February 8, 2024


Do Paytm’s woes spell trouble for the BNPL sector?

It hasn’t been a banner week for the Indian startup world. Edtech giant Byju and its founder, Byju Raveendran, face an existential challenge. Then came the Paytm news that rocked the fintech sector. From the outside looking in as the members of the public, the news cycle perhaps diminishes the image of the new-age economy.

On the Paytm issues specifically, it seems some of the company’s practices have caught up to it. Indian startups have long been criticised for lack of governance, compliance, and transparency. It’s a culture that was bound to come back and bite them. It’s what Paytm is dealing with now. Its own existential threat. The question is, what does this mean for the sector as a whole?


Last week, Paytm’s stock price crashed by 40%. It came in the wake of the Reserve Bank of India’s (RBI) letter to the company barring it from undertaking any banking activities – no deposits, credit transactions, bill payments, wallet top-ups, nothing, after February 29. While the RBI had taken action against financial companies in the past, this was different. The scary thing for Paytm is, it seems there’s no window for it to return to normal.

It seems it all began in the early days of Paytm Payments Bank (PPBL), which got a banking license in 2017. That was seven years after the company was born, which began by allowing people to top up their mobile phone balance. By 2014, they were a digital wallet platform where users could load money and make payments. When the RBI announced the concept of Payment Banks in 2015, Paytm applied for a license.

For Paytm, getting the banking license was a big deal. If it ran smoothly for the next five years, it could become a small finance bank. Here’s where we need to mention Paytm’s ownership structure. 49% is owned by One97 Communications, which runs the Paytm brand. The remaining share is held by Paytm’s founder, Vijay Shekhar Sharma. The RBI had its eyes on the two entities.

Within a year of getting the license, the troubles began. Strike one – licensing condition violations like breaches of day-end balances and non-compliance with know-your-customer (KYC) guidelines. The RBI temporarily halted the opening of new accounts in June 2018, but the ban was lifted that December.

Strike two was in 2021. The RBI found that PPBL gave false information while applying for the final Certificate of Authorisation (CoA), leading to a ₹1 crore fine. Strike three came soon after. Investigations found lapses in cybersecurity and KYC anti-money laundering compliance. There was also no separation between the bank and One97, which should be there. In March 2022, the company wasn’t allowed to onboard new customers.

Later that year, the RBI found the company didn’t take any corrective action. In October 2023, it was fined ₹5.39 crore.

In the course of its investigation, the RBI found several issues. Among them were thousands of cases where the same PAN was linked to over 100 customers, transaction values that ran into crores (that’s beyond regulatory limits), and an unusually high number of dormant accounts.

The saga, culminating with the recent RBI letter, sent an unnerving ripple throughout the fintech world, especially in the Buy Now Pay Later (BNPL) space. Should the sector be worried? Are the screws tightening?

VIEW: It doesn’t look good

You can look at the RBI’s decision in a couple of ways. On the one hand, the decision seems hasty. The RBI itself sees payment banks as a sound business venture. When the BNPL model came to the fore, it seemed logical, given India’s credit boom. The RBI had no choice but to bring in regulations. Consequently, payment banks associated with fintech players became collateral damage.

There has been a big jump in non-collateralised personal loans. This acceleration is happening faster than the overall credit scenario. That’s a recipe for disaster. Coupled with the RBI’s discomfort with how BNPL companies in this space operate, the sector seems to be in regulatory limbo. Companies have repeatedly asked for clarity on regulations but to little satisfaction.

Take ZestMoney and its troubles as an example. The company cited RBI’s move to increase risk weight on consumer loans. Investors are wary, and it shows. A report by Tracxn showed funding in the Indian fintech sector saw a 63% decline last year. Only one company in the sector, InCred, emerged as a unicorn last year. Ultimately, it all comes back to the RBI. In the absence of regulations, the decision against PPBL doesn’t bode well for other companies.

COUNTERVIEW: The sector is safe

Embedded finance will continue to be a game-changer in the financial services sector. BNPL was always seen as a way for traditional financial institutions and new companies to create a smoother financial future. India has a lot going for it on this front – increasing smartphone penetration, internet connectivity, and the growing digital ecosystem. There’s a vast market opportunity with the potential to impact several sectors.

While there are some issues that the sector and the regulator need to sort out, Paytm’s troubles were its own fault. Payments and financial services is a highly competitive space. Large banks invest a lot of resources in digital payment and lending. Going forward, Paytm’s lending partners could reassess their partnerships. Lending partners could limit their business due to governance and operational risks with the company, given what the RBI’s investigations have uncovered.

Some companies in this sector have managed to become profitable. While questions remain about their business model, they’ve found innovative ways to acquire and retain customers. Some are well on their way to becoming small finance banks. BNPL adoption, according to one estimate, is projected to have a compounded annual growth rate of just over 12% during 2023-28.

Reference Links:

  • RBI’s crackdown on Paytm Payments Bank: The inside story – CNBC TV-18
  • The Paytm saga so far… from RBI intervention to stock crash and sale speculation – Livemint
  • Paytm shares decline further. Will it be business as usual for the fintech giant after RBI curbs? – The Week
  • RBI’s action against Paytm hurts Buy-Now-Pay-Later ecosystem – Moneycontrol
  • Regulatory Uncertainty, High Risk Keeping Investors Away From Fintech Sector – The Core
  • Paytm moderates Buy Now, Pay Later lending, but overall impact marginal – Forbes India

What is your opinion on this?
(Only subscribers can participate in polls)

a) Paytm’s woes spell trouble for the BNPL sector.

b) Paytm’s woes don’t spell trouble for the BNPL sector.


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