Explainer: Unlocking the Paytm Wallet: How the Paytm problem might become worse for the biggest fintech company in India

Explainer: Unlocking the Paytm Wallet: How the Paytm problem might become worse for the biggest fintech company in India

With the Reserve Bank of India's (RBI) decision to prohibit new deposits and top-ups as of February 29, 2024, Paytm Payments Bank has an unclear future. There are worries that the RBI would revoke PPBL's license.

One of the main participants in India's fintech scene, Paytm Payments Bank (PPBL), is caught in the middle of a regulatory storm. With effect from February 29, 2024, the Reserve Bank of India (RBI) has prohibited PPBL, with the exception of new deposits and top-ups. Due to severe accusations made against the bank and worries about a potential license revocation, the issue has called into doubt the bank's viability. consequences for the fintech industry. Let's examine the main elements of the PPBL dilemma and its potential repercussions in this setting.

What recent action did the RBI take against the Paytm Payments Bank?

Paytm Payments Bank Limited (PPBL) has been instructed by the Reserve Bank of India (RBI) to cease the majority of its operations. After February 29, the RBI directed PPBL, a restricted bank, to stop accepting new deposits, processing credit applications, and topping up any client accounts, wallets, cards, or other devices.

Who owns Paytm Payments Bank and what is its purpose?

One97 Communications Limited (OCL) is a shareholder in Paytm Payments Bank Limited (PPBL), holding 49% of the paid-up share capital. One97 Communications' founder, Vijay Shekhar Sharma, has a 51 percent share in the bank. PPBL started off as a payments bank in 2017 and provided digital banking services such wallets, UPI, Fastag, fixed deposits, savings and current accounts, and wallets.

What accusations has RBI made against PPBL, and why is it the subject of an investigation?

The RBI has voiced grave concerns over PPBL's ongoing non-compliance and significant supervisory problems. A thorough system audit uncovered flaws such as regulatory infractions, KYC concerns, and data sharing vulnerabilities. In October 2023, PPBL would be subject to a penalty of Rs 5.39 crore for noncompliance with regulations.

What does this signify for users of Paytm?

Users using the Paytm wallet may continue making transactions until February 29; after that, they won't be able to add more funds to their accounts. Fastag, PPBL accounts, and other related services will be subject to comparable limitations. Until their amount is depleted, customers are free to take money out or utilize their current balance.

What choices are available to users?

Wallet services are offered by around 20 banks and non-banking organizations, such as PhonePe, MobiKwik, SBI, ICICI Bank, HDFC, and Amazon Pay. Customers may choose from 37 approved banks, including SBI, HDFC, ICICI, IDFC, and Airtel Payments Bank, for Fastag services.

Why did the RBI start looking into Paytm Payments Bank?

Money laundering and questionable transactions involving Paytm and its banking division have drawn the attention of RBI. The regulatory prohibition was influenced by non-compliance concerns, such as the use of the same PAN for many accounts and millions of non-KYC compliant accounts.

What is Paytm's response to the RBI's move?

Paytm is in talks with RBI to follow the direction and go on with its operations. The business made it clear that other financial services like insurance, equities broking, and loan distribution would not be impacted. Card readers and other offline merchant payment network services, such as Paytm QR, will keep operating normally.

What effect has this had on the shares of One97 Communications?

One97 Communications, the company that owns the Paytm brand, had a 40% drop in shares in only two days after the RBI's decision. In only three days, the market valuation of the company fell by more over Rs 20,000 crore as it reached its lowest trading limit.

What are the salient features of PPBL's clientele and offerings?

Over 30 crore wallets and 3 crore bank accounts are owned by PPBL. It boasts a massive user base with over 80 lakh Fastag units issued and over 10 crore KYC clients. It may, however, accept deposits up to Rs 2 lakh as a payments bank, but it is unable to provide credit cards or loans.

What effect will this have on PPBL clients?

After February 29, 2024, customers will not be able to make deposits or additions to their PPBL accounts. To protect the security of the current funds, there isn't a limit on how much may be taken out of the balance.

What is Paytm's take on the matter, and how is it going to manage the transition?

Paytm anticipates a few weeks of interruption and anticipates returning to normal by the beginning of March. Paytm is collaborating with interested banks to acquire wallets and UPIs while actively working on the migration process. The organization is in communication with regulatory bodies to enable a seamless transition procedure.

Is there a relationship between anti-money laundering efforts and Paytm?

One97 Communications insists on abiding by Indian regulations and disputes any participation in anti-money laundering actions. The CEO and founder of the firm are not under investigation by the Enforcement Directorate for possible money laundering.

What potential effects may the Paytm controversy have on the industry's fintech companies' valuations?

Experts worry that Paytm's predicament would affect fintech companies' valuations. Fintech companies can face trust problems, which might result in value reductions if a major participant in the market fails to comply.

Is there a potential acquirer for Paytm's company?

Jio Financial Services (JFSL) and HDFC Bank are reportedly the top candidates to buy Paytm's wallet division. Discussions around JFSL have been ongoing since November of last year.