March 4, 2024

Paytm: Indian fintech startup Rockstar faces serious crisis

  • By Archana Shukla
  • BBC business correspondent

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Millions of people use Paytm payment app

A small grocery store in Mumbai, India’s financial capital, has started asking customers to pay in cash, as a popular digital payment service, which it used until now, faces uncertainty over its survival.

India’s central bank has asked Paytm – the company that revolutionized digital payments in the country – to stop all services offered by its banking arm, also known as a wallet service, due to “persistent non-compliance” with its rules. The division supports Swift payments through the Paytm app, which has over 330 million users.

The Reserve Bank of India (RBI) has reportedly accused Paytm of financial crimes, including falsifying customer information and money laundering.

It has asked the company to stop accepting deposits into people’s Paytm bank accounts or wallets from March 1, although customers will be allowed to continue making payments until their account balance is depleted.

Meanwhile, Paytm has denied the allegations. In a statement, the company said that “the Paytm app remains fully operational and our services are not affected.”

The app can continue to facilitate quick payments between bank accounts other than Paytm as an intermediary, but cannot accept direct deposits.

This would severely impact the company’s wallet business. Paytm Wallet is almost like a bank account where people can receive deposits, store money and make payments, all by scanning a QR code or using mobile numbers as identity.

People can also transfer money from their wallets to their accounts at other banks and vice versa.

Not surprisingly, the regulatory crackdown has been a blow to thousands of small business owners who relied on the app for quick and easy transactions.

It also left Paytm in dire straits as investors cashed out billions of rupees after the company’s shares began plunging following the order.

Industry experts say the move could be a precursor to the payments bank losing its license in the coming weeks, further adding to investor jitters.

On Thursday, RBI Governor Shaktikanta Das said Paytm had been given enough time to rectify the lapses.

“RBI action is always proportionate to the severity of the violation and is in the interest of systemic stability and protection of consumer interests. Action is taken when regulated entities fail to take effective action,” Mr Das said.

A Paytm spokesperson told the BBC that the company was taking the RBI directive “very seriously.”

“We respect the RBI’s decision and are working diligently to address the concerns raised,” the spokesperson added.

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Thousands of merchants use Paytm app

Paytm founder Vijay Shekhar Sharma, once named India’s youngest billionaire, has been putting out fires. He motivates employees, calms investors and gives security to traders. Sharma met RBI officials and reportedly even approached the country’s finance minister for help.

This is not the first time Paytm has run into trouble with the banking regulator. Since 2018, the RBI has recalled the company at least four times in a series of lapses.

Srinath Sridharan, a financial expert, says the central bank’s concerns are serious.

“The RBI has used provisions of a law that gives powers to the regulator to rule in public interest. This shows the gravity of the situation. Paytm has lost the confidence of the regulator,” he said.

Launched in 2010, Paytm gained popularity after India banned high-denomination banknotes in 2016, a move that took cash out of circulation and boosted online transactions.

People began using the app for a variety of transactions, including purchasing household items, paying tuk-tuk drivers and even utility bills. Paytm saw big investments from Japanese tech investor SoftBank and counted Warren Buffett and China’s Alibaba among its early investors.

Payments bank Paytm, which is at the center of the current regulatory storm, obtained its banking license in 2017.

The bank can accept deposits of up to 200,000 rupees ($2,411; £1,907), but cannot lend money; offers digital banking services, fixed deposits and sells insurance and loans to third parties.

The bank has 50 million accounts, including those of merchants who accept payments using the platform’s blue and white QR code stickers.

Sharma has said his company is exploring third-party banks to provide back-end banking support to merchant accounts, whose transactions contribute to half of Paytm’s revenue.

But this would mean that the margins made on deposits and transactions would have to be shared with the partner bank and would put even more pressure on an already loss-making entity: Paytm has lost almost 80% of its market value since it went public two years ago. years.

Furthermore, the company could face difficulties in finding a banking partner due to the regulatory problems it is currently in.

Paytm has been trying to reassure merchants through calls and messages, but analysts say the severe restrictions and uncertainty are likely to impact the company’s customer retention.

Merchants have started shifting from Paytm to other payment options. Banks, including the government-run State Bank of India (SBI), have already offered to help merchants in the transition with new QR codes and point-of-sale machines.

According to data from market intelligence firm Sensor Tower, the Paytm app has seen a 20% drop in downloads since the RBI ruling, while rival apps like Google Pay and PhonePe have seen a 50% rise in downloads. , reported the Reuters news agency.

The most important battle to fight will be reputation, experts say.

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People use Paytm for a variety of financial transactions

Experts say the current crisis at the company has raised questions over the efficiency of the company’s board of directors, which includes finance veterans and former RBI officials, and the banking regulator may seek changes in the management structure of the board.

They have also raised concerns about the founder’s majority stake in both the parent entity (One97 Communications, which houses the digital payments business) and the payments bank, saying the two do not operate at arm’s length.

It has also had repercussions on the country’s fintech and start-up companies: a group of founders wrote to Prime Minister Narendra Modi, Finance Minister Nirmala Sitharaman and Mr Das urging a reversal of sanctions on Paytm, calling them detrimental to the financial technology ecosystem.

But Das has clarified that there is no need to worry the entire system as the problem is with a “specific institution”.

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