India’s Fintech Pioneer Has Lost More Than Its Bank

(Bloomberg Opinion) -- India’s fintech pioneer can live without its own bank. But can it thrive without the regulator’s trust?

That’s the question investors are asking after the Reserve Bank of India barred Paytm Payments Bank Ltd. from any deposit or credit transaction in customer accounts, wallets or cards after Feb. 29.

On the face of it, it’s not a very big deal. A payments bank in India is basically a utility, which can accept deposits up to 200,000 rupees ($2,400) and is not allowed to make loans. Now that it has been effectively frozen by the regulator, Paytm, which owns 49% of the bank, can always switch its fintech customers to another institution. It won’t be easy. Nearly 24% of India’s popular smartphone-based transfers are received in a Paytm Payments Bank account. Still, it can be done. What’s more important, however, is the signal the regulator has sent with its surprisingly harsh ban.

It was nearly two years ago that the RBI stopped the payments bank from onboarding new customers. Paytm has so far been suggesting that remedial action was going well. In October 2022, the bank received a final report from the RBI outlining the need to strengthen IT outsourcing and operational risk management, including know-your-customer and anti-money-laundering processes. After that, the RBI recommended timebound steps. “The Bank has completed the compliance to these instructions,” Paytm said in its 2023 annual report. 

Clearly, the RBI has a different view. Its press release Wednesday highlighted “persistent non-compliances and continued material supervisory concerns.” The regulator stuck its knife still deeper by mandating that the bank terminate the main accounts of One 97 Communications Ltd., the publicly traded entity, and Paytm Payments Services Ltd., a subsidiary, “at the earliest.”

This, too, is interesting. In December, the RBI gave out payment aggregator licenses to half a dozen firms, including Razorpay and Google Pay. Paytm Payments Services, which had been asked to refile its application, wasn’t among them. Pending a license, the unit can’t onboard new online merchants to its gateway. If that restriction gets lifted upon taking the account to another deposit-taking institution, then it would indicate that the RBI’s concerns were specific to the payments bank. If not, it would signal deeper trust issues with the fintech group.  

Paytm has said that its loan and insurance distribution and equity broking services will remain unaffected, and that it estimates a worst-case hit of up to $60 million to its annual earnings from the RBI’s recent move. While that could well delay the startup’s goal to turn profitable, it’s only one stumbling block among several for a firm that lost $220 million last year.

The problem lies elsewhere. Confidence in a mainstream business — used by consumers for everything from paying for an autorickshaw ride to settling highway tolls — is a function of regulatory assurance. Ditto for banking partners, who hawked nearly $2 billion in loans on Paytm’s online network last quarter. The RBI’s stern disapproval may give some of them pause and prompt them to seek other platforms. Shares of the digital-payments provider plunged 20% on Thursday.

A few months ago, Paytm founder Vijay Shekhar Sharma bought a 10% stake from China’s Ant Group Co., an early backer of the Indian startup. Given the frosty relationship between Beijing and New Delhi, it was becoming crucial to demonstrate to authorities that an app embedded in the plumbing of the country’s payments industry was firmly under local control. While he may have satisfied the politicians, it looks like Sharma didn’t succeed in making the RBI comfortable with the way the bank was operating. The investment case for Paytm just got a lot weaker.

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(Adds the bank’s share of business in third paragraph, and price movement in Paytm shares in eighth paragraph.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.

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