The Reserve Bank of India (RBI) on Wednesday ordered Paytm Payments Bank to stop all forms of banking services — including accepting deposits and processing of payments — within a month. The central bank has put a freeze on all basic transaction services through Paytm’s various platforms using Unified Payments Interface (UPI), IMPS, Aadhaar-enabled payments and others, effective February 29.

The disciplinary measures are seen as unprecedented for the financial services industry, and will affect the app’s users as well as the wider merchant community that uses the Paytm network for payment processing, wage disbursals and other quasi-banking functions.

“Customers using the Paytm application for UPI and wallet payments, where the underlying bank account might be with a different bank, should be able to continue operating normally, but those using the bank account will have to stop doing so from February 29,” said a person in the know.

Paytm also offers a wide range of products across travel, movie tickets and others, which will continue as before, said the person.

“This is huge and the impact will be at multiple places,” said a senior industry executive. “There are many small enterprises that use Paytm for salary payments. They will face major issues.”

The payments bank is part-owned by One 97 Communications, while the app is owned by One 97, and not the bank.ET’s mailed queries to Paytm remained unanswered until the publication of this report.The order is expected to disrupt Paytm Payment Bank’s Fastag users and National Common Mobility Card (NCMC) holders in a major way. The bank supports these services fully.

Paytm Page 1 GFXETtech

In December, 57 million transactions were reported through Paytm Fastags, among the highest in the industry.

RBI has also asked all nodal accounts held by One 97 and Paytm Payments Services to stop such services by the end of this month.

Paytm Payments Bank must stop accepting deposits and credit transactions or any form of top-ups in its wallets too. New customer onboarding was banned for the bank from March 2022. Now, even existing customers will not be allowed to add money to the payments bank accounts.

To ensure funds held by consumers do not get stuck, RBI has allowed withdrawal and utilisation until a credit balance is available in the Paytm account. However, adding of fresh funds will not be permitted after February 29.

The company made its stock market debut more than two years ago, one of the biggest initial public offerings (IPO) in India. It has seen its stock more than halve since though lately, the scrip has climbed, closing on January 31 at Rs 761.

One 97 closed the December quarter with total revenue of Rs 2,850 crore and a net loss of Rs 222 crore. It has a market capitalisation of more than Rs 48,000 crore.

Cracking the whip

The central bank has meted out harsh penalties earlier too. It stopped HDFC Bank from issuing credit cards — one of the lender’s most profitable products — for less than a year and from launching new digital initiatives between December 2020 and March 2022.

It had also stopped Mastercard and American Express from issuing new cards because of data localisation violations.

However, the purview of the order is vast in the case of Paytm.

In nodal accounts of One 97 and Paytm Payments Services, all transactions initiated before February 29 need to be settled by March 15, after which no such transaction will be permitted, the regulator said.

A nodal account is a special purpose account created to accept payments from different bank accounts and forward to merchants. This is used for online merchant payments as well as offline payments through point of sales terminals. By using such accounts, payment companies can track fund flow to merchants, block fraudulent merchants and also offer pay out services.

“This is bound to disrupt their (Paytm’s) payment services for both online and offline merchants. While they may eventually settle directly in another bank account, it will surely create a lot of disruptions,” said a senior banker with a Mumbai-based private sector bank.

One 97, which owns Paytm, has a 49% stake in Paytm Payments Bank, with the remaining is owned by founder Vijay Shekhar Sharma. In its IPO prospectus filed in 2021, Paytm had called out its dependence on the bank for many of its services.

Many of the payment channels, such as the wallet, Paytm UPI, NACH, Fastag and fixed deposits are offered on the app by the bank in accordance with the respective agreements executed between the two entities, the company had said in its public listing documents.

This shows that the impact of the order would be felt on wallet customers too. Paytm might need to move a lot of backend services for its wallet offerings to other banks now.

Curbs had been coming

The regulatory action on January 31 is not out of the blue. Paytm Payments Bank has been under an embargo from adding new customers from March 11, 2022.

In its latest order, RBI said a thorough external audit of Paytm revealed “persistent non-compliances and continued material supervisory concerns in the bank.”

The bank received a showcause notice from the regulator on July 29, 2021, regarding shifting the bill payments unit from Paytm to the bank. RBI had then imposed a fine of Rs 1 crore on the bank.

Overall, the fintech major has faced multiple regulatory hiccups on its route to become a full stack financial services player. It wanted to start an insurance business, but its application for a general insurance licence remains pending.

The company did not manage to get a payment aggregator licence either, though rivals Razorpay and Cashfree got the nod in December last year.

Industry watchers then pointed to the Chinese shareholding in the company for these setbacks. Eventually, China’s Alibaba has sold its entire stake in the payments company.

RBI is seen to be extremely serious about data localisation and its action against Paytm could be a result of issues around data storage and access. “It is of paramount importance for any business enterprise in the tech space or handling data for any business purpose, whether regulated or not, to store data within the territory of India to protect data of the users. It seems the action taken by RBI is more from a data security and national security perspective,” said Rishabh Mastaram, founder, RGM Legal.

(You can now subscribe to our ETMarkets WhatsApp channel)


Source link