Let us admit - Paytm as a wallet business was excellent - especially with all the cashback and offers. Everyone loved the cashback every time a payment was made using the wallet.
The reality is that businesses can grow with cashback but cannot sustain it for long. As a result, the cashbacks have dried up. Also, UPI killed its wallet business. Paytm's parent company, One97 Communications, as a result, ventured into different businesses. However, it could not disrupt any segment. Payments bank license could have been the game-changer for them, but that has been the problem for the company for a while now. Let us look at the issues with the company in this article.
One97 Communications: The Business & Basic Problems
One97 Communications is into bill payments, money transfers, ticketing services (bus and movie tickets), online games, and retail brokerage products.
Image Source: Paytm Blog
As a business, when you are into too many verticals and none of them are profitable, it is a problem. Second, the company, in November 2021, launched its IPO - the biggest Indian IPO at that time. The issue price was set at Rs 2150. The subscription was high, but after the launch, the share price crashed. Within a year, 75% of investors' wealth was gone.
There were two reasons for it:
- Super high valuation
- No clear path to profitability
The company faced pressure to turn profitable, and the CEO said they are shifting focus to turn profitable. The share price stabilized after a year. Investors waited to see losses narrowing down and profits showing up eventually.
In our narrative thus far, we have not covered Paytm Payments Bank Limited (PPBL) - it requires a detailed discussion. While the company tried to turn profitable, it completely ignored the compliance related to PPBL - and it is a big - a very big problem for the company now. Let us look at the details.
Paytm Payment Bank: The Road to Success?
We mentioned earlier that a Payment Bank license was a big thing for Paytm. The license opened doors for them to get into the Indian financial sector. They could expand their service offerings beyond digital wallets. Payment banks are allowed to accept deposits (up to a certain limit), issue co-branded cards, facilitate online transactions, and provide other banking services. This expansion can attract a broader customer base and increase revenue streams for Paytm.
Being regulated by the Reserve Bank of India (RBI) enhances the trust and credibility of Paytm as a financial institution. Customers may feel more secure depositing money with a payment bank knowing that it operates under regulatory oversight, leading to increased adoption and usage of Paytm's services.
Paytm Payments Bank: Past and current problems
As mentioned in the last section, being under RBI regulation brings credibility to any company. However, for that, they need to do the basics right - meet all the RBI guidelines. Paytm has failed to do it in multiple instances.
For that reason, on 31 January 2024, RBI barred Paytm Payments bank from accepting deposits or top-ups in their customer accounts, prepaid instruments, FASTags, wallets, and NCMC cards after February 29, 2024.
You may think it was a harsh decision by the RBI! Well, you need to look at PPBL history before drawing a conclusion. Let us bring some facts and numbers to you, and you may pass judgment based on that. So, here they are:
Point 1: The company got the license in January 2017. In its first year of operation, the RBI warned the PPBL on grounds of violations of licensing conditions. It includes issues with their day-end balances and non-compliance with KYC guidelines. In June 2018, the central bank asked PPBL to stop onboarding new accounts. The ban was lifted later in December 2018.
Point 2: In October 2021, the RBI found that PPBL had submitted false information to the central bank. No warning - a fine of Rs 1 crore.
Point 3: In further investigation, RBI found lapses in cybersecurity, technology, and KYC anti-money laundering compliance. There is a long list - we will not go into details, but the point is made. The central bank asked to put a check on these lapses. In March 2022, RBI again asked PPBL to stop onboarding new clients and appoint an external audit firm to conduct a comprehensive system audit.
Point 4: In the second half of 2022, the RBI revisited Paytm and found no serious action was taken by the bank to set things right. In October, the RBI imposed a monetary penalty of Rs 5.39 crore. The RBI found instances where thousands of accounts were opened on the same PAN and many more serious issues.
Now, you are free to form your opinion.
The Future
The company is trying hard to set things right for both stakeholders and customers. At this point, no one knows if it is the end of the story of Paytm or if we will see a turn-around story. For investors, it is a great case study when it comes to investing. You can learn a lot from it. Some investors have made money during the bumpy share price journey of Paytm, while many have lost a large part of their investments. We leave you with the facts to take a call on your own.
Disclaimer:
Investments in the securities market are subject to market risks, read all the related documents carefully before investing. This blog is for education purposes only and should not be considered as advice, consult your financial advisor before investing.
