Paytm holds a 13% market share in UPI debit transactions and approximately 20% market share in credit transactions.
There is a potential risk that all UPI transactions on the Paytm app may not be processed after February 29 if they do not receive approval from the Reserve Bank of India.
Paytm’s UPI function is made possible by Paytm Payments Bank Limited (PPBL)
The exclusive PSP bank on the Paytm platform. A PSP bank serves as the intermediary between the UPI app and the banking channel, as only banks are eligible to act as PSPs.
The majority of Paytm’s transactions, accounting for approximately 75 percent of the gross merchandise value (GMV), are conducted through the widely used Unified Payments Interface (UPI) on its app. As of now, One 97 Communications Limited (OCL), the parent company of Paytm, has no affiliations with any other commercial banks for its UPI app.
To put it more simply, all the UPI handles in the Paytm app rely on PPBL as the PSP bank. If PPBL ceases its banking operations after February 29, it will no longer be able to serve as a PSP or settlement bank for UPI transactions on the platform. Consequently, the Paytm app will be unable to facilitate UPI transactions. Unless the RBI grants an exception, PSP is considered a banking service.
The circular issued by the RBI on January 31st regarding PPBL stated that, starting from February 29, 2024, the bank should not offer any banking services apart from the ones mentioned in (ii). These services include fund transfers (regardless of the name and nature of services such as AEPS, IMPS, etc.), BBPOU, and UPI facility. However, it is important to note that the exceptions mentioned in the second clause pertain to the withdrawal and utilization of balance by customers and do not encompass the PSP function.
During an investor concall on February 1, Bhavesh Gupta, COO and group president of Paytm, emphasized the importance of working alongside the regulator. He acknowledged that certain changes, such as the acquisition or issuance of handles for other banks, would require guidance from the Reserve Bank of India. The discussions have already commenced to determine the most effective approach in order to minimize inconvenience to customers and ensure the smooth continuation of business operations.
While the Reserve Bank of India (RBI) has prohibited Paytm Payments Bank Limited (PPBL) from acquiring new customers for savings bank accounts, it has not restricted PPBL, which functions as a Payment Service Provider (PSP) bank, from issuing new UPI handles. According to sources cited by Moneycontrol, PPBL has issued approximately 245 million UPI handles, with around 90 million being monthly active users.
On February 7, Moneycontrol reported that the RBI declined to provide any concessions, including extending the migration process deadline beyond February 29 or encouraging banks to participate in the process. Due to regulatory concerns, banks are not enthusiastic about engaging in PPBL-related business.
On February 8, the RBI announced that it would release a Frequently Asked Questions (FAQ) document regarding the Paytm crisis. This FAQ is expected to clarify whether the PSP banking service can continue after February 29.
Paytm is unable to form a partnership with a commercial bank to act as a PSP bank and issue new UPI handles because it lacks the necessary approval from the National Payments Corporation of India (NPCI) to operate as a Third Party Application Provider (TPAP). However, since Paytm already has its own bank, PPBL, it does not require TPAP status. On the other hand, UPI apps like Google Pay, PhonePe, Cred, and Amazon Pay are all considered TPAPs.
Even if Paytm were to expedite the process of obtaining a TPAP license from NPCI to prevent disruption of UPI transactions, the customer data associated with existing Paytm handles would remain with PPBL and could not be transferred to a new PSP bank such as Axis Bank or Yes Bank, which Paytm may onboard. Consequently, Paytm users would have to use the app as if it were their first time, without any transaction history.
According to a senior banking executive who closely collaborates with RBI, there is no precedent for a situation like this. If such a scenario were to occur, the Reserve Bank of India (RBI) would need to issue a new mandate. While NPCI governs UPI, the rules are established by RBI. Therefore, approval from RBI is necessary, which has not been granted thus far.
In the event that Paytm acquires a TPAP
Its existing users would not have access to their transaction history on the Paytm app. They would essentially be using the app as if they were new users. They would need to register on the app, complete the device binding process by sending an SMS, and then link their bank account on the Paytm app.
The banking executive mentioned earlier stated that the device binding data is held by PPBL and cannot be transferred due to current regulations. Additionally, the executive mentioned that even if the regulator approves, the migration process will take several months to finish. Until then, the RBI will need to grant PPBL permission to continue providing PSP as a banking service beyond the current deadline of February 29. As of now, there is no information available regarding this matter.
Gupta, during the investor concall on February 1, mentioned that there will be a discussion regarding the movement of existing merchants who accept UPI to other banks. This discussion will involve engaging with the regulator, NPCI, and others to determine if it can be a one-time event or handled on a case-by-case basis. Although some discussions have taken place, they have not been formally concluded yet. It is expected that in the next few days, more clarity will be obtained on how the migration will be carried out. According to certain sources, the regulator has not provided any specific information on whether this migration will be allowed, except for assuring that customer convenience will not be compromised.
On February 9th, a committee led by N. Damodaran, a former chairman of India’s markets regulator, was established by the board of OCL to provide guidance on compliance and regulation to PPBL. This move came after the banking regulator expressed concerns about the lender’s repeated failure to comply with regulations. The formation of this committee may help instill confidence in the central bank regarding PPBL’s commitment to compliance.