The Reserve Bank of India’s (RBI) directive to Paytm Payments Bank last week indicates serious irregularities in the controls and checks in the bank and raises concerns about similar lapses in other fintech service providers. As this newspaper has reported, the Enforcement Directorate will probe the Bank if the RBI raises concerns over money laundering. The RBI has practically asked the bank to pull down its shutters by stating that it cannot take any further deposits or allow any top-ups in customer accounts, wallets, FASTags, prepaid instruments or National Common Mobility Cards. It cannot provide any fund transfer or banking service after the end of this month. Customers have, however, been allowed to withdraw their funds from accounts and prepaid instruments. The Paytm Payments Bank’s customers may shrink sharply by the end of this month.

This action will have ripple effects across the digital payments ecosystem. Paytm Payments Bank is the back-end for One97 Communications, which is among the popular players in online digital transactions, offering its services under the Paytm brand. The 330 million Paytm wallets were however issued by Paytm Payments Bank. RBI has tried to sever the link between the Paytm Payments Bank and One97 Communications by asking the bank to close the nodal accounts of One97 Communications at the earliest. One97 Communications now has a month to migrate its merchants and users to some other bank, which is not going to be easy. According to NPCI, Paytm accounted for 13 per cent of UPI transaction volumes and 11 per cent of transaction value in October 2023. Millions of users will be inconvenienced, if the transfer of funds to another bank is held up. Paytm Payments Bank has also issued 17 per cent of the FASTags in the country and its 58 million users will also have to shift to another service provider before March.

Paytm Payments Bank had been found non-compliant with RBI’s rules multiple times since it was established in 2017. RBI has not spelt out the offences this time, but has said that the action was due to “persistent non-compliances and material supervisory concerns in the bank.” This episode shines the spotlight on the rather lax policies adopted by payments banks, small finance banks and other fintech payment gateways while onboarding new customers and their lack of adherence to the stipulated KYC checks. In a bid to show higher customer addition, creation of fake accounts with fake IDs appears rampant.

The need to encourage the rapid increase in digitisation of payments should not translate into regulatory laxity. RBI has done well to crack the whip on Paytm Payments Bank and should follow this with tighter surveillance on such entities. Besides their opacity, they have not been able to further financial inclusion through lending. RBI also needs to review the fundamental question of whether there is a place at all for payment banks in the financial system.

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