The Reserve Bank of India (RBI) last month restricted the operations of Paytm Payments Bank Limited (PPBL), noting “persistent irregularities and ongoing significant supervisory issues at the bank” in an audit report. The RBI also asked PPBL to stop accepting new customers and deposits, credit transactions or recharges into customer accounts, wallets, FASTags.
Paytm shares have plunged more than 40% in three trading days since the RBI announced the news. In a press conference on Thursday, the Reserve Bank of India reiterated its stance on Paytm and stressed that they had been given enough time to resolve the issue, but failed.
Paytm founder Vijay Shekhar Sharma has requested an extension to the February 29 deadline and a transition plan in its ongoing efforts to meet the requirements set by the Reserve Bank of India (RBI).
How does Paytm make money?
Customers pay on the app through Unified Payments Interface (UPI), online banking, credit cards and digital wallets. According to Moneycontrol.com, in the third quarter of fiscal 2024, 38% of the company’s revenue came from processing payments for merchants and 21% of its revenue came from processing payments for consumers.
Paytm also leverages its customer base to sell other services such as brokerage, movie and travel tickets, and cloud services. For merchants, the app offers small business loans or Paytm commerce services to increase sales through tickets, gift certificates.
Analysts believe Paytm’s more profitable businesses include cloud and commerce services.
How RBI restrictions will impact Paytm
The RBI guidelines for payment bank licenses say entities cannot directly engage in lending activities. Another question is about the governance structure of PPBL. Paytm owns 49% stake in PPBL while the remaining shares are held by Vijay Shekhar Sharma. One97 Communication (OCL) initially argued that PPBL was run independently by its management and board of directors.
News publication NDTV Profit recently learned that more than 1,000 accounts were found to have the same PAN associated with their accounts. Therefore, concerns about money laundering have been raised.
PPBL has 330 million Paytm wallet accounts, which means that wallet money is kept in PPBL escrow accounts. According to MoneyControl.com, citing Macquaire, this can no longer remain in the PPB. If Paytm cannot find another bank to host it, customers will have to withdraw funds from the wallet and will not be able to add more funds.As mentioned in Moneycontrol.com, this may cause the wallet business to collapse
The road to transformation
It can continue to be a UPI third-party app, just like Google Pay and Amazon Pay, but it will depend on the National Payments Corporation of India (NPCI) and Paytm finding banks willing to host their node accounts.
According to Moneycontrol.com, if PPBL loses its license, it will need another sponsoring bank, which will be responsible for Paytm’s actions
The bank further stated that it intends to expand its third-party banking partnerships with other banks for merchant acquiring services (providing acquiring merchants with the necessary infrastructure to help them get paid).
President and Chief Operating Officer (COO) Bhavesh Gupta said the transition will be carried out in three phases, The Hindu reported. The first step is to find interested partner banks to integrate the necessary Paytm ecosystem. Second, assess subsequent commercial viability and, finally, facilitate account-to-account migration.
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