Unravelling the Impact of RBI's Directive on PayTM Payments Bank

Introduction:

On January 31, 2024, the Reserve Bank of India (RBI) wielded its regulatory power, instructing PayTM Payments Bank to cease all banking services. The subsequent directives issued by the RBI are comprehensive and carry implications for both PayTM and its user base.

RBI Directives:

·??????? No further deposits, credit transactions, or top-ups are allowed in customer accounts, prepaid instruments, wallets, FASTags, NCMC cards, etc., after February 29, 2024. Withdrawals are permitted only until the extent of utilizing existing funds.

·??????? All other banking services, including fund transfers of any kind, are prohibited post February 29, 2024.

·??????? Nodal Accounts of One97 Communications Ltd and Paytm Payments Services Ltd. are to be terminated at the earliest, no later than February 29, 2024.

Objective Behind RBI's Intervention:

The primary objective of the RBI is to untangle the extensive entanglement between PayTM Payments Bank Limited (PPBL) and PayTM app/payment gateway (PG) services. The intertwining of services reached a level where customers found it challenging to differentiate between the two entities. For instance, PPBL accounts could only be opened via the PayTM app, and customer onboarding was exclusively through PayTM.

Implications for Merchants and Users:

With the cessation of PayTM Payments Bank operations, a deep dive into the consequences for merchants and users becomes essential. PayTM payments bank offers a range of services including savings and current accounts, nodal accounts, wallets, FASTags, NCMC cards, UPI etc. Under its payments bank license, PPBL is restricted from accepting deposits exceeding INR 2 lakhs, lending, and can only distribute non-bank loan products like postpaid and personal loans.

It is important to note that the UPI services provided by PayTM are actually facilitated by PayTM Payments Bank with the VPA handle @PayTM. Unlike Gpay and Phonepe, who act in the capacity of TPAP, PayTM is not a TPAP.

1.????? Payment Gateway Operations:

Paytm Payments Service Ltd, the payment gateway operator of PayTM, holds its nodal account with PPBL. The settlement of funds for all transactions processed by PayTM to the merchant follows a specific procedure.

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This implies that post-February 29, 2024, PayTM must establish an active nodal account with another bank. However, opening a nodal account is a cumbersome process, presenting a significant challenge for PayTM.

2.????? Implications on UPI Transactions:

Exploring the implications on UPI transactions, there are several scenarios to consider:

?????? I.????????? When a Payment Gateway (PG) acquires UPI transactions for a merchant, it is executed through different acquiring banks, each providing the merchant with a Virtual Payment Address (VPA) handle. This implies that the sponsor or Payment Service Provider (PSP) bank is the same as the acquiring bank. For instance, if AXIS and ICICI are acquiring UPI transactions for a merchant named XYZ, the merchant will have two VPA handles – one provided by AXIS and another by ICICI. In the case of PayTM PA/PG, where PPBL is the acquiring bank, all those transactions will also fail. Consequently, PayTM needs to establish UPI acquiring relationships with other banks.

????? II.????????? In scenarios where PayTM Payment Gateway (PG) has been acquiring transactions on PayTM Payments Bank Limited (PPBL) for subscription-based businesses, these mandates will fail due to the current setup where all entries used to create mandates must be the same for processing mandates as well. In case PayTM switches its acquiring bank from PPBL to another, customers will have to re-register their mandates to avail services.

? III.????????? Regarding UPI transactions where the VPA handle is created on PayTM or any other UPI app linked to an underlying PPBL bank account, these transactions will fail post February 29, 2024, as the accounts will be frozen. Additionally, subscriptions created on such bank accounts will start failing, and customers will need to first create a VPA on an alternate app and re-register a new mandate for their subscriptions

?3.????? Clarity on PayTM’s UPI services

There remains a need for further clarity regarding the impact this directive will have on users currently utilizing the PayTM app for UPI payments. The intricacy arises from PayTM not being a Third Party Application Provider (TPAP) but rather relying on the services of PayTM Payments Bank Limited (PPBL) to facilitate UPI transactions on its platform. This sets PayTM apart from competitors like Google and PhonePe, who operate with multiple Payment Service Providers (PSPs) and sponsor banks in the backend.

It's worth noting that, in all likelihood, this situation may not directly impact PayTM's operations negatively. This is because PPBL, in its role as a Payment Service Provider (PSP) and sponsor bank, primarily provides technical capabilities rather than being the TPAP. However, this development serves as a crucial reminder for PayTM to explore the TPAP route. This consideration becomes even more pertinent given the current unfulfilled aspiration of obtaining a small finance bank license, emphasizing the importance of strategic planning and adaptability in the ever-evolving financial landscape.

Conclusion:

While the initial understanding of the impact is apparent, clarity is awaited from the RBI on certain aspects. For PayTM, the next 29 days are crucial to implementing necessary changes and amendments to prevent user churn, as they navigate the regulatory landscape and strive for continued operational excellence.