India central bank’s crackdown on Paytm likely to affect country’s FinTech sector
▶ Regulatory action a sign of increased scrutiny, analysts tell Rebecca Bundhun in Mumbai
The regulator’s order for Indian digital payments firm Paytm to halt a large part of its business by the end of this month serves as a warning to some companies in the country’s fast-growing financial technology sector as scrutiny increases, analysts say.
India’s central bank, the Reserve Bank of India (RBI), recently ordered Paytm’s payment bank to cease its business by February 29, citing “persistent non-compliance”. It caused the company’s share price to plummet.
Paytm Payments Bank is behind many of the features that the Paytm app offers, including its digital wallet.
Barnik Maitra, strategy consultant and former managing partner at consultancies Arthur D Little and McKinsey, describes the RBI crackdown as a sign of tightening scrutiny and monitoring in the coming days.
“There will be very little patience for players who are breaking laws and compliance norms which everyone in the industry, including larger players, are expected to adhere to,” Mr Maitra says.
India’s financial technology sector has grown rapidly. More than 9,000 FinTech start-ups operate in the country – the third-highest globally.
The sector is projected to reach $70 billion in annual revenue by 2030 in the country, McKinsey India and Elevation Capital said in a report. It said that FinTech companies account for 70 per cent of digital payment transactions in India.
As the industry expands, regulators are trying to balance regulation with innovation.
However, some companies have frequently fallen foul of RBI guidelines, Mr Maitra says.
“In general, the RBI has been tightening its stance towards FinTech, particularly when it comes to either lending or even taking deposits,” he says.
“The RBI is a conservative regulator. They are fine with allowing experimentation for a certain period of time within well-defined guardrails – but I think there will be a crackdown on repeat offenders.”
FinTech companies are sitting up and taking notice, but they are also concerned that any overregulation could have negative consequences for the sector’s development.
“The recent RBI action against Paytm will prompt other companies in the sector to be more vigilant regarding regulatory directives and compliance,” says Gaurav Goel, founder and director of Fynocrat Technologies, a financial technology start-up.
“We believe that the era of taking regulatory and compliance matters lightly has passed. Nevertheless, such actions may have repercussions on innovation within the FinTech sector.”
Akshar Shah, founder and chief executive at Fixerra, says the Paytm case “raises significant concerns” for the sector in India. It also “underscores the importance of fostering a culture of compliance and accountability within FinTech organisations”, he adds.
It is not the first time that there has been a crackdown.
In 2022, the RBI announced new digital lending regulations which barred the practice of loading nonbank prepaid payment instruments via credit lines. This impacted several FinTech firms and forced them to overhaul their operations.
Companies like Paytm, over the years, have capitalised on being pioneers in a new sector – and regulators had to try to keep pace, analysts say.
“All wallet and aggregator platforms came about and flourished in an environment where there was a glut of consumers who wanted to transact online, but couldn’t as the regulatory oversight required to issue credit cards, or to on-board users into the formal banking system was too onerous, defeating unit cost economics,” says Utkarsh Sinha, managing director at Bexley Advisors, a boutique investment bank.
“Wallets filled the gap perfectly. Regulators at the time adapted quickly and tried to mainstream these innovations.”
The market has become competitive, with Paytm locking horns with Google and Walmart-owned PhonePe, and the sector has attracted billions of dollars from investors.
Paytm listed on the stock exchanges in India to great fanfare in 2021. But its share price slumped and never recovered to its issue price, with analysts citing overvaluation.
“The [latest] woes specific to Paytm Payments Bank stem from an era of excess equity capital and valuations, where there was a glut of money chasing customer acquisition, often at the cost of regulatory compliance,” says Mr Sinha.
Following the RBI’s notice asking Paytm to stop a large part of its operations, the company said it is intent on being fully compliant with the central bank regulations.
“For every challenge, there is a solution and we are sincerely committed to serve our nation in full compliance,” Paytm founder and managing director Vijay Shekhar Sharma said.
The RBI has sought to calm industry-wide concerns following the Paytm row. “There is no worry about the entire system; it is an issue with a specific institution,” said RBI governor Shaktikanta Das. “It is not a case of regulatory deficiency. It is an issue of compliance with various parameters,” he said.
Ultimately, however, the sector stands to benefit, some analysts say. “This tussle between the companies testing their limits and the regulator reining them in is healthy for the ecosystem, a part of the natural order that helps find a balance and create new operating paradigms,” says Mr Sinha.
Concerns are growing that any overregulation could have negative consequences for the sector’s development