With the RBI imposing a slew of restrictive directions on PayTM Payments Bank (“PPBL”), the banking arm of the PayTM group, PayTM finds itself caught in a quandary despite being a trailblazer in the fintech sector. PPBL has been ordered to stop accepting deposits and fund transfer services by 29th February 2024. Other offerings such as FASTags, saving/current account services, UPI handle and PayTM wallet (with a 300 million+ user base) are also impacted by the RBI’s directions.
While the regulator’s move has created an industry-wide discord, with most fintechs left spellbound at the drastic measure adopted by the RBI, we thought, as legal and regulatory advisers it is pertinent to sift through the noise and closely evaluate the non-compliances that triggered a critical intervention of this sort.
The recent restrictions come in after the RBI reviewed the outcome of a half-year-long RBI-mandated systems audit conducted on PPBL. The audit revealed persistent non-compliances and continued material concerns warranting this supervisory action.
Since its inception, PPBL has been ordered to stop customer onboarding on two separate occasions (informally in 2018 and then formally via a press release in 20221) and has been charged with a penalty of INR 5.39 crores in 2023 for non-compliant banking practices (more on this further) in addition to an INR 1 crore penalty that was levied in October 2021 for incorrect information submitted by PayTM2.
In a nutshell, the non-compliances primarily pertain to the violation of multiple guidelines on KYC norms, cyber security reporting, mobile banking, risk profiling, monitoring of transactions, etc. For example, PPBL can accept a maximum of INR 2 lakhs as deposits per account, which was breached for certain accounts. Additionally, compliance with respect to security controls in video-based KYC processes and device binding measures were not met. Despite the nine-member board of directors with an established banking record, consistent and fundamental lapses appear to have triggered this downfall.
One also wonders whether the commingling of infrastructure and operational services between PPBL and its non-banking listed promoter One97 Communications Ltd. (“OCL”) that owns the ‘PayTM’ platform was also an “implicit” concern. The RBI guidelines for payments banks state that other financial and non-financial services activities of the promoters, if any, should be kept distinctly ring-fenced and not commingled with the banking and financial services business of the payments bank. The commingling is apparent from the PPBL website3 which suggests that installing the PayTM app (owned and operated by OCL) is the only way to open an account with PPBL, clearly establishing PPBL’s dependency on OCL, an unregulated entity. This not only goes against the ring-fencing requirement but also questions PPBL’s modus operandi as a regulated entity.
Typically, after receiving a regulatory notice highlighting non-compliant practices, the board springs into action to fix the issues, closes all compliance and risk gaps, and proactively engages with the regulator to get a green chit. The “go-slow” signs in the form of penalties, embargos, and systems audits seem to have been missed by PPBL.
Even though PayTM reassures merchants and customers of the option to transition to other banks for operating a nodal account, it remains to be seen whether banks will be open to onboarding smaller merchants. With KYC non-compliances emerging as a primary concern, there is a worry that services could be disrupted for small merchants as well as wallet holders. It will be interesting to observe whether PayTM can effectively transition, or if other players will seize the opportunity to capitalize on the situation.
While financial innovation and inclusion cannot come at the cost of prudent banking practices, the impact of pioneers like PayTM on the growth of the digital economy, their penetration, and the dependence of the economy on them cannot be underplayed. For the industry, it is a crucial time to look from the outside and understand the regulator’s stance on compliance within the fintech industry. Their importance may not overshadow their lapses.
Views expressed by: Ankita Hariramani, Counsel, Spice Route Legal
