Paytm shock: Fintech cos wary as frequent regulatory actions hurt sentiment

Compliance to take centre-stage in fintech operations this year: Industry

A regulatory storm on Paytm Payments Bank has cautioned participants in the fintech ecosystem to make compliance a priority in terms of a company’s operations. 

Fintech industry players believe the Paytm Payments Bank episode will ensure strict adherence of compliance and regulatory measures in the growing sector. Executives Business Standard spoke to said companies should have clarity on regulatory requirements. 

“RBI has been a progressive regulator, but we now see frequent action in the fintech space. The sentiment takes a hit in the short term due to the frequency of such action. We see a lot of consolidation happening in the space this year. Many smaller players will die, others will get acquired,” said a senior executive from the fintech industry on condition of anonymity. 

Another senior executive from the investment community, who did not wish to be named, explained that RBI’s decision to suspend most of Paytm Payments Bank’s operations hurts the ecosystem and customers at large. 

“The decision can have a cascading effect on users and the company separately. Users will be affected first since many in tier two and tier three regions may not understand the scale of impact on them, and the nitty-gritty of the regulator’s decision. The company has to scramble and will have less than a month to mitigate any substantial impact,” the person said. 

One immediate impact could be the listing attempts of a few of the players. An investment banking source quoted above said: “There are are some fintech IPOs in the pipeline currently. Based on our discussions, we expect it to be a difficult year for those IPOs.”

The person explained that investors too will ensure abundant caution before investing into any fintech company since compliance will assume a bigger role than the product. 

“Fintech founders are entrepreneurs and product people. They are driven more by the product, and the way it solves real problems and may lack sufficient legal and regulatory knowledge. As investors, we study how a certain regulation may affect companies in the longer term based on risks associated with the business model,” the person added. 

But with this incident, compliance now takes centre-stage. “This shows that one should be very serious about compliance. I think this is how players look at the entire episode at the Paytm Payments Bank,” a fintech industry executive on the condition of anonymity said. 

Fintech participants added that VC companies and other investment firms are now keen on having talent skilled on regulatory themes before making an investment. 

“VCs are looking to see if a young firm has enough talent to address compliance. It is necessary to not just objectively look at compliance, but also follow it in the spirit of the law. That requires skilled talent,” an industry executive said. 

The Reserve Bank of India (RBI) had cited ‘persistent non-compliances’ and ‘continued material supervisory concerns’ in the payments bank which led the regulator to place restrictions on the platform from accepting new deposits and carrying out transactions. 

While some are clearly worried of the impact of the regulator on Paytm, many are of the opinion that with the fintech industry becoming such an important part of the economy that they can no longer avoid compliance.

“This does not seem like an issue that has happened all of a sudden. If you trace the whole trajectory of the company, there were problems that were observed even earlier. The regulator always gives a long rope to people to correct complications, and would not want any market disruption,” the person quoted above said. 

In March 2022, the regulator barred Paytm Payments Bank from taking in new customers. It was asked at that time to appoint an external auditor to check its information technology systems. 
 

Meanwhile, in an analyst call held last week, Vijay Shekhar Sharma, founder and CEO, Paytm, explained that the company was not aware of the nuances that triggered regulatory restrictions on the payments bank.

“There is something the RBI believes in and we totally believe in the fact that there is something that RBI would have seen. Have they sent us details?  Answer is no. They have not sent us any details. The opinion has come based on different audits they have done and solutions based over a period of time. We do not know the exact nuance, what triggered it,” Sharma added. 

A person close to the industry added that the regulator ensures detailed reports are provided in case of lapses. 

“RBI is found to be thorough when penalties are levied, or lapses are observed. They give a company a detailed report on what was observed, what are the lapses, and provide evidence to back the violation. It is like an academic exercise,” the person said. 

Meanwhile, VCs elucidated that funding to companies starting with series A rounds may experience a squeeze going forward. 

This development comes on the back of an already fragile funding year (2023), when funding to fintechs dipped 63 per cent year-on-year (YoY) from $5.4 billion in 2022 to $2 billion in 2023, according to data from market intelligence platform Tracxn. 

Data shows funding rounds decreased 71 per cent, from 504 rounds to 144 rounds, during the same time. Series A funding rounds were down from 194 to 46 during the same period. 
 

Meanwhile, Growthpal, a merger and acquisition (M&A) deal sourcing platform, in a report said there has been a decline in fintech start-ups amidst regulatory complexities. 

Out of the 30 acquisitions last year, 19  buyers were large acquirers ( with over 1000 employees or funding greater than $50 million), six were mid-sized acquirers ( over 500 employees or funding  over $20 million) and 5 were small acquirers ( with less than 500 employees or funding less than $20 million).     

The report added that all fintech verticals except lending had gone through consolidation in 2023 where a few large players acquired smaller ones and grew their portfolio by doing so.