Lessons to learn from Paytm Payments Bank !

Paytm Payments Bank has established itself as a major player in India's digital payments landscape. While its journey has been filled with both successes and challenges, valuable lessons can be gleaned from its experience.

The Reserve Bank of India on January 31 issued an order banning Paytm Payments Bank Limited from carrying out a wide range of activities from February 29. 2024.

The restrictions on PAYTM Payments Bank imposed are:

# No further deposits, credit transactions, or top-ups are allowed in any customer accounts, prepaid instruments, wallets, FASTags, or National Common Mobility Cards after February 29, 2024, other than any interest, cashback, or refunds.

# No fund transfers, Bharath Bill Pay, and UPI facility should be provided by the bank after February 29, 2024.

# The nodal accounts of One97 Communications Limited and Paytm Payments Services Limited are to be terminated at the earliest, in any case not later than February 29, 2024.

# Settlement of all pipeline transactions and nodal accounts (in respect of all transactions initiated on or before February 29, 2024) should be completed by March 15, 2024, and no further transactions should be permitted thereafter.

A system audit conducted by the RBI into Paytm Payments Bank found several lapses pertaining to adherence to anti-money laundering laws regarding know-your-customer (KYC) documents, The RBI found that the company did not conduct proper background checks on the source of funds before onboarding clients.

Customers of Paytm Payments Bank are, however, allowed to withdraw or use their balances in their bank accounts, current accounts, prepaid instruments, FASTags, National Common Mobility Cards, etc., without any restrictions, up to their available balance.

Last year, the RBI fined Paytm Payments Bank $650,000 for non-compliance, including on “know your customer” rules. In 2022, it barred the bank from taking on new customers and ordered a comprehensive IT system audit. Following this, multiple audits by external auditors revealed persistent non-compliance and continued material supervisory concerns in the bank, warranting the said supervisory action, RBI stated.

Parent One97 Communications Ltd wholly owns Paytm Payment Services and 49% of Paytm Payments Bank, in which founder Vijay Shekhar Sharma owns 51% in his personal capacity. The complex ownership structure of Paytm Payments Bank adds to the central bank’s concerns about related-party transactions. Whereas, CEO Vijay Shekhar Sharma said. “Digital payments and services app Paytm is working and will continue to work as usual even after February 29.

The central bank also noted certain vulnerabilities in the IT systems of the lender in terms of cloud, data storage and data privacy, which were also flagged to the company on several occasions, but the regulator found lapses despite warnings.

Fintech players need to find a balance between innovation and risk management. Pushing boundaries for financial inclusion and convenience is important, but it should not come at the expense of safety and regulatory compliance.

S Mohini Ratna, Editor, VARINDIA