Paytm's New Four-Letter Word For Fintechs: Mess
The recent events surrounding the RBI action against Paytm should hopefully serve as a rude reminder to other financial entities.
Even the mighty can fall. That’s the law of Nature. Any avid reader of animal kingdoms, natural ecosystems or human civilizational history would know this.
The recent events surrounding the RBI action against Paytm should hopefully serve as a rude reminder to other financial entities. Even the most formidable entities—be it with proud-as-profit CapTable investors, with large equity amounts being infused, disruptive innovations, or photo ops with political and policy leaders—are not immune to regulatory watch.
Finance 101 is all about risk management and compliance. Suddenly, it looks as if the sector is brushing up on those very essential core lessons. While Paytm's meteoric rise has been fuelled by innovation and aggressive market strategies, the recent turn of events serves as a stark reminder that success, when not coupled with prudent risk management and adherence to regulatory norms, can swiftly transform into a house of cards. The debate over whether Paytm is done-for-ever or whether it will rise like Phoenix is still abounding.
It is irresponsible and even mischievous of all those suggesting the Reserve Bank of India is anti-fintech. The RBI's stance has consistently emphasised the necessity of regulations for any entity operating in the financial space. The argument that regulations impede innovation fails to acknowledge that adherence to regulatory frameworks is foundational for trust in the financial sector. Fintech firms aiming to straddle the combination of finance and technology must recognise the importance of abiding by established financial regulations.
Recent media reports suggest that the regulatory intervention against Paytm Payments Bank was prompted by multiple violations, including issues related to money laundering and repeated non-compliance with warnings from the RBI. And the highest levels of the government had been briefed about security concerns related to fund flows with links to China. These disclosures highlight substantial national security implications, emphasising that Paytm cannot simply brush aside these concerns in the name of innovation. While the specific details are not disclosed publicly, the use of Section 35A by the RBI to enforce corrective measures shows the seriousness of the observed lapses.
In light of these revelations, it raises a pertinent question: why would any other bank engage with Paytm without explicit approval from the RBI, given the gravity of the issues at hand? After all, the wallet business licence (PPI) is with Paytm Payments Bank, and it cannot be transferred. So that puts the larger business of Paytm at risk.
It is an undeniable truth that every institution, regardless of its stature, is susceptible to the prospect of collapse. Irrespective of the milestones achieved, the extent of progress made, or the magnitude of influence amassed, the vulnerability to decline is an omnipresent reality. That is what risk management and prudential regulations are about. Here is where a balance of exuberance, innovation as strengths, paranoia to be well governed, and consumer centricity, all with regulatory expectations, is key. Certainly, history is replete with examples of large corporations facing downfall. Enron, Lehman Brothers, Barings Bank, and Wirecard. Closer home in India, we have seen that large corporations and even multi-generational family businesses have folded up. For the dominoes to collapse, it needs the gentlest push to the first chip!
A relentless pursuit of growth, if unsustainable, can swiftly propel a company through the stages of decline. A valuable lesson for Indian tech startups lies in shunning the main pursuit of lofty valuations. It's not important to become the poster child for Indian political or policy events. Instead, the key is to steadfastly concentrate on the core business, fostering sustainable growth and resilience in the market. The central message is clear: no entity, regardless of its size or influence, is immune to regulatory oversight or consequences for non-compliance. This sends a powerful message to stakeholders across industries, emphasising the urgency for robust governance, adherence to regulatory frameworks, and a commitment to ethical business practices.
The repercussions of a major player's crisis extend beyond its own issues, inflicting pain on other entities within the same industry segment. The collateral damage resonates with various stakeholders, causing investors, customers, and regulators alike to harbour an innate sense of doubt and skepticism. This erosion of trust becomes a pervasive force, creating a ripple effect that taints perceptions and challenges the credibility of all players within the industry.
Trust is a binary concept—it cannot fluctuate like a temperature of 98.4 degrees. It either exists or is absent. In the case of Paytm, why should other lenders extend their trust when issues such as data misuse, KYC concerns, and anti-money laundering problems are apparent? These compliance lapses strike at the core functions of any financial entity.
This OpEd is not about whether Paytm will survive this regulatory action; the true concern lies in the collateral damage it has inflicted on the fintech community. With other fintechs eyeing public markets, the fallout from Paytm’s regulatory troubles casts a shadow over their prospects. Convincing investors of their differentiation and resilience just became a tougher task. Paytm has just made fintech the new four-letter word: MESS.
Srinath Sridharan is Policy Researcher and Corporate Advisor. Shailesh Haribhakti is an Independent Director on corporate boards.
The views expressed here are those of the authors and do not necessarily represent the views of NDTV Profit or its editorial team.
