Is Paytm Going to Lose its Payment Bank Licence?

2024 brought one bad news after another for One97 Communications Ltd.’ Paytm as the RBI banned its lending arm from performing any banking services. The Reserve Bank of India has been tightening the regulatory framework in the banking sector to prevent people from getting involved in nefarious activity or scams.

This essential effort led to Paytm Payments Bank’s slow, painful, and very public demise. Paytm Payments Bank Ltd. (PPBL) is one of the largest payment banks in India. Despite this, it is now almost a non-existent entity as it can’t do most of its operations due to the restrictions imposed.

So, what took place that led to the downfall of Paytm Payments Bank and caused a loss of over 3 crore wallet accounts in just three months?

Before we begin exploring what the future looks like for Paytm, let’s take a look at…

Difference Between Payment Banks & Regular Banks

The establishment of payment banks was an initiative to boost financial literacy and digital penetration. In India, there are 6 payment banks in operation as of May 2024. They are:

1. Airtel Payments Bank
2. Paytm Payments Bank
3. Fino Payments Bank
4. Indian Post Payments Bank
5. Jio Payments Bank
6. NSDL Payments Bank

To easily understand the difference between the two, here’s a basic table:

How did Paytm Payments Bank Come Into Existence?

In 2014, the RBI issued guidelines for the establishment of payment banks in India. Payment banks were conceptualised as a new category of banks aimed to extend banking services to the unbanked & underbanked population, promote digital payments, and foster financial inclusion.

Recognising an opportunity to expand its offerings and reach, in January 2015, Paytm's parent company One97 Communications Ltd. (OCL) applied for a licence to operate a payments bank. In this way, Paytm, a leading digital payments platform in India, ventured into banking services.

Following the approval, Paytm Payments Bank was formally established as a subsidiary of OCL. Paytm leveraged its existing technology infrastructure, user base, and brand recognition to launch the payments bank and offer its customers a range of banking services.

In May 2017, Paytm Payments Bank officially commenced operations. It initially offered digital savings accounts with no minimum balance requirement and other banking services such as digital wallets and online transactions. Over time, the bank's offerings expanded to include features like fixed deposits, debit cards, and integrated payment solutions within the broader Paytm ecosystem.

Paytm Payments Bank soon boasted 3 crore accounts in India and over 60 crore wallets. Then, one plain morning, a circular from the RBI arrived that changed everything.

Why Did Paytm Payments Bank Was Banned by RBI?

Facing scrutiny in terms of regulatory actions won’t be Paytm’s first rodeo, as it has received warnings for irregularities in other services. This time, however, the situation was way more severe, so much so that One97 Communications Ltd. is hellbent on cutting off its lending arm.

Let’s start from the beginning. The RBI took action against PPBL in March 2022 due to concerns about adhering to Know Your Customer (KYC) norms. KYC is a crucial process for banks to verify customer identities and prevent illegal activities like money laundering.

Here's what went wrong:

a. Non-compliant Accounts: RBI found a large number of accounts at PPBL that lacked proper KYC verification. This could potentially expose the bank and its customers to fraud.

b. Suspicious Activity: Reports suggested multiple accounts linked to the same ID and transactions worth crores in these accounts. This raised concerns about money laundering.

And so, RBI barred PPBL from onboarding new customers in March 2022. PPBL was then ordered to conduct a comprehensive IT audit to identify and rectify any systemic issues. Even when no solution was found, Paytm Payment Services, the online payment business was asked to stop onboarding of new merchants in November 2023.

Eventually, RBI directed PPBL to stop accepting further deposits and wind down operations by February 2024.

This caused a major distraught for not only PPBL but for Paytm overall, as customers began withdrawing their money and closing accounts rapidly. Due to this, Paytm's playbook looked like this. ⬇️

Seeing all the regulatory roadblocks, several partner NBFCs, like Aditya Birla Finance, stopped offering loans through Paytm. The concerns about Paytm's compliance rules and potential loan defaults were way too big to ignore this time around, causing the partnership to be broken.

Paytm might have to pay guarantees offered to NBFCs, further impacting its finances. This particular roadblock is a blow to Paytm as a significant portion of its revenue comes from financial services.

Paytm has also seen high-profile exits from senior management. PPBL’s CEO Surinder Chawla also resigned, giving “personal reasons” as an excuse for leaving. Another personnel who played a pivotal role in driving the company's loan growth, Bhavesh Gupta, the former President & COO of One97 Communications, also resigned in May.

Parties Affected by the Ban

Millions of merchants and normal consumers use Paytm Payments Bank to receive payments digitally. UPI’s increasing acceptance throughout the nation led to a hike in Paytm and other digital payment banks' popularity.

However, the sudden ban on PPBL disrupted business, which disallowed consumers (merchants and otherwise) from crediting money in their accounts. Shopkeepers who relied on PPBL to accept digital payments would have to find alternative ways until they migrated to other platforms offered by Paytm or other providers.

On the other hand, there are customers who specifically use PPBL for payments. These individuals might have chosen to shop elsewhere if the shopkeeper hadn't offered alternative digital payment options.  

Revenue Loss:

When it comes to revenue, Paytm faced these losses:

a. Reduced Transaction Fees: PPBL's core function was offering basic banking services. With the shutdown, Paytm lost out on transaction fees associated with these services, like money transfers and bill payments processed through PPBL.

b. Potential Loan Losses: PPBL might have been involved in facilitating Paytm's small-ticket loan products. Restrictions on PPBL could have hampered the disbursal and collection of these loans, leading to potential revenue loss from interest earned.

c. Brand Image: Negative publicity surrounding the RBI action against PPBL could have tarnished Paytm's image to some extent. This might have deterred new users from signing up and using Paytm services, impacting potential revenue growth.

Another party affected by this was the RBI itself. Yes, I agree that the RBI was the one to impose a ban on PPBL, but this led to people raising questions about the bank's credibility. The RBI's reputation for regulating the financial system could be impacted depending on how the situation unfolds and whether PPBL can address compliance issues.

Paytm Financials & Possible Layoffs

Paytm announced its March quarter’s results a few days back which portrayed a ₹550 crore net loss. What’s surprising is that if you forget about the net loss then Paytm’s other fundamentals, say Total Revenue and its EBITDA (before ESOP) came out seemingly well.

That’s not all! Before the RBI’s diktat ban on PPBL, the operations on the lending arm was going well. Whether you look at the merchant, postpaid, or personal loans, the numbers were steadily rising with every passing month.

That’s why Paytm Payment Bank's ban came as a major shock to the merchant partners, as the bank was portraying optimistic possibilities & growth. Paytm's financial results for Q4 FY24 reflect the impact of the PPBL restrictions. It reported a decline in revenue from operations compared to the same period in the previous year.

Paytm, struggling to regain its footing after a tumultuous period, is implementing a multi-pronged strategy to return to growth. A crucial element of this strategy involves significant cost reduction, particularly in employee expenses. The company aims to save an estimated ₹400-500 crore in personnel costs over the next year, i.e., FY 2024-25.

This cost-cutting drive has translated into a wave of layoffs across the company.  Paytm employees themselves corroborate these reports. As per The Ken, managerial staff of the company have been tasked with dealing a 30% reduction in their respective department costs. This is bound to be a major round of layoff seen in the sector making hundreds to thousands unemployed.

Uncertainties & Challenges:

While Paytm's cost-cutting efforts aim to streamline operations and improve profitability, several uncertainties remain. The impact on employee morale could hinder productivity and innovation. Additionally, the company needs to ensure a smooth transition for departing employees to minimise disruptions in ongoing projects.

Paytm's ambitious goal of returning to growth by Q2 2025 hinges on the success of its cost-cutting measures and its ability to build a strong, motivated workforce moving forward. The coming year will be crucial in determining whether Paytm can achieve its turnaround strategy.

Paytm has exited the small-ticket consumer loan segment (typically under ₹50,000) offered through products like Paytm Postpaid. Instead, it’s now focusing on larger personal loans and merchant loans, which are bound to be less risky and less affected by the RBI's regulations.

If you are wondering how Paytm's lending operations are taking place, here’s the answer. Paytm now primarily acts as a loan distributor for NBFCs (Non-Banking Financial Companies). They leverage their large customer base to connect borrowers with NBFCs offering personal and merchant loans.

In simple words, Paytm doesn't take on the risk of loan defaults as it did previously. The NBFCs that provide the loans handle credit assessment, loan disbursal, and collection activities.

The Bottom Line

Now, seeing that the volume of loans disbursed through Paytm is likely much lower compared to when they offered their own small-ticket loans directly. This could mean that the new approach might not be able to generate the same revenue as before. 

So, Paytm's lending business is a shadow of its former self. The regulatory actions and strategic shift have resulted in a smaller-scale operation focused on larger loans and distribution for NBFCs. The future success of this model is uncertain, and it may not generate the same level of growth or profitability as its previous lending strategy.

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