Paytm Payments Bank faces bleak future

Written by Kapronasia || February 08 2024

Long a cornerstone of the business of Indian fintech giant Paytm, the company’s payments bank may have entered its twilight. While the Reserve Bank of India (RBI) has previously barred the payments bank from onboarding new customers, this new directive issued on January 31 is more comprehensive and foreboding. It appears the payments bank will no longer be operational after February 29, with just a few exceptions. India's central bank said it took the action due to "persistent non-compliances and continued material supervisory concerns in the bank” –  which it did not specify.

In recent days, the exact nature of the restrictions Paytm Payments Bank will face effective Feb. 29 have been revealed, and they are comprehensive. For instance, the lending arm will be required to suspend deposits, credit transactions, fund transfers, and top-ups. Services like repaid instruments, wallets, FASTags, and National Common Mobility Cards will also have to pause their operations. Linkage with India's paramount payments rail UPI will be terminated. However, interest, cashback, and refunds will still be credited. Accounts will still be accessible for withdrawals. 

It appears that the RBI came down hard on Paytm Payments Bank because it discovered hundreds of thousands of accounts lacking proper identification. An "unusually" high number of dormant accounts had also been found. Those accounts, in the view of the RBI and India’s financial crime fighting agency, pose a substantial money-laundering risk – an allegation that Paytm has refuted.  

That said, Paytm is complying with the directive. The company said it would cease working with Paytm Payments Bank and begin working only with other lenders.

Though Paytm CEO and founder Vijay Shekhar Sharma described the RBI's action as a "speed bump" during a conference call with analysts on February 1, we expect there to be some problematic knock-on effects. This situation is especially problematic for the 50 million merchants that rely on the app. While switching e-wallets is a hassle but generally feasible for retail customers, many merchants rely on Paytm and cannot afford to pay for pricey payments infrastructure and credit-card fees.

Further, Paytm has long sought to be able to directly offer lending services to customers. Margins would be more attractive as it could cut out the middlemen. Paytm Payments Bank has technically been eligible to apply for a small finance bank (SFB) license since 2022 and Paytm had reportedly been working towards satisfying related regulatory requirements. But if its payments bank shuts down, that license will be out of reach.

Meanwhile, Paytm is reportedly trying to sell the wallet business. With 330 million customers, it has achieved considerable scale. 

Investors are not taking the RBI’s decision lightly. Shares of Paytm plunged 10% on Feb. 5, the third consecutive session of declines, touching an all-time low of 438.35 Indian rupees  ($5.28) though it has since recovered to about 496 rupees.

The company has lost about US$2.5 billion in market capitalization since the debacle began about a week ago. 

Technically, it is still possible that Paytm Payments Bank could survive, but there would need to be a clear signal from the RBI. We will be watching closely for any reasons to be optimistic.