RBI action against Paytm Payments Bank creates flutter in fintech industry

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Reserve Bank’s crackdown on Paytm Payments Bank, an associate company of Paytm, has created a flutter among the fintech community, which is now apprehending strict regulatory environment, The Economic Times has reported.

On January 31, the banking regulator asked Paytm Payments Bank to stop all forms of basic banking services and directed Paytm and Paytm Payments Services to terminate their nodal accounts with the bank. Paytm and Paytm Payments Services are the payment gateway business of the Paytm Payments Bank.

Several investors and people who founded fintech entities, revealed to the newspaper their concern that the central bank’s step might have been too harsh which might impact innumerable consumers and the business. Some legal experts and fintech professionals thought that though the RBI order was directed against the payment bank and not strictly the fintech entity, it could have wider ramifications too that could engulf the fintech domain.

Aparajita Srivastava, partner, Ikigai Law stated, “For the larger ecosystem, it gives out a clear message that investing in robust compliance architecture like KYC, AML (anti-money-laundering) procedures and information security systems is mission-critical.”

Paytm stock plunged 20% following the regulatory action and reports said earnings could be hit.

The RBI announcement on January 31 against the payments bank sent several company bosses into a huddle to brainstorm whether they would need to have a thorough look at their own data systems and compliance machinery, the newspaper reported.

“We (fintech founders) thought that a licence from the regulator means you are safe, but that is not the case, we need to be more proactive in ensuring compliance going forward,” the newspaper quoted the founder of a large fintech startup who preferred to remain anonymous.

Another founder concurred and said that the past two years have injected a sense of uncertainty among fintechs. He too thought that the RBI measure is a early warning signal and none could feel safe from the wrath of the regulator.

“If Paytm with its massive human resources and capital could not get its systems fixed as per the expectation of the regulator, smaller startups will have more difficulty in getting things in place,” remarked another founder.

“The damage is likely to be more on Paytm’s reputation and user trust which is expected to lead to a shift in market share towards other players such as PhonePe and Google Pay,” said the second founder quoted above.

However, the RBI action has drilled into everyone the climate for stricter scrutiny of the fintech entities. The central bank’s directive needs to be understood in the context of the larger ecosystem and the recent actions of the regulator, felt industry experts. The RBI won’t relent unless the highest compliance standards are enforced, they felt.

“The RBI has been pushing up its level of scrutiny on fintech companies and Wednesday’s order on Paytm shows that even one of the oldest and most established fintechs can face regulatory action if it does not adhere to the highest compliance standards,” Srivastava of Ikigai Law added.

One of the startup founders cited earlier said the regulator has been acting sternly with violations for banks and NBFCs as well and the action against the payments bank was not exceptional.

“The regulatory actions on Bajaj Finance, HDFC Bank, Bank of Baroda and now Paytm show that the regulator wants rules to be followed in principle as well as in spirit; any violations will attract penal action,” said this person.

The fintech sector in India has flourished on huge venture funds that have been pumped in. Industry insiders believe investors might now become more cautious before pumping fund into this domain.

“Such enforcement actions leave an exhaustion on the industry as a whole. We should expect risk premia on the fintech equity paper coming to the market to go up, and regulatory scrutiny on fintech entities to get stronger. Without transparency around the exact reason for enforcement, we can’t say in what specific niche of the regulatory areas this scrutiny will manifest,” Mandar Kagade, founder, Black Dot Public Policy Advisors told the newspaper.