Paytm, RBI, and payment banks: A ruined concept

Paytm, RBI, and payment banks: A ruined concept

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Strangely, after just two years of existence in 2017, Paytm Payments Bank emerged as the first of the six banks to generate a profit, reporting a net profit of Rs 19 crore for FY2019.

To my dear reader,

The Reserve Bank of India has to acknowledge that the concept of payments banks was flawed from the start.

The regulator's proposal to establish a bank that would just handle payments and not provide credit was met with skepticism eight years ago. However, the regulator portrayed the idea as a magic bullet for financial inclusion, with the understanding that payments banks would facilitate transactions for low-income consumers.

But there was limited room for profit in the income stream, and the business strategy remained unclear. There were also a lot of tight regulations. As a consequence, only eight of the eleven approved applicants who were granted a payments bank license chose to make use of it. Only six of them are now in existence, and Paytm Payments Bank is one of them.

Strangely, after only two years of existence in 2017, Paytm Payments Bank emerged as the first of the six to generate a profit, reporting a net profit of Rs 19 crore for FY2019. In the present day, the bank is dangerously close to failing. Not just because to unprofitable company, but also because of non-compliance with regulations.

According to the RBI, the bank has a history of non-compliance. The regulator has given the bank enough time to make amends, but if it doesn't, trade restrictions will be applied.

What does this reveal about the composition and operating principles of payment banks?

In the ruthless realm of capitalism, a company may make a profit by raising sales or cutting expenses. Businesses often combine the two strategies to some extent, with bigger companies focusing more on revenue growth than expense reduction. Lending is the main source of income for financial intermediaries; payments are a secondary source. In contrast, the payments bank model makes payments the primary source of income and offers lending as a supplemental source, but only after loans are disbursed. Here's where the payments bank model falls short of expectations. Because of the low margin nature of payments, scaling is simpler than making them profitable.

It should come as a surprise that promoters turn to cost-cutting when they see the difficulty in turning a profit via revenue. In severe circumstances, people engage in carelessness, which helps to explain why Paytm Payments Bank does not comply with basic KYC standards. Paytm's non-compliance is understandable when one considers the need to be the face of the digital payments revolution. After all, the allure of fast ascent to the top has seduced even reputable and well-established public sector banks. In an apparent attempt to reach their stringent business objectives, Bank of Baroda personnel recently used fictitious mobile phones to raise the number of users on the public sector lender's mobile application, "Bob World." Naturally, RBI has stopped accepting new clients until the problem is fixed. Can we expect promoters to maintain KYC hygiene while workers are prone to lapses?

It is indisputable that noncompliance need to result in consequences in every situation. A poor business strategy in payments institutions makes breaches more alluring. The RBI need to reconsider its position on payments banks and even do away with the notion entirely. The Unified Payment Interface (UPI) is more than capable of achieving financial inclusion in payments.

In terms of Paytm, the industry-leading fintech must establish a workable business plan. Its wallet business is in serious trouble, and the loan distribution industry's cyclical nature makes it a poor income source. It has a lot of pies in its mouth. Prior to all of this, however, the reputation has to be restored and the clients need to be moved as seamlessly as feasible.

However, the time has come for Paytm and RBI to abandon the payment bank business model.