Paytm: Rockstar Indian fintech startup in crisis

A little grocery store in Mumbai, the financial hub of India, has initiated a policy of accepting only physical currency due to the precarious future of a widely-used digital payment service it had previously relied on.

The Reserve Bank of India has instructed Paytm, the business that transformed digital payments in the nation, to cease all operations provided by its banking sector, commonly referred to as the wallet service, as a result of its consistent failure to adhere to regulatory requirements. The business facilitates Swift payments using the Paytm app, which boasts a user base of over 330 million.

The Reserve Bank of India (RBI) has alleged that Paytm has engaged in financial misconduct, including misrepresenting customer information and engaging in money laundering activities.

The business has been instructed to cease taking deposits into individuals' Paytm bank accounts or wallets starting from 1 March. However, clients will still be able to make payments until the funds in their accounts are depleted.

Paytm has refuted the allegations. The business stated that the Paytm app is functioning normally and its services are not impacted.

The application can still serve as a middleman for swift transactions between non-Paytm bank accounts, but it is unable to receive direct deposits.

This would have a significant negative impact on the company's wallet business. The Paytm wallet functions as a quasi-bank account, enabling individuals to receive deposits, store funds, and conduct transactions by scanning a QR code or utilising their mobile phone numbers as identification.

Individuals can move funds from their physical wallets to their accounts at different financial institutions, and conversely.

Unsurprisingly, the stringent enforcement measures have dealt a significant blow to numerous small business proprietors who depended on the application for expeditious and effortless transactions.

The order has caused significant financial distress for Paytm, as investors withdrew substantial amounts of money, resulting in a sharp decline in the company's share value.

According to industry analysts, this action may indicate that the payments bank is at risk of having its licence revoked in the coming weeks, which would exacerbate investor anxiety.

RBI Governor Shaktikanta Das stated that Paytm had been provided with an ample amount of time to correct any deficiencies.

"The actions taken by the RBI are always commensurate with the seriousness of the violation and are aimed at ensuring the stability of the financial system and safeguarding the interests of consumers." "Action is initiated in cases where regulated entities fail to implement effective measures," stated Mr. Das.

A representative from Paytm informed the BBC that the company is treating the directive from the RBI with great seriousness.

The spokeswoman said, "We acknowledge and appreciate the RBI's decision, and we are actively and diligently working towards resolving the raised concerns."

Vijay Shekhar Sharma, the creator of Paytm and formerly recognised as India's youngest millionaire, has been dealing with urgent and challenging situations. He is inspiring staff, reassuring investors, and comforting merchants. Mr Sharma convened with officials from the Reserve Bank of India (RBI) and purportedly sought assistance from the nation's finance minister.

Paytm has previously encountered issues with the banking regulator on multiple occasions. Since 2018, the RBI has reprimanded the firm on multiple occasions for several failures.

Srinath Sridharan, a financial specialist, asserts that the concerns of the central bank are significant.

"The RBI has utilised provisions of legislation that grants authority to the regulator to make decisions in the best interest of the public." This demonstrates the severity of the situation. "Paytm has forfeited the confidence of the regulator," he stated.

Paytm, which was introduced in 2010, experienced a surge in popularity following India's decision to prohibit high-value banknotes in 2016. This action resulted in a decrease in physical currency and an increase in online transactions.

Individuals started utilising the application for various operations, encompassing the purchase of domestic commodities, remunerating tuk-tuk operators, and even settling energy bills. Paytm received substantial financing from SoftBank, a prominent Japanese technology investor, and has notable early investors such as Warren Buffett and Alibaba from China.

The Paytm payments bank, which is currently facing regulatory scrutiny, obtained its banking licence in 2017.

The bank has a maximum deposit limit of 200,000 rupees ($2,411; £1,907) and does not provide loans. It provides digital banking services, offers fixed deposits, and sells third-party insurance and loans.

The bank possesses a total of 50 million accounts, which encompasses the accounts of merchants who utilise the platform's blue-and-white QR code stickers for accepting payments.

According to Mr. Sharma, his company is currently investigating the possibility of partnering with external banks to offer banking support for merchant accounts. These accounts are responsible for generating fifty percent of Paytm's total income.

However, this would imply that the profits obtained from deposits and transactions would need to be divided with the collaborating bank, which would exacerbate the financial difficulties of an already unprofitable organisation. Paytm's market value has plummeted by almost 80% since its initial public offering on the stock exchange two years ago.

Moreover, the company may encounter difficulties in securing a financial partner as a result of the current regulatory complications it is entangled in.

• The downfall of India's most esteemed start-up

• The India start-up event that quickly turned into a scandal

Paytm has been endeavouring to assuage merchants via phone calls and messaging; nevertheless, analysts assert that stringent limitations and ambiguity are expected to adversely affect the company's customer retention.

Traders have begun transferring from Paytm to other payment solutions. Banks, such as the State Bank of India (SBI), have already extended their assistance to merchants by providing them with new QR codes and point-of-sale machines to facilitate their changeover.

Reuters news agency stated that market intelligence firm Sensor Tower's data shows a 20% decrease in downloads for the Paytm app following the RBI order while competing apps such as Google Pay and PhonePe had a 50% increase in downloads.

According to experts, the more significant challenge to address will be related to reputation.

According to experts, the current issue at the firm has prompted concerns over the effectiveness of the firm's managing board, which consists of experienced finance professionals and former officials from the Reserve Bank of India. The banking regulator may request modifications to the board's management structure.

Furthermore, they have raised concerns regarding the founder's dominant ownership in both the parent company, One97 Communications, which encompasses the digital payments business, and the payments bank. They argue that the two entities are not maintaining a sufficient level of independence.

Paytm is currently the target of legal action, which coincides with Byju's, an illustrious and pricey ed-tech start-up in India, struggling to overcome numerous financial challenges. Experts have raised doubts about the significance of corporate governance in prominent start-ups.

Furthermore, this action has caused significant repercussions throughout India's fintech and start-up companies. A collective of founders has composed a letter to Prime Minister Narendra Modi, Finance Minister Nirmala Sitharaman, and Mr Das, appealing for the reversal of sanctions imposed on Paytm. They argue that these sanctions are harmful to the overall fintech ecosystem.

However, Mr Das has underlined that the problem does not extend to the entire system since it is limited to a "specific institution.".