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Fintech Fear Factor: A Bird's Eye View of the Paytm Crisis

Paytm's decline prompts fintech industry scrutiny. Who dominates UPI? How RBI actions raise reliability concerns? Investors remain cautious, urging regulatory clarity? Paytm's downfall sparks fear amongst fintechs. Know what the experts opine.

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Swati Dayal
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The recent fall of the fintech giant Paytm has sent shockwaves throughout the entire ecosystem, leaving startups, banks, investors, and top talents in a state of panic. As the industry grapples with the aftermath, it becomes crucial to delve into the market dynamics, the business models of fintechs, the underlying issues within the industry, and why fear has permeated its key players.

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Is Paytm The Biggest Player in the Fintech Space in India?

Examining the National Payments Corporation of India (NPCI) data, the top three UPI transactions by value are dominated by PhonePe, Google Pay, and Paytm. With Paytm facing challenges, PhonePe and Google Pay stand to benefit. As of December 2023, PhonePe held a 46% share in UPI volumes, followed by Google Pay with 36%, and Paytm Payments Bank with 13%.

UPI Market share

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Dr. Yerram Raju, an economist, emphasizes the pivotal role of digitalization, noting that businesses swiftly adapt to alternative platforms amid the digital shift.

Dr Yerram Raju

Talking to TICE News, Dr Raju, an economist and risk management specialist says, “There has been a chorus on digital banking since 2010 when the Fintechs came into being. Brick and mortar banking, rather branch banking in physical form, was considered archaic and would serve limited purpose for effective future banking. 

Dr Raju is presently the Founder Director of Telangana Industrial Health Clinic Ltd. 

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Someone’s Loss Is Other Person’s Gain

With Paytm's decline, Walmart-owned PhonePe and Google, already a major player, are likely to gain more prominence. However, any migration of merchants or banking partners is contingent on RBI approval. The situation underscores the industry's reliance on regulatory decisions and the potential impact on user preferences.

Sharing a real life experience, Dr Raju says, “The ease of payment transactions through a smart phone gave the real push. I was not surprised to see a person seeking alms in front of a local Sainath Temple holding a QR Code of a Fintech for his daily activity. He confirms that his daily earnings improved twice after he opened account with the Paytm!! He does not know that with the present directive of the RBI, ere long, his deposits would do a vanishing trick. I told him what is in store for him and the need for him to quickly change the account and withdraw his deposit and move to his Jan Dhan Account with a public sector bank.”

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Why Did PayTM Payments Bank Get Into Bad Books of the RBI

The Paytm saga has prompted scrutiny from the Reserve Bank of India (RBI) due to concerns about money laundering and questionable transactions.

Dr Raju elaborated that "Of course, the concerns of the RBI on Paytm arose on account of money laundering and several questionable transactions between Paytm and the parent bank. There were reports of non-compliance of the KYC, single PAN for multiple customers’ accounts and these led to the drastic measures announced by the regulator. Operational risks somewhere missed the radar and tightening the belt in this area is required in regard to all the fintech companies. A special Risk Audit of all the fintechs and a transparent report of such audit would instill greater confidence in the retail customer. Sooner it is done, the better would it be."

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What Are The Issues with Fintech Industry?

The RBI's decision to ban fresh deposits and top-ups in Paytm Payments Bank has raised questions about the reliability of fintech as a bankable entity. Several regulatory interventions, such as Account Aggregator, Bharat Bill Payment System, Prepaid instruments, Offline UPI payments, and Rupay Credit Card via UPI, instilled confidence in customers. However, Paytm's ban has cast doubt on the safety of other digital wallets, raising concerns about the industry's overall reliability.

Ashish Jain

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Ashish Jain, Co-Founder of The Startup Board, points out challenges related to the unavailability of digital KYC through Aadhaar. 

"Unavailability of digital KYC through Aadhaar. Since the time Aadhaar has been made voluntary, fintech companies are finding it costly, time consuming and involving more effort in getting the compliance done.

This is true for every fintech provider, irrespective of whether you are PhonePe, CashKaro, Slice or any other. That is the reason Industry is voicing concern for reducing the punishment proportionate to the non-compliance, instead of blanket ban. Only difference is extent of non-compliance. Whoever grew faster, have lax processes and unskilled field personnals onboarding merchants and customers. Had it been Aadhaar seeded, physical KYC could have been saved and compliance could have been higher," he said.

Another point raised by Mr Jain was that field staff rarely gets incentive on onboarding with KYC compliance. They get incentive on onboarding. " Compliance will be taken care of later" is the attitude.

Why Are All the Players in Fear?

Prakash chawla

Mr Prakash Chawla, Independent Senior Journalist and Analyst, explains, "The Paytm crisis arising out of RBI's stringent action against the pioneer of payment bank which had built the powerful brand in the digital financial services, has created an environment of fear amongst the entire fintech industry. The fintechs, celebrated as stars of the Startup ecosystem are caught unaware by RBI which has sent a strong message that it would brook no leniency for irregularities or procedural non-compliance in the financial sector. The fintechs have teamed up into a huddle , and came out with a statement cautioning that the RBI action may discourage innovation and technology upgradation. Worried fintechs do have a point! 

But then RBI too has a point and a stronger one. While fintechs witnessed a remarkable growth and took formal credit to individual entrepreneurs, roadside vendors and small traders, rationality of being prudent and strictly compliant with the financial regulatory environment was somewhat being lost sight of.  They did not realise, banking and finance business is not like selling beverages; it is a highly regulated sector anywhere in the world. Is it over-regulated in India? One may argue so, but the sheer nature of borrowing and lending demands strict regulation. I suspect some of the new age promoters did not realise the gravity of the risks if foolproof systems are not built into their businesses. Post Paytm saga, they will have to invest heavily into building resources for regulatory compliance and systems. They need to take cues from public sector banks or some of the large well established private sector lenders. The PSBs and private banks have transformed themselves into  excellent technology platforms along with their traditional systems.  It is not the end of road for fintechs,but sooner they fall in line with the RBI regulatory regime, better for their forward journey."

Meanwhile, Dr. Raju emphasizes that a single failure should not unsettle the entire system, urging regulators to build confidence and sound alarms when necessary. 

"A single bank failure or the failure of a technology-based financial institution should not unnerve the entire system. The responsibility of the regulator lies as much in creating confidence in the system as raising the right alarm in good time. It is the UPI that should make positive sounds now and resurrect confidence of millions of wallet users of different kinds," he says.

Dr. Raju stresses the need for a transparent risk audit of all fintech companies to bolster retail customer confidence.

He explains “Asia-Pacific financial markets are more vulnerable to fintech failures than successes, for the reason that at least 80 percent of customers are not digitally educated. Operating a mobile transaction cannot be classified as digital knowledge.”

What Do The Investors Think?

Anil Joshi, Managing Partner at Unicorn India Ventures, views Paytm's impact as specific to the payment sector.

Anil Joshi Unicorn India Ventures

"Fintech is a large space and one of them is payment, Paytm did got impacted due to change in policy and may  impact other fintech space. However considering the wide space and gaps we will see many new emerging solutions. As long as the companies are within the policy framework with large addressable market will always attract investors. While Paytm is impacted so is Vijay Shekar Sharma, this is not the first time he has seen challenge and will continue to witness as they progress, Vijay has always found a way to move on with innovative business idea and this time also he will bounce back. Very unlikely that the investors confidence will impact negatively just that the investors will be cautious on business where regulatory clarity is less.”

What is the Corporate Interest?

Amid rumors of Jio Finances acquiring Paytm Wallet and Paytm Payments Bank, the company dismisses the speculations as baseless and factually incorrect. Examining Paytm's shareholding pattern,

Dr. Raju calls for a deeper investigation into the issue of licensing fintech as a payment bank, given that a significant portion is held by one individual, Vijay Shekhar Sharma.

"Now let’s have a look at the shareholing pattern of Paytm. Dr Raju says, “If we look at the happenings of the Paytm Bank, only 49 percent of the shares are held by multiple share holders while the rest is held by just one individual, Vijay Shekhar Sharma, a deft operator in digital banking and risk management. When we look at this pattern of shareholding, which would be known only to very few persons, the issue of licence to operate the fintech as a payment bank needs a deeper investigation,” he says.

The downfall of Paytm serves as a wake-up call for the fintech industry, prompting a reevaluation of compliance, risk management, and the overall reliability of digital platforms. As the sector navigates through this crisis, regulatory clarity, transparent risk audits, and industry-wide improvements are imperative to rebuild trust and ensure the sustained growth of fintech in India.

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