounts with proper KYC.

Paytm Payments Bank MD and CEO Satish Kumar Gupta has asserted that the bank remains stable, all its operations are normal and existing customers can continue using its services. He denied any probe against the bank related to money laundering.

However, reports indicate that RBI may not relax restrictions until it is fully satisfied with Paytm’s audit reports. Transfer of Paytm’s wallet business to a new entity is also hanging fire amid the uncertainties.

Massive Value Erosion for Paytm After Showing Early Promise

The regulatory clampdown has led to Paytm’s market value eroding by a massive $2.1 billion in just 2 days. From a peak valuation of over $16 billion during its IPO in late 2021, Paytm is now valued at less than $5 billion.

Paytm pioneered digital payments in India with its eponymous wallet, and then became the first company to launch a payments bank in 2017. This early mover advantage helped Paytm gain immense goodwill, with its app becoming almost synonymous with online money transfers.

However, the growth also brought greater scrutiny. As more Indians adopted online payments during pandemic, regulators grew increasingly concerned regarding breaches. Paytm perhaps failed to transform its governance and compliance structure rapidly in line with its exponential user growth.

What Next for Customers Amid Regulatory Uncertainty?

While existing customers of Paytm can continue to use most payment services for now, new user acquisitions have stopped. Paytm’s market share may gradually decline if the restrictions continue over months.

This has led to calls for users to start evaluating other payment apps like Google Pay, PhonePe and Amazon Pay. These competitors have witnessed strong growth recently and will gain further if migration from Paytm happens.

For investments, regulators have advised investors to take their own call amid high volatility in Paytm stock. Analyst views are mixed at present regarding whether this presents a buying opportunity for the long term.

Paytm meanwhile maintains it will keep working as usual even beyond the February 29 timeline set by some reports. However, the company looks set for a long battle to regain regulatory approval before resuming growth.

Timeline of Events Leading up to RBI Action

Date Event
October 2016 Paytm launches payments bank after getting RBI approval
November 2016 Over 5 million wallet accounts are transferred to payments bank
November 2022 RBI starts inspection of Paytm Payments Bank
January 2023 Inspection reveals data flow concerns, common PAN accounts etc.
Late January 2023 RBI warns Paytm Payments Bank to fix issues in 3 months
February 1, 2023 RBI bars adding new customers; orders IT systems audit
February 2, 2023 Paytm share price tanks 27%, loses $2.1 billion value
February 3, 2023 Paytm requests RBI for 6 more months to comply fully

So in summary, serious allegations regarding compliance failures have led to RBI taking drastic action against Paytm Payments Bank. While existing customers are unlikely to face major issues for now, the already turbulent journey of India’s pioneer fintech major faces its biggest existential crisis yet. Paytm’s management has their task cut out to satisfy the regulator about governance reforms in the next few months.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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