Paytm is India’s iconic fintech business, founded by Vijay Shekhar Sharma in 2010 to ‘Pay Through Mobile’. The business achieved several milestones but became a household name in 2016, when Prime Minister Narendra Modi launched a demonetization scheme, withdrawing Rs500 and Rs1000 notes from circulation.
By then, Paytm had become India’s first fintech with millions of users, innovating, winning customer loyalty, and turning customer data into a new kind of competitive advantage.
Now Sharma’s empire, already crumbling, faces an extinction event: the Reserve Bank of India has ordered an affiliated bank majority-owned by Sharma to halt new business, and it may revoke the license – an act that strikes at the core of Paytm itself.
One97
Paytm is one of several tech companies under the umbrella of One97 Communications, a technology umbrella company owned by Sharma, and previously backed by big names like Softbank. One97 also owns the other companies related to Paytm, including Paytm Payments Bank.
One97 listed on both the National Stock Exchange and the Bombay Stock Exchange in 2021 and raised $2.2 billion – the biggest IPO in Indian history. It is also the most controversial: after an initial pop, the share price has trended downwards, sparking resentments among Indian shareholders: the stock price debuted at Rs1,560 per share but today languishes at Rs496 per share.
The business has had ups and downs, along with the fortunes of its mercurial founder. But the advent of India’s United Payments Interface and the rise of deep-pocketed competitors threaten Paytm’s model.
Now Sharma faces a crisis that even a talented and charismatic entrepreneur such as he cannot wiggle out of. The Reserve Bank of India has cracked down on Paytm’s affiliate, Paytm Payments Bank, barring it from accepting new deposits after February 29.
While this is not a death blow – yet – it puts Sharma’s business empire in jeopardy. It also raises questions about the prospects for India’s fintech industry more broadly.
Paytm acquired a license to operate a payments bank, which it launched in 2017. In India, a payments bank can accept deposits but cannot make loans, including via credit cards. The idea was to become the deposit institution for customers that brick-and-mortar banks would ignore, and integrate other digital services, such as purchasing gold or offering interest-bearing accounts, into mobile money.
RBI intervenes
Since them, Paytm Payments Bank, which is 51 percent owned by One97, has come under occasional fire from RBI for various compliance breaches. But so do other banks and fintechs. These sanctions have escalated since 2022, but the new measures, announced on January 31, are far stricter. For one thing, RBI hasn’t given Paytm Payments Bank a timetable to sort out its problems.
More dramatically, RBI hasn’t specified the violations. It cited “persistent non-compliances” and supervisory concerns.
Sources tell DigFin other factors are likely involved, including violations on customer onboarding, breaching data-sovereignty laws, and ongoing lapses in cybersecurity – notably, the payments bank lacks a chief information and security officer (CISO).
“Paytm’s been sloppy,” one person said. “Why hasn’t the board taken this into account?”
Industry figures tell DigFin that if the RBI is so concerned as to bring the business to a screeching halt, it probably does so for good reason, as the regulator is held in high esteem. But its cryptic judgment and the severity of its action has the industry wondering what this portends.
Some local media speculated that RBI could also be upset at the ongoing stake in the payments bank by Antfin, a Netherlands-based subsidiary of Ant Financial. At one point Ant had a 24.9 percent stake in One97, which raised the hackles of New Delhi, which has banned many Chinese-operated apps.
Last year Ant sold down its stake to only 13 percent, and sources in India tell DigFin this is no longer a contentious issue. However, the complex corporate structure among One97 entities, plus the large foreign presence, may have contributed to RBI’s mistrust.
Sharma’s worries have probably been from a different perspective: since the IPO, his most important backers have pared their stakes or exited, including Softbank and Berkshire Hathaway.
Where does this leave Paytm?
Business disrupted
By ordering the payments bank to stop taking new customer money, RBI also imposed other sanctions. Users can’t top-up accounts, or facilitate credit transactions or fund transfers – crucially, including via UPI. The only activities allowed are to pay interest, honor cashbacks, and offer refunds. (The payment app is operated by Paytm itself, not the payments bank.)
“Lots of people are blaming Vijay,” says a fintech executive who has worked for him. “But Paytm is India’s fintech pioneer. Every player has their compliance violations. When everyone is a little dirty, the RBI’s action seems very harsh.”
The worst case for Sharma is if RBI revokes the payments banking license. But this wouldn’t stop him from partnering with other banks to provide many of these services, such as UPI transactions, escrow accounts, or quotidian bill payments for utilities or tolls. Indeed, Paytm has multiple bank partnerships.
Moreover, Paytm’s consumer userbase may not be directly affected, as they can top up a Paytm wallet at other banks. There will be issues, however, with its large merchant base.
One fintech exec says, “Paytm’s like a hollow superapp. The banking license made it stable, and now that’s been lost. But Sharma could go buy a bank – he’s got the money.”
There is a wrinkle to this optimistic picture: as one local journalist has pointed out, it’s not clear whether Paytm has a payments-aggregator license.
That’s a move the RBI might have to approve if One97 were to acquire a distressed bank that needs rescuing – of which there are quite a few in India. It’s possible that the RBI could block him out of spite or mistrust, but this is where its gold-plated reputation suggests otherwise.
Decline
The longer-term challenge is keeping Paytm relevant. UPI is the digital payments arm of “the India Stack”, built and run by the government agency, National Payments Corporation of India.
NPCI was launched by Congress under Prime Minister Manmohan Singh, so it’s not a vehicle of the current prime minister. But Modi has aggressively pitched NPCI and the India Stack as critical infrastructure for digitalizing a big emerging market. UPI in many respects is a huge achievement, but it’s also undermined many businesses.
Live by the Stack, die by the Stack: Paytm was the big beneficiary of Modi’s demonetization, and helped Indians go digital. But UPI has since eaten into its consumer and merchant base. UPI is free, so it has become the primary infrastructure for Indians to make payments, either peer-to-peer or with a merchant.
Not everything goes through UPI. UPI is designed for lower-value transactions, although NPCI occasionally raises the ceiling. However, affluent people are more likely to use a credit card than an e-wallet.
And because UPI is free, wallet operators facilitating UPI transactions (dubbed ‘Prepaid Payment Instruments’) can’t charge a fee, even though the business costs them money to operate. Starting this year, PPIs will be allowed to charge up to 1.1 percent interchange fees on merchants accepting payment via UPI, but this just underscores the extent to which digital payments has become a sheer volume game.
It’s not a game that Paytm is winning.
Today, three PPIs dominate UPI payments: PhonePe (46 percent of the market), Google Pay (36 percent) and Paytm (13 percent). Paytm has not only been eclipsed, but it is also losing ground to two more competitors looking to break into this arena: Amazon Pay and WhatsApp Pay.
PhonePe is owned by Walmart and Amazon Pay owns Flipkart, India’s homegrown e-commerce giant. This is why PhonePe dominates UPI payments and why Amazon Pay is likely to take market share. Paytm has its own e-commerce arm but Walmart and Flipkart are far bigger.
In fact, this competition is so fierce that even on interchange fees, Paytm has been forced to reduce what it charges merchants to 0.64 percent, according to Anurag Singh of hedge fund Ansid Capital.
In the broader game of digital payments (not just through UPI), Paytm is also fending off rivals such as telecoms giant Jio (which also owns a payments banking license) and the commercial banks’ online offerings.
And fall?
The RBI’s sanctions on Paytm Payments Bank is going to worsen Paytm’s position. Why would customers take the risk of putting their money into a Paytm wallet if they perceive it as risky?
Paytm’s loss of market share is reflected in its userbase. The company claims to have 300 million users. That’s a huge number compared to a bank’s customer base: HDFC, for example, the largest privately owned commercial bank in India, serves about 120 million people.
But the active number of Paytm users as of end 2023 is only 50 million. That number can now be expected to go down, not up.
Paytm also seems to have relied on its payments bank affiliate for related-party transactions. Singh notes that 70 percent of transactions in Paytm Payments Bank come from Paytm itself, not the bank’s customers. This accounts for 43 percent of Paytm Payments Bank’s $250 million topline revenue.
If the bank loses its license, Paytm can still transact through third-party banks, but then it will be paying transaction fees to someone else, not to an entity controlled by Sharma.
This relationship enabled the payments bank to always report a profit, but it may be another factor in RBI’s displeasure with the group. As an example of blurry lines, both the payments bank and Paytm operate their own apps. But they are both branded ‘Paytm’, so it’s unclear whether users know the difference. This cavalier approach to governance is now going to haunt Sharma because it’s likely that regular Paytm app users will now flee.
Implications
Big rivals will happily take Paytm users, but for many in the fintech industry, the crackdown on Paytm is troubling.
One venture capitalist told DigFin he thinks the sanctions are specific to Paytm and won’t impact the broader fintech industry. One97’s IPO came at the peak of worldwide hype and crazy valuations, and shareholders were already angry before RBI’s actions knocked the stock price down another 20 percent. But that’s not about fintech per se.
But fintech founders have sent Modi a letter asking for him to rein in RBI. The harshness of the punishment, especially the expectation that RBI will revoke Paytm Payments Bank’s license, is out of kilter with its willingness to work out problems with troubled banks.
For Paytm’s faults, Sharma played a pioneering role in bringing digital money to India. He’s a towering figure in fintech. Attacking him feels like an attack on the innovation sector: because RBI hasn’t spelled out its reasons, fintech founders believe its actions are akin to expressing mistrust of fintech.
While this may sound crazy, given the government’s pride in its digital infrastructure, it’s important to note that UPI and the rest of the India Stack are government projects that have squeezed out the private sector. Entrepreneurs may feel justified in remembering what happened to China’s Ant Group and wondering if something similar is happening in India. The irony is that Paytm was the beneficiary of another high-handed government project – Modi’s demonetization campaign.
