Paytm vs. Regulations: Will it Fly Again?
The Rise of the Wallet Wizard You might have paid your kirane wala and heard "Paytm karo", satisfying isn't it? Transforming an economy that solely relied on cash to an economy that started dealing in cashless transactions more often, Paytm emerged as a game changer. Paytm, initially founded as a mobile wallet-based startup, commenced its journey in 2010. Cheered by many, the prominent fintech startup has done much more to celebrate than just mere numbers. Nonetheless, it is to be acknowledged that Paytm has hunted significant glory across India recently. The master plan kicked things off with people paying for bills and recharges. The user base of Paytm showed a meteoric rise from 1.18 Crores to 10.4 Crores recording a significant 781% growth from August 2014 to the same month in 2015. This performance was owed to the introduction of its own mobile wallet and collaboration with the heart of retail grocery purchase – The Kirana Stores. The seamless integration of technology into payments whispered an easy-to-understand and convenient payment system into the ears of Indians. The revolutionary emergence didn’t stop there. Rather it intensified further when the Indian government made 500 and 1000 RS notes cease as legal tenders and called for digitalization of the economy in one way or another. This shift made Paytm the go-to platform to support Indian payments’ digitalization. Let alone looking back, Paytm moved forward aggressively with its compelling marketing strategies for tier 2 and 3 cities. The infusion of Unified digital payments (UPI) by the Indian government in 2016 and the acquisition of a license to operate as a full-fledged bank in 2021 further immersed the fintech giant in success.
Cracks in the Facade
Most of today’s Indian markets are fiercely competitive and the Indian fintech market is no different with major competitors like PhonePe, Google Pay, and Amazon Pay along with new entrants hindering Paytm’s business objectives while vying for market share. Paytm’s initial excitement started to wear off over time due to the new entrants offering lucrative offers to acquire customers. Many question Paytm over the unsustainability of its business model, arguing that it relies heavily on discounts and cashback offers, eventually questioning the long-term profitability of the adorned startup with Macquarie research report going so far as saying ”Paytm’s business model lacks direction and focus”. On top of that, Warren Buffet’s only Indian investment didn’t live up to the hype it had when it underwent the IPO listing. The One97 Communications subsidiary was alleged to be overpriced at the same time. The expectations of the IPO soaring on the initial day of listing were hit when its opening price fell apart and recorded a 27% decrease on the opening day. Furthermore, the Paytm Mall, the e-commerce diversification of Paytm, had been allegedly involved in a major data breach in 2018 on 30 August. Not only this, Paytm Mall was never found good enough to be profitable as it crashed heavily on the front of valuation as it curtailed from $3 billion in 2019 to $13 Million. A forgettable journey for Paytm, isn’t it? Unfortunately, the attempt to mark a significant presence in the insurance sector was found to be a vain attempt. The unsuccessful diversifications into new segments along with frequent regulatory blows added to the woes of the pioneer in mobile payments apps.
The Regulatory Hammer Blow
The Reserve Bank of India wielded its regulatory hammer with precision, delivering a crippling blow to Paytm Payments Bank. The fallout from this action reverberated through the financial ecosystem, leaving scars on growth prospects and investor sentiment. The company’s stock plummeted by 20% in one day. This sharp decline wiped out approximately ₹609 per share, erasing around $1.2 billion in value from the company
It all started in 2019 when the Office of Banking Ombudsman (a body created by the RBI to take care of the banking complaints of the general public in India) issued a show-cause notice for Paytm Payments Bank’s failure to monitor a certain account maintained with it that had shown a sudden increase in the velocity of daily transactions involving immediate transfer to other banks.
These actions were found to be in violation of RBI’s provisions on KYC norms. In July 2021, the central bank issued a show-cause notice to Paytm for submitting false information about the transfer of an operating unit from One 97 Communications to Paytm. By October the same year, Paytm was charged a ₹1 crore penalty for contravention of the Payment and Settlement Systems Act, 2007.
From the RBI’s point of view, a row of red flags was popping up: Paytm did not monitor payout transactions or carry out risk profiling of entities availing those services. In several cases, the regulatory ceiling of end-of-day balance in customer advance accounts was breached. The banking regulator also found that Paytm Payments Bank had reported a cyber security incident late, and had failed to implement device-binding control measures related to “SMS delivery receipt check”. In October 2023, another penalty of Rs.5.93 crore was imposed on the payments bank after the RBI found several non-compliances—once again highlighting the bank’s failures around the identification of account owners. While reports pointed to money laundering concerns, Paytm and its management vociferously denied any such violation.
However, the final blow came in 2024. The Comprehensive System Audit report, coupled with compliance validation by external auditors, exposed glaring lapses. Paytm’s transgressions ranged from failing to identify beneficial owners to breaching regulatory balance limits. The RBI’s patience had worn thin, and it acted decisively.
Paytm’s Stock price falling by 20% on the same day RBI issued the notice.
During their deposit drought, the bank was prohibited from accepting further deposits or top-ups in various customer channels, including accounts, wallets, FASTags, and NCMC cards. Although customers retained the ability to withdraw or utilize their balances without constraints, the once-bustling banking services of Paytm came to a grinding halt with the suspension of fund transfers, Bharat bill payment operating unit (BBPOU), and UPI facilities.
“The bigger issue is that Paytm has not been on the good books of the regulator and going forward, their lending partners also could possibly re-look at the relationships,” Macquarie analysts wrote after the RBI’s action against Paytm Payments Bank.
Paytm, once a fintech disruptor, faced a seismic impact. Its growth stalled, and investor confidence wavered. We cross fingers as India asks, Can it regain trust? Is profitability still possible?
Reflecting on a Larger Problem
In the aftermath of the Paytm crisis, several key players come into focus. The Securities and Exchange Board of India (SEBI) appears sidelined—its hands wringing as an ineffective bystander. SEBI played no role in determining the IPO pricing or mitigating the stock’s subsequent hammering. Meanwhile, venture capital firms continue to wield immense power, often valuing businesses at staggering multiples. Paytm’s primary market debut, at 27 times enterprise value or gross profit for fiscal 2024, exemplifies this trend.
Amidst this turmoil, India’s entrepreneurial ecosystem takes center stage. Start-up founders petition RBI Governor Shaktikanta Das and Finance Minister Nirmala Sitharaman, urging a reconsideration of the “proportionality of restrictions” on Paytm. Their plea underscores the broader impact on the payments bank, the fintech landscape, and the economy at large.
With the RBI's sanctions worsening the woes, the fintech giant seeks remedy amidst the proliferation of doubt. One hopes, for the sake of Paytm’s depositors, investors, and users, that it is now time to do what is right rather than do what is braveThe rise and fall of Paytm serves as a cautionary tale within the rapidly evolving fintech sector. Its initial success was undeniable, but a series of missteps, combined with increased competition and regulatory scrutiny, have cast a shadow over its future. The RBI's actions send a clear message that compliance and sound financial practices are paramount, even for innovative disruptors. Whether Paytm can regain trust, navigate regulatory hurdles, and chart a path to sustainable profitability is a question that will define its future, and potentially shape the trajectory of the broader Indian fintech landscape.
Authors : Sachkeerat Singh and Md Imran
Illustrator: Kumari Janawi
Sources: Verdict The Economic Times Linkedin