RBI Ban On PayTm Payments Bank: A Wake-Up Call For The Thriving FinTech Sector

Though PPBL’s over 5.5 crore customers need not worry about their deposits, the RBI action has shaken customer confidence prompting many businesses into knee-jerk reactions. Even when there will be no disruptions in PayTm savings accounts, wallets, FASTags, and National Common Mobility Card (NCMC) accounts, several businesses even refused online transactions through the PayTm payments app, though PPBL and the PayTm digital payments platform are two separate businesses.

Not only has Vijay Shekhar Sharma, founder chairman of One97 Communications Ltd, issued a statement saying PPBL will take immediate steps to comply with RBI directions, the company has been trying to reach out to customers to reassure them through various channels including social media.

Damage control measures have done little to salvage the situation, so far. Information and news related to PayTm have been trending on social media since the RBI notification on Wednesday. Needless to say, the company’s stock prices nosedived as well.

Finance Minister Nirmala Sitharaman has refrained from commenting on the PayTm episode. But the minister did say the RBI move was aimed at protecting consumers and the digital payments space.

Why Was PPBL Hauled Up?

This is not the first time that the banking arm of PayTm has been censured. From time to time, the bank, set up in 2017, has been found to be violating regulatory norms surrounding Know Your Customer (KYC) guidelines leading to frauds. Issues related to cyber security have also come up.

A Reuters report said the bank could even come under the purview of the Enforcement Directorate (ED) if fresh money laundering charges emerge. PayTm, however, denied the allegations and said it hadn't received any queries from any of the agencies named in the news reports.

Barely three months ago, the bank was slapped a penalty of Rs 5.39 crore for violating regulatory guidelines. “There have been lapses and these problems have been there for sometime but the management turned a blind eye...this was coming,” an insider said.

Ashvin Parekh, banking expert and managing partner APA Services, said RBI’s move was necessary to ensure all payments banks (PBs) adhere to regulatory norms. “Despite the consequences, RBI has had to step in—this was due to PPBL’s non-compliance. The message is clear, all payments banks must adhere to regulatory norms set out by RBI,” Parekh said.

Impact On Payment Banking Space

The RBI move is a wake-up call for payments and small finance banks. Experts said the going for these banks is getting tougher and the recent incident could provide a fresh jolt to existing players. A few of them have been flouting norms and even compromising with KYC guidelines. A source said other PBs, such as Airtel and Fino, could spring into action and scrutinise their existing processes.

“Most of the PBs are facing the same issues, it is not just PayTm Bank,” the source added.

The PBs, much like the small finance banks, operate at a much lower scale compared to regular banks. Set up to increase financial inclusion and primarily serve the unorganised sector, the PBs are allowed to accept deposits of only up to Rs 2 lakh per customer. They are also barred from providing loans.

"But the players have often been blamed for oversight or breaking the norms that cannot be accepted, this involves public money and the RBI stand on PPBL, therefore, has not come as a surprise,” a government official said.

Will PayTm’s Payment Services Be Hit?

Technically, the RBI ruling on PPBL has no implication on PayTm’s digital payments platform, which deals with several other banks as well. Though the news has dealt a blow to PayTm users, Parekh said it would be business as usual for the digital payments platform very soon.

“A lot of this is due to lack of knowledge... the fact is PPBL is clearly a separate business and the digital payment service is different. The digital payment platform will not have any serious issue and this reaction that we see today could be short-lived,” Parekh said.

Will RBI Move Hurt Financial Inclusion?

Based on recommendations of the Nachiket Mor Committee, RBI allowed a host of business entities to enter the payment banking space in 2015 after which payment banks and small finance banks came into being. Among the 11 entities that got RBI’s in-principle approval, only a few continue to be in business.

The main challenge for these PBs, such as those of India Post, Airtel and Fino among others, has been a thin customer base. Several analyses have highlighted that RBI’s rather stringent guidelines for PBs are proving to be a roadblock for more players to enter this space.

In addition, the Supreme Court’s 2018 ruling barring private entities from using Aadhaar cards for KYC authentication hit PBs as it led to confusion. As a result, these banks lost precious months as they refrained from opening any new accounts due to lack of clarity on the ruling. Once it was clarified, the banks returned to normal operations.

The GSMA, which represents the interests of mobile network operators worldwide, highlighted in a blog that these banks “seem to have been at a receiving end of a regulatory arbitrage where their offering is no different from a payments aggregator (or the fintechs providing payment solutions) but with comparatively stringent regulatory and compliance requirements”. It also said the compliance-related challenges have become a stumbling block and has eroded the initial euphoria.

Going by RBI’s own admission earlier, the customer base of payments banks is yet to develop fully, which, in turn, is making break-even challenging. Many said it is time for RBI to look into its regulatory guidelines as well.

“The stringent regulatory regime laid by the RBI has strengthened India’s banking system, winning global accolades but it is also important to remember these guidelines need to be revised keeping in mind the changing needs of the time. The regulatory guidelines should not become an impediment to the growth of the industry,” a legal expert pointed out.

Future Of India’s Fintech Sector

India’s fintech industry has been one of the fastest growing markets globally, driven by digital payments, lending, and blockchain among others. The total digital payment transactions volume in India increased from Rs 2,071 crore in FY 2017-18 to Rs 13,462 crore in 2022-23. The Unified Payment Interface and the emergence of e-wallet players have led to a booming cashless society, according to data portal Statista. In fact, India’s robust fintech industry was one of the highlights at the G20 summit in New Delhi last year.

Now, the RBI move has prompted several fintech companies and startups to wake up and smell the coffee. Ashneer Grover, BharatPe co-founder, said RBI’s action would “kill the sector”.

“I don’t understand RBI. Clearly, RBI does not want FinTechs in business - of late all regulations/moves are against Fintechs. Such moves will kill the sector altogether,” he wrote on X (formerly Twitter) and even urged the finance ministry and the Prime Minister’s Office to step in.

“Startups have been the biggest creators of market cap and employment in last decade. Today IIM and IIT are struggling to place people - we as a country cannot afford such overreach ! Tom-Tom-Ing @UPI_NPCI to the world and punishing pioneers in the space is pure ‘doglapan’ (duplicity),” he added.

Experts don’t agree entirely: they maintain the fintech sector would continue to remain robust despite a decrease in funding, referred to as a “funding winter”, since 2023 due to geo-economic issues, borrowing costs etc.

As per Statista, the fintech sector has demonstrated remarkable resilience in spite of these difficulties. “This resilience was bolstered by regulatory measures and a strong commitment to digitalisation. The sector is expected to experience long-term growth, driven by factors such as a young, tech-savvy population, an expanding consumer base, reliance on informal financial and commercial systems, and government-led digitalisation initiatives,” it said.

The bottomline- while the payments and small finance banks need to tighten regulatory systems and processes, RBI too may need to ease certain norms to boost the fintech industry growth and digital economy.

(The author is a New Delhi-based independent journalist with nearly three decades of experience in covering banking, finance, and public policy. Views expressed are personal)