Post-Payments Bank Paytm starts to take shape

Written by Kapronasia || March 04 2024

It increasingly appears that India’s fintech unicorn Paytm has a way forward from the regulatory pressure it is facing, but the company will have to part ways with its payments bank and restructure accordingly. To that end, India's Financial Intelligence Unit (FIU) on March 1 imposed a penalty of 54.9 million rupees (US$662,565) on Paytm Payments Bank for violations in reporting illegal money routed through its accounts. Given that Paytm overall has a market capitalization of almost US$3.3 billion, the fine itself is manageable, but the loss of its payments bank will require that the company rejig its operations to remain competitive.

The FIU initiated a review of Paytm Payments Bank after information from law enforcement agencies about some entities reportedly engaged in illegal acts, including organizing and facilitating online gambling, and routing proceeds through the bank. Do these violations warrant what amounts to a death sentence? That is not an easy question to answer. Perhaps the best way to answer it is by noting that Paytm was repeatedly warned about these issues but did not address them with the urgency regulators expected. We believe this is the reason that the Reserve Bank of India (RBI) ultimately told Paytm Payments Bank to close up shop by March 15.

While the demise of Paytm Payments Bank creates a headache for Paytm, several of India’s incumbent lenders are likely to benefit from the closure of the payments bank. Reuters recently reported that Paytm is likely to work with Aix Bank, HDFC, Yes Bank and the State Bank of India to process transactions though India’s paramount United Payments Interface (UPI) payments rail. The National Payments Corporation of India (NPCI), the owner of UPI, can help certify four to five banks as payment service providers, as long as they can process high-volume UPI transactions. “Talks to onboard banking partners are on, and Paytm wants to start this process with large banks that have the technological bandwidth to handle large volumes seamlessly,” a source told Reuters in late February.

Amid these developments, Paytm’s share price seems to have stabilized. In trading on March 4, it had risen 2.75% to 414.4 rupees by midday.

However, Japan’s SoftBank last week further reduced its stake to 2.83% from 5.01%, according to an exchange filing. SoftBank held a 17.5% stake in Paytm in September 2022, but has trimmed its ownership for more than a year through multiple open market deals.

SoftBank is not the only high-profile investor to pare down or exit its stake in Paytm in recent months. For its part, Berkshire Hathaway exited Paytm in Nov. 2023 when it sold its entire stake in the company for rough 13.71 billion rupees ($164.7 million) through a bulk deal.