Paytm Payments Bank, Wallet Woes Explained: What are the Options Before the Company?

The Reserve Bank of India (RBI) had last month restricted Paytm Payments Bank Limited (PPBL) operations, citing “persistent non-compliances and continued material supervisory concerns in the bank” in the audit report. The RBI also asked the PPBL to stop accepting new customers, and deposits, credit transactions, or top ups in customer accounts, wallets, FASTags.

Paytm stocks have plunged more than 40% in three trading sessions since the RBI’s announcement. During the press conference on Thursday, the RBI reiterated its stance on Paytm, and stressed that they had been given sufficient time to address the issue, but failed.

Paytm founder, Vijay Shekhar Sharma, has requested the extension of February 29 deadline, along with a transition plan, in the ongoing efforts to meet the requirements set by the RBI.

How Does Paytm Make Money?

The customers make payments on the app through Unified Payments Interface (UPI), net banking, credit cards and digital wallet. It makes 38% of its revenue from processing payments for merchants in Q3 of FY24 and 21% from processing payments for consumers, according to Moneycontrol.com.

Paytm also uses its customer base to sell other services such as broking, movie and travel tickets, and cloud services. For merchants, the app offers small-time business loans or Paytm commerce services to increase sales with tickets, gift vouchers.

Analysts believe that Paytm’s more profitable business include cloud and commerce services.

How RBI restrictions will impact Paytm

RBI guidelines for licensing of payments banks say entities cannot directly undertake lending activities. The other issue is about PPBL’s governance structure. Paytm owns 49% of PPBL, and the remainder is held by Vijay Shekhar Sharma. One97 Communication (OCL) initially argued that PPBL is run independently by its management and board.

News publication NDTV Profit recently learnt that over 1,000 accounts were found to be linked with the same PAN to their accounts. Thus, creating concerns about money laundering.

PPBL has 33 crore Paytm wallet accounts, that is, the wallet money is kept in the PPBL escrow account. This can no longer remain in PPB, according to Macquaire, as quoted by MoneyControl.com. If Paytm cannot find another bank to host it, then the customers will have to withdraw money in their wallets, and won’t be able to add more money. This can collapse the wallet business, as mentioned in Moneycontrol.com

Road to Transition

It can continue to be the UPI third-party application just like Google Pay and Amazon Pay, but this will depend on the National Payments Corporation of India (NPCI), and Paytm finding a bank willing to host its nodal account.

If PPBL loses its licence, it will need another sponsor bank, which will be held responsible for Paytm’s actions, as per Moneycontrol.com

It further said it intends to expand third-party bank partnerships for merchant acquiring services (providing essential infrastructure for acquiring merchants for helping them access payments) with other banks.

According to The Hindu, President and Chief Operating Officer (COO) Bhavesh Gupta, said the transition will take place in three stages. The first would be finding an interested partner bank to integrate with the necessary Paytm ecosystem. Second, assessing the ensuing commercial viability and finally, facilitating the account-to-account migration.