CIOInsider India Magazine

Paytm’s constant battle against the regulatory upheaval is a major example of the precarious balance between ambition and compliance in the financial technology ecosystem. Seen as a founding father who inspired the start of a fintech chapter in India, Paytm pioneered the usage of QR-code much before the demonetization in 2016. The fintech major basked in the glory of being valued nearly $ 20 billion since the time of its initial public offering (IPO) in 2021. This year, its shares crashed about 50 percent amid high-profile exits, the Reserve Bank of India’s ban on some of its businesses and the fresh reports about some lending partners revoking loan guarantees due to repayment defaults from customers. This led the fintech major back to square one of restructuring its strategic overhaul in response to the regulatory upheaval that forced shut its payment bank business.

Glory Days
PayTM’s role significantly helped foster the advancement of digitization of the cash-based economy. When cash was becoming scarce during the demonetization incident, PayTM stood as the only entity that benefitted from the misfortune. It had millions of Indians flock towards seeking aid from its services after high-denomination currency notes worth Rs. 500 and Rs.1000 were deemed illegitimate. At the time, its user-friendly digital wallet quickly not only helped ease the transaction concerns of users, but increased Paytm's performance which eventually positioned it as a major participant in the developing fintech market in India.

The Launch of Paytm Payments Bank
PayTM launched Paytm Payments Bank and its app's Bank feature in 2017. The Paytm Payments Bank rose to stellar heights thanks to the growth of its wallets, bank accounts, KYC customers, and burgeoning onboarding of users each month. It became one of the largest issuers, leading in FASTag issuance with over 80 lakh units. Numerous services, including IMPS, NEFT, RTGS, UPI, FASTag, and Netbanking banked on Paytm Payments Bank.

However, Paytm soon found itself caught in a kettle of fish with PayTM Payment Bank that progressively undermined its formerly unchallenged standing. For the fintech behemoth, the latest regulation by the RBI against the PayTM Payments Bank has opened a Pandora's box of issues.

A Series of Missteps
Starting from 2019, Paytm Payments Bank overlooked a specific account which is believed to have caused an abrupt spike in the velocity of daily transactions involving immediate transfer to other banks. It received a show-cause notice from the Office of Banking Ombudsman, a body established by the RBI to handle banking complaints from the general public in India.

It was exposed for acting against the regulations of the RBI regarding KYC standards. Again, it received a show-cause notice from the central bank in July 2021 for giving out false information about the transfer of an operational unit from One 97 Communications to Paytm. It was then charged for a fine of Rs.1 crore for not following the Payment and Settlement Systems Act, 2007 in the same year.

The fintech major appeared to be lacking in keeping an eye on payout transactions or perform risk assessments on the companies using its services. Then on several instances, the regulatory ceiling on the end-of-day balance in customer advance accounts was broken in multiple instances. That didn’t stop there, the central bank also discovered that Paytm Payments Bank had neglected to apply device-binding control measures linked to "SMS delivery receipt check" and had reported a cyber security problem after the fact.

As a result, the payments bank was told to pay an additional penalty of Rs. 5.93 crore last year, on account of multiple non-compliances. This caused another severe blow to the fintech major’s shortcomings concerning account owner identification. Although reports raised questions about the potential money laundering, Paytm was observed to deny any such violation.

Thus, came the final blow this year when the missteps were brought to notice by the Comprehensive System Audit report and external auditors' compliance validation. Among the many violations that Paytm committed, it especially highlighted failing to identify beneficial owners and going beyond regulatory balance limitations. The RBI took decisive action since its patience had run out.

Although the RBI's recent intervention were about suspicious activities and money laundering, including the use of single PANs for several accounts and accounts that did not comply with KYC regulations. But, users of Paytm Wallets can still continue to transact till February 29th, except that they cannot add money after that due to an RBI directive. The National Common Mobility Card services connected to Paytm Wallet, FASTag, and PPBL accounts are all subject to the same restriction. One97 Communications' shares saw a sharp 40 percent decrease in two days as a result of the decision, reducing the company's market valuation by Rs.17,378.41 crore.

Comeback from Setback
When it all came down to it, Paytm started to proactively address the problems where it could by improving its services, and win back its lost ground from the market.

Enhancing Security
Well aware of the dangers lurking in today’s digital world, the fintech major spent some serious amount of money to solidify its security infrastructure. Likewise, it brought in a bunch of highly used security features such as end-to-end encryption, biometric verification, and two-factor authentication. The launch of Paytm Authentication makes it a clear example of the fintech major’s commitment to ensure consumer safety, as this feature offers a safe and easy transaction experience.

Improving User Experience
While Paytm did the security checks, it simultaneously worked towards improving the user experience. It induced features that helped streamline transactions and enhanced usability which left the platform to experience a major makeover. An example of this effort can be attributed to the Paytm Quick Checkout which eased and boosted the payment method by streamlining the process with one click.

Educating on Cybersecurity Practices
Practicing cyberhygiene is not only becoming common place within firms but in extending it to customers as well. Paytm also embarked on this concept and initiated an open dialogue campaign. Here, it began to inculcate the best practices of cybersecurity to consumers. In a way it outlined its motive of upholding safety and security as a part of its system through webinars, workshops, and instructional content.

Strategic Alliances
Well aware of the kind of support that teamwork can bring particularly during turbulent times, Paytm began forming strategic collaborations with financial institutions, industry specialists, and regulatory organizations. For instance, the fintech major is currently working in tandem with the National Payments Corporation of India (NPCI) to get the best out of security measures for UPI transactions, and to continue keeping its word on guaranteeing a safer digital payment ecosystem for all users.