Anushruti Singh
The saga of Paytm, once hailed as the poster child of India’s fintech revolution, has taken a dramatic turn as regulatory woes and compliance concerns cast a shadow over its subsidiary’s operations. From the heights of market dominance to the depths of regulatory scrutiny, the journey of Paytm Payments Bank serves as a cautionary tale for the entire fintech industry.
As the Reserve Bank of India (RBI) clamped down on Paytm Payments Bank, ordering it to halt several activities due to non-compliance and supervisory issues, investors hurriedly offloaded Paytm shares, signalling their apprehensions about the company’s future. The repercussions were swift and severe, with Paytm stock losing a staggering 55 per cent of its market value since RBI’s intervention on January 31, according to media reports.
While, this is how bourses reacted after, foreign institutional investors (FIIs) were particularly prescient, divesting Paytm shares worth a staggering Rs 7,441 crores in the December quarter, even before the RBI’s action, foreshadowing the troubles that lay ahead.
The RBIs circular dealt a severe blow to Paytm Payments Bank, prohibiting it from accepting new deposits, top-ups, or even facilitating transactions through digital wallets and FASTags. While existing customers can still access their funds and conduct transactions, the ban on new inflows has stymied the bank’s growth prospects.
But what went wrong with the nation’s beloved Paytm?
Why RBI hammered Paytm—many reasons
An industry expert and a former insider sheds light on the root causes of Paytm’s predicament.
“This is the 3rd time that the company is getting banned by RBI. Almost every alternative year it is getting banned, because of one major reason in the company,” he says.
Ravi Teja Gupta, an ex-executive at Paytm and Founder of Guptaji Invests, a Hyderabad based VC firm, elucidates the company’s history of regulatory run-ins, attributing its woes to a cavalier disregard for compliance.
Gupta underscores Paytm’s penchant for prioritising speed over direction, a mindset that led to repeated clashes with regulatory authorities. He highlights instances of non-compliance, such as shared office spaces for subsidiary companies and lax adherence to KYC norms, as glaring examples of Paytm’s regulatory missteps.
“For them, speed is more important than direction,” he says. By direction he means doing the right thing. “It’s not important. If they (Paytm) make any mistakes in valid business, it doesn’t affect much, because it does not come under RBI. But Paytm as a company never cared about RBI guidelines,” he adds.
They were overconfident too, asserts Gupta.
During the tumultuous period of demonetisation, Paytm reigned supreme, commanding an impressive 70 per cent share of the market for legitimate transactions. The remaining 30 per cent was held by Freecharge and Mobikwik.
“Back then, the company’s main rivals were Freecharge and MobiKwik, with no trace of Google Pay, Amazon Pay, Bharat Pay, or Phonepay. Basking in the glow of dominance, perhaps they became too complacent in the belief that they were untouchable. There are numerous RBI rules that the company did not observe,” he says.
Sharing same premises
In the banking sector, it’s standard practice for each institution to have its own dedicated office space. However, Paytm’s entities operated from a shared office facility.
This was a clear violation of bank licencing norms.
As per banking licensing regulations, it’s mandated that every bank develop and maintain its own technology infrastructure, ensuring its segregation from other entities within the group, which Paytm ignored.
“One 97 Communications served as the parent company, overseeing five to six subsidiary ventures, sharing the same premises and using shared services. The journey began with Paytm Money and subsequently expanded to encompass a multitude of services. While Paytm Wallet functioned as a separate entity, One 97 Mobility Fund operated as an investment arm of Paytm. And One 97 Communications was a tech support provider,” Gupta elaborates.
Slips in PPB
The missteps extended to the launch of Paytm Payments Bank, where hastily implemented policies and a lack of dedicated personnel resulted in flawed operations.
Gupta recalls how former employees of Airtel Payments Bank, hired to spearhead Paytm’s banking venture, replicated processes without due diligence, exacerbating compliance concerns.
“Prior to Paytm Payments Bank, Airtel Payments Bank existed in the market. Paytm recruited numerous employees from Airtel Payments Bank to run PPB. Unfortunately, these new recruits uncritically adopted policies from their previous workplace. The root cause of this issue was the absence of dedicated departmental staff for the Payments Bank. These employees from a telecom background, who had worked with entirely different KPIs in Airtel PB, were reassigned to work on Paytm’s operations. Consequently, they simply replicated the processes and regulations they were accustomed to from their previous roles. This was the worst error Paytm made,” Gupta asserts.
Issues with KYCs
One of the purported breaches was a failure to adhere to know your customer (KYC) norms. Paytm neglected to conduct adequate KYC verifications for thousands of customers. Surprisingly, many accounts were run by individuals with past fines or legal issues.
A report by ET mentions that a single Permanent Account Number (PAN) was associated with over 1,000 wallets, highlighting a glaring lack of oversight. Payment wallets, primarily designed for minor transactions, were found to hold substantial balances (in millions), contrary to their intended use.
Linking a single Pan card to many bank accounts and conducting various transactions in foreign countries, all for big quantities of money, falls completely within the KYC process, Gupta points out.
“So, when the RBI demanded that Paytm conduct an external audit report from any of the BIG 4 banks, Paytm declined. The RBI warned Paytm about similar difficulties multiple times, but they ignored them, therefore this had to happen; we must follow the norms of the state, regardless of who we are. We may be the market leaders right now, but no one can be number one forever,” he says.
Furthermore, several processes and policies were blindly replicated without consideration for regulatory compliance, according to Gupta.
“Perhaps the RBI could have included information about processes, policies, and how to do business while issuing licences for them,” he says.
There was a significant discrepancy between their prevailing KYC process and the ideal standard. This inconsistency not only incurred substantial expenses and errors but also hampered productivity. In response to these shortcomings, Gupta’s team, based in Hyderabad, developed innovative KYC processes.
“Through strategic adjustments, we significantly reduced expenses per KYC, minimised errors to zero, and enhanced overall productivity. Despite these efforts, concerns regarding the company’s future arose, prompting my decision to depart. While I initially joined Paytm due to its growth potential, uncertainties surrounding the company’s direction prompted me to pursue my entrepreneurial aspirations,” Gupta tells us.
No direction amidst rapid growth
As evidenced by various research papers and news articles, for Paytm, speed outweighs the importance of direction. Even if their trajectory is off course, they prioritise velocity above all else. And that shows in their KYC processes, says Gupta.
This accelerated growth contributed to an increase in valuation, attracting more investments. However, the failure of Paytm’s IPO highlights a fundamental difference in investor mindset. While start-up investors may prioritise innovation and market share over immediate profitability, retail investors, who predominantly participated in the IPO, seek companies with a clear path to profitability.
But Paytm’s relentless pursuit of numerical milestones overshadowed the importance of strategic alignment. This shortsighted approach ultimately undermined investor confidence and led to detrimental consequences, particularly for retail investors.
“Finding the right balance between speed and direction is crucial. In the end, it’s the retail investors who bear the brunt of the losses. Unlike institutional investors, retail investors, often from the middle class, invest smaller amounts, making each investment significant to them. They lack the time and resources to conduct extensive research, relying on concepts like mutual funds for diversified investments,” comments Gupta.
Pressure from investors
Paytm is allegedly said to be in a critical breach which involved the unauthorised disclosure of KYC data to affiliated companies, including Chinese entities such as Ant Financial, Alibaba’s financial arm. This unsettling revelation raises questions about investor influence, the motivations behind such disclosures and the company’s integrity.
“So, the KYCs data was given to the investors of Paytm. Maybe they wanted to use it for some other intention, which we don’t know of,” Gupta says.
Moreover, the involvement of Chinese investors adds another layer of complexity, as they hold significant sway in the Indian market without directly conducting business operations. This underscores the delicate balance that founders must strike between investor demands and regulatory compliance, as failing to do so could significantly impact the company’s valuation and credibility.
“Disagreeing with investors caused them to back out, lowering the company’s valuation. This happened with Paytm Mall. When investors pulled out, their valuation dropped to one percent. It means that if its valuation was Rs 100, once the two major investors stepped out of the company and sold their shares, their company’s price became one rupee,” he elaborates.
RBI vs Paytm: Clash of perspective?
The divergence of opinions between One97 Communications and the RBI can be likened to a generational gap, with each party viewing the situation from their own angle. While Paytm claims to address contemporary consumer demands, it suggests that the RBI, as an older institution, may not fully understand these needs. This sentiment echoes Ashneer Grover’s remarks and reflects similar sentiments expressed by Jack Ma regarding the Chinese government, Gupta emphasises.
Amidst the flurry of news surrounding Paytm and its operations, one prominent topic of discussion is its potential buyout by Jio. Recent media speculation about RBI’s motives, suggesting a deliberate devaluation to facilitate a discounted acquisition by Jio or others, adds further complexity. However, navigating the regulatory terrain poses significant challenges for Paytm and explicitly prohibits the sale of the bank to external parties.
The Paytm saga serves as a cautionary tale for start-ups, emphasizing the significance of ethical conduct, regulatory compliance, and foundational business principles. It signals a shift towards more conscientious partnerships and a greater emphasis on innovation to address market needs. Ultimately, it highlights the evolving regulatory landscape and the imperative for founders to uphold moral and ethical standards while navigating the intricacies of business operations.
