Tech or Trust, Regulators Decide Not founders

What are the stark differences between fintech and banks? How does fintech's speed-focused tech platform clashes with banks' trust-oriented approach. KYC lapses in fintech sector prompt broader regulatory scrutiny. Read on for details.

Swati Dayal
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Paytm's Mahadev

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The difference between a fintech and a bank becomes stark when the regulatory lens falls on the latter. Fintech’s believe in speed and they see themself as tech platforms while banks position themselves as trust platforms. This conflict between tech and trust becomes real as fintech migrate from being unregulated to regulated entities. Some are able to do this migration most are not able.

Knowing the customer is strategic for all business, but in the banking sector, it becomes mandatory as it is the public money at stake. Banks have fiduciary responsibility to not just one customer but all customers as they have entrusted them with their funds which are leveraged to create financial lending models. The leverage is allowed as long as the banks do not take risk with the base capital of the depositors. Banks and fintech are all leveraged financial institution and the leverage can be high compared to the equity maybe 95:5 debt equity is common in banks. Leverage is risk, this freedom to take risk is only given because the banks follow very stringent guidelines to protect their depositors Leverage or the speed of leverage changes dramatically in the digital world.

In a digital era, money launderers are always looking for loopholes to transfer or leverage their funds through the banking or fintech networks.

 Gaming or gambling apps are utilized for money laundering and terrorist financing globally, investigations into the Mahadev Apps online betting app have uncovered the use of fake UPI accounts through platforms like Paytm's payments banks and other fintechs too. Fintech derived their valuation from number of users and did not follow the simple procudures for KYC which even telecom companies do for subscribers.

The regulatory action taken by the RBI on Paytm Payments Bank raises questions about the manner in which Mahadev online betting app could leverage it for sending money abroad.

Some of the leading media houses have already published information suggesting a link or regulatory action. However, following the RBI's suspension of Paytm's Payments Bank’s banking license, experts are unveiling more aspects of this unfolding story.

The Reserve Bank of India's (RBI) regulatory action against Paytm Payments Bank has raised concerns about the misuse of fintech platforms for money laundering and avoiding taxation. If the  1,536 acts and rules and over 69,000 compliance obligations, that are part of the financial regulatory ecosystem were to be strictly applied to fintech firms it will seriously slow down their growth.

 The Minister of State for Information Technology Rajeev Chandrashekhar has also strongly supported has strongly supported the Reserve Bank of India's regulatory measures against Paytm Payments Bank, , emphasising that these actions have underscored the necessity of legal compliances for the fintechs.

KYC Lapses in the Fintech Sector or More?

Apart from Paytm, there are several fintech companies, including a leading payments aggregator and wallet service provider, which are likely to face regulatory action due to lapses in their know-your-customer (KYC) processes. This follows the RBI's move to impose restrictions on Paytm Payments Bank on January 31, barring it from offering banking services post February 29, 2024.

“The problem is not only at the Fintechs' side but also on the regulator side. There is a gap in the regulatory system because of which the digital or gaming apps were able to by pass the existing banking networks and transfer funds from India almost like a parallel havala system. This is a reflection not on the fintech community but also how the regulator is still playing catch up with digital channels for moving money," Mr Yatish Rajawat, a Policy Commentator told TICE News highlighting potential shortcomings in both fintech companies and regulatory oversight.

“Compared to traditional banks, so are these KYC systems put in place by and for fintech companies not strong enough," emphasised the expert, highlighting the need for robust customer verification systems aligned with global standards.

Is the Mahadev Betting App Linked to Paytm?

The regulatory action against Paytm Payments Bank stemmed from compliance lapses in its KYC process. What is interesting is the discovery of these lapses coincided with an investigation into the Mahadev app, shedding light on potential issues with other payment companies. While it is not been clarified by RBI that how did one lead to the other but the lapses in PPB were noticed in earlier audits by RBI.

The Financial Intelligence Unit (FIU) is reportedly contemplating an investigation into Paytm's Indian payment gateway amid suspicions of its involvement in illegal betting transactions linked to the Mahadev online betting app. Allegations indicate that fraudulent UPI accounts associated with the app may have facilitated money laundering through various payment gateways, including Paytm.


"Did the Mahadev App investigations lead to the discovery of Paytm's lapses in regulatory norms?  Some of this money laundering was done by politically exposed persons, which are to be specifically identified in all KYC compliances?" Mr Rajawat tells TICE News that this will come out once the name the details of the investigations are disclosed. The regulators and investigating authorities are yet to disclose the extent and extant of the compliance lapses across fintechs.

The FIU has detected around 50,000 bank accounts without proper know-your-customer (KYC) documents, triggering suspicion of money laundering, ET reported While 30,000 of these accounts were linked with Paytm Payments Bank, additional probe is being launched into the rest of the accounts.

The FIU report on Paytm Payments Bank was reportedly given to the RBI four months ago. The list of violations by the Paytm bank is not just limited to KYC violations, but include other irregularities.

Now, FIU has broadened its investigation into other payment banks, seeking information under Section 13 of the Prevention of Money Laundering Act (PMLA).

According to HT ReportED was also probing the Mahadev app scam and detected about 10,000 UPI accounts registered with Paytm that were allegedly being used for money laundering.

Legal Framework and Regulatory Bodies

Under the Prevention of Money Laundering Act (PMLA), financial institutions must maintain records of transactions and customer identities. The FIU analyzes this data, sharing it with enforcement agencies and regulatory bodies like the RBI. More payment banks may face regulatory action over KYC violations and potential money laundering, indicating a broader issue within the sector.

Regulators, including the Securities and Exchange Board of India and the Insurance Regulatory and Development Authority of India, play a crucial role in ensuring financial entities adhere to anti-money laundering norms.

The Global Perspective: Financial Action Task Force (FATF)

India's financial institutions are currently undergoing a Financial Action Task Force (FATF) audit, evaluating their preparedness to combat money laundering and terrorism financing. Adherence to high KYC documentation standards is crucial for staying on the green list of FATF, avoiding global financial sanctions, and attracting foreign investment.

Regulatory Action and Digital Lending Guidelines

The recent regulatory action by the RBI extends beyond KYC lapses. The Guidelines on Digital Lending have been implemented to curb digital loan fraud cases. The guidelines mandate that loan disbursals and repayments occur only between the borrower’s bank accounts and regulated entities. Additionally, automatic credit limit increases without explicit borrower consent are prohibited.

RBI Governor affirms support for fintech sector and commitment to safeguarding customers' interests.

Dr Shaktikanta Das, RBI Governor last week strictly come down on the fintech for flouting norms. He had said that while the central bank is supportive of the fintech sector, it is also committed to protect the interests of the customers as well as ensure financial stability.

Das said the RBI promotes and will continue to promote fintech, but customer interests and financial stability is of prime importance.

“There should not be any doubt about RBI's support for the fintech sector,” he said.

Paytm Payments Bank: A Case Study

The RBI's action on Paytm Payments Bank is the result of a four-year dispute involving issues such as IT segregation, risk management, and persistent violations of KYC and customer onboarding norms. The ongoing scrutiny underscores the importance of compliance and governance in the fintech sector.

The regulatory landscape for fintech companies is evolving rapidly, with a focus on strengthening KYC processes and preventing fraudulent activities. The industry must align with global standards to ensure the integrity and security of financial transactions, fostering trust among regulators, customers, and investors alike.

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