India’s Paytm is in flux

Shares of Paytm plunged 10% on Monday, the third consecutive session of declines, touching an all-time low of 438.35 Indian rupees (or $5.28) after the RBI’s clampdown last week looks to have had a more extensive impact than previously anticipated.

The trading was halted after Paytm’s shares fell 10%, the artificial limit put on its daily trade by the local exchanges. Even as Paytm initially anticipated RBI’s decision to have a maximum annual impact of $60 million to its business, the financial services firm has shed about $2.5 billion in its market cap in three days, or more than 40% of its value since Wednesday close. (Paytm’s market cap on Monday stood at $3.35 billion, below the $3.4 billion valuation at which it raised capital from Ant Financial in 2015 and far below its IPO valuation of $20 billion. More on numbers here.)

The Reserve Bank of India (RBI) last week widened its curbs on Paytm’s Payments Bank, which processes transactions for Paytm, barring it from offering many banking services, including accepting fresh deposits and credit transactions across its services. In response, Paytm initially said it will terminate business with its affiliate and seek partnership with other banks.

However, uncoupling Paytm from its affiliated Paytm Payments Bank appears to engender additional difficulties, both technical and perceptual.

TechCrunch first reported last week that the RBI is considering canceling Paytm’s Payments Bank license. In early 2018, when Paytm received the Payments Bank license – which allows the holder to offer customers a savings account of up to $2,400 – it had to surrender its PPI license, the permit required to operate the wallet business.

Paytm Payments Bank houses more than 330 million wallet customers and Paytm cannot transition them to a different banking partner until the central bank returns the firm its PPI license. And it’s unclear if the central bank – which has been uncharacteristically strong-worded in its penalty order on Paytm – will make any concessions by the deadline (February 29). Indian daily Hindu Businessline reported on Sunday that Paytm is trying to sell the wallet business.

And that is not the only other license at stake. As Bengaluru-based fintech investor Osborne Saldanha adds:

The obvious, direct impact is that Paytm’s payment banking operations will be halted until RBI releases further instructions. It is however unclear if RBI will allow Paytm to ever resume payment banking operations even post compliance with RBI’s requirements as the notification does state any remedial clauses. It’s entirely possible that RBI may cancel Paytm’s payment banking license altogether. If that happens, bear with me as I’m not able to conclusively decipher, but it seems Paytm might not even have a payment aggregator license, as the payment aggregator license would have resided in the payment bank license and Paytm’s application for a payment aggregator license was returned by RBI.

In its notification last week. the RBI said Paytm’s “persistent” noncompliance with an earlier order — from March 2022, when the RBI ordered Paytm to stop adding customers to Payments Bank — raised supervisory concerns and warranted further actions. The RBI said an audit found the instances of noncompliances, but didn’t go into details.

The local media reported last week that Paytm Payments Bank was riddled with issues such as money-laundering and that India’s crime-fighting agency Enforcement Directorate was probing the firm. Paytm declined (PDF) that the ED was conducting any investigation, and in a townhall with employees on Saturday, Paytm’s senior executives assured that the issues reported in media were “old” and had been fixed “long back,” TechCrunch first reported.

As we attempt to understand the full extent of the potential damage from the RBI’s initial ruling to Paytm, the company is already beginning to bleed customers and merchants. As Macquarie analyst Suresh Ganapathy pointed out on an analyst call last week, many Paytm customers are already harbouring the belief that Paytm is defunct.

“We anticipate this to dent Paytm’s consumer brand credibility that could drive market share losses in segments Paytm dominated in the past,” JPMorgan analysts said in a note last week.

The ongoing episode with Paytm is also shaking the confidence of investors in the Indian fintech market. The RBI has introduced a series of regulatory changes — or clarifications —  in the last three years and fintech as a sector was already becoming hostile for many VCs.

“I believe this action against Paytm is precedent-setting, harsh and impacts the broader financial services ecosystem in India. I don’t remember the last time RBI canceled the license of a bank for reasons other than adequate capital requirements,” Saldanha added.

Bipin Singh, co-founder of financial services firm MobiKwik, defended the RBI’s rationale: “Having worked with the regulator closely over the last decade or so, I can say conclusively that RBI is neither against innovation nor against fintechs. If they were, we wouldn’t have the huge fintech ecosystem in India today. Compliance, however, is not negotiable,” he tweeted.