Fintech industry shivers in wake of RBI's Paytm crackdown – What's next?

The Reserve Bank of India (RBI) has dealt a severe blow to Paytm Payments Bank Ltd (PPBL), the digital banking unit of One97 Communication, by prohibiting it from offering all banking services. This decision, announced on January 31, has sent shockwaves throughout the fintech industry, with many considering it one of the harshest actions taken by the regulator against a fintech company in recent times.

The RBI's notification dictates that PPBL cannot onboard new customers and must cease all basic services, including UPI, Immediate Payment Service (IMPS), bill payments, and accepting deposits, effective February 29.

While some industry insiders hope for a resolution, others view this as a potentially fatal blow to the payments bank. Even if the embargo is lifted or Paytm addresses the issues, PPBL may struggle to recover as customers are likely to withdraw their deposits.

Fintech leaders express disappointment with the RBI's decision, with one stating that it's a sad day for fintechs and suggesting that the regulator could have imposed penalties instead of destroying the company completely. Another founder, speaking anonymously, believes this move will harm the spirit of the fintech sector and deter new players from entering the banking business.

PPBL, one of the largest profitable payments banks, has faced scrutiny since 2022 due to "material supervisory concerns." The RBI had earlier barred PPBL from onboarding new customers on March 11, 2022, and instructed a comprehensive audit of its IT system. Despite Paytm's claims of cooperation, the regulator remained dissatisfied, citing violations of KYC norms, data storage, data privacy, and outsourcing of data.

Fintech experts speculate that PPBL's independent IT system and potential misuse for non-KYC accounts may have triggered the regulatory action. Fintech founders express shock over the development, anticipating a ripple effect on the ecosystem.

Bernstein, an investment research firm, expects no immediate impact on Paytm's UPI business and loan distribution but highlights potential risks to payment margins, especially for higher-margin products dependent on the Payments bank entity (PPBL), such as wallets and FasTag. The overall sentiment is that this regulatory action underscores the uncertainties surrounding Paytm's business model and its relationship with regulators.