Paytm crisis: A short story on India's most trusted fintech platform

The Reserve Bank of India has announced that Paytm's payment Bank will be stop working from Feb 29 of 2024. In this blog we will elucidate what is really happening to Paytm and the major reasons for this big announcement. 

• What is the difference between a commercial bank and payment Bank ? 

Payments Banks are created by RBI to enhance the unorganised and the small sector in our country and also to make tier 3 of India to get access to digital payments. 
However payments Bank can accept maximum deposit of 1 lakh and can offer credit cards and loan only when they have link with a commercial bank. 

• Why the people cannot directly go the commercial bank for loan? 

The magic with payments Bank is that they have a robust data about your transaction history and identification documents by the help of which they can fetch you a personal loan in just 5 minutes. Zero balance account can also be maintained in payments Bank.


Why RBI banned Paytm payments Bank ?

 There are 3 major reasons for it 

1. No consent with customer

In 2015 when Paytm was just growing, in the process of KYC ( know your customer ) compliances Paytm mandated every customer to open a Paytm payments Bank account to use Paytm wallet and to process other transactions. 

2. Incentives became dangerous

In 2017 Paytm started its savings account and it provided incentives for agents an amount of rupees 50 for every new account opened. Which eventually turned into an MLM and people started using Paytm's services and the company was growing tremendously. Though Paytm's intention was not to create a MLM it eventually turned into a nightmare for the company.

3. Geopolitics

Ant group of companies ( Chinese company) and fintech group owned by Alibaba owns almost 10% in Paytm and everybody knows relationship of our country with China. In 2022 RBI directs Paytm not to onboard new customer and it conducted IT systems audit as the regulator feared data leak happening in the company.


Why UPI and fastags are affected ? 

You may get a question ❓ why UPI and fastags get affected due to the problem of payments Bank. We need to understand the backend of the qr code services 

When we send money via scanning the qr code to the seller. The money will be transferred to a nodal account and then it goes to the wallet of the seller.

In your UPI ID - customer@icici in this line ICICI represents the nodal account services which are held by ICICI. What is a nodal account ? In simple words an intermediary in the business ( a person acting on behalf of seller ) will receive money form the customer and pays it to the seller within the stipulated time. However to setup this nodal accounts permission form RBI is mandatory. 

In case of Paytm these nodal accounts are held by paytm payments Bank, as the regulator has put a restriction on. It will be difficult for Paytm to move the huge no of nodal accounts to another commercial bank. 

The beneficiaries here will be ICICI or hadfc or yes Bank. As they have the huge infrastructure. 

Conclusion


We are going to see how Vijay sekhar Varma and his team are going to fight back this situation. Will they come again with a strong regulatory compliance? or it is their end of  banking services? 




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