Paytm fiasco: Merchants must onboard alternative provider for UPI payments

Long-term, fundamentals-oriented investors should stay away from its stock for now

The Reserve Bank of India (RBI) recently imposed significant restrictions on Paytm Payments Bank (PPB). These restrictions, according to the central bank, are the result of “continued material supervisory concerns”.
 

Risks faced by UPI customers

Paytm’s Unified Payments Interface (UPI) service customers may not be hit too hard. Their Paytm UPI handle would be linked to a wallet, a PPB account, or another bank account. After February 29, they will not be able to add money to the wallet or the PPB account.
 

“You will still be able to spend the money in the wallet or the PPB account even after February 29,” says Udbhav Tiwari, head of global product policy, Mozilla.
  

In March 2022, the RBI had stopped PPB from onboarding customers. “If you set up your Paytm UPI account after this event, it would anyway be linked to another bank (non-PPB) account. Such accounts will continue to function,” says Tiwari.  
 

Advice: Avoid adding money to the PPB account or wallet in February. To be 100 per cent safe, spend or transfer the money lying in them. Those whose Paytm UPI handles are linked to a PPB account should link them to another bank account. 

As a precaution, onboard an alternative UPI service so that you don’t face potential difficulties in making payments. Banks offer UPI services. Other major providers include Google Pay, PhonePe, BHIM, Mobikwik.
 

Risks faced by retailers/merchants
 

Experts say retailers or merchants face higher risks. When a customer scans a Paytm Quick Response (QR) code at a retailer’s, the money, for the majority of retailers, goes into a PPB account in the retailer’s name. After February 29, no more money can be deposited in those accounts.
 

Some retailers may be receiving money in another bank account (non-PPB account). They also face risks. Every time a customer makes a payment, the money is aggregated in an account. A settlement occurs at the end of the day or after the amount crosses a threshold. 

The aggregate amount is then transferred to the retailer’s account. Currently, Paytm uses PPB accounts for these settlements. 

Paytm is working on partnerships with alternative banks to temporarily store money before settlement occurs.  Paytm is also working on porting current retailer handles to other banks (to replace PPB accounts) so they can continue receiving payments. However, experts say accomplishing this before February 29 may be challenging, given Paytm’s large customer base.
 

Remember, a shop that is unable to accept digital payments after February 29 could lose customers.  
 

Advice: Get a new QR code from an alternative provider. PhonePe, Google Pay, Pine Labs, etc. are some of the other service providers. It is advisable to onboard an alternative service rather than wait for Paytm to fix the problem.
 

Risks faced by PPB customers
 

A payment bank cannot lend money. It must also invest 75 per cent of its deposits in government securities as Statutory Liquidity Ratio (SLR) and 25 per cent in time deposits of other scheduled commercial banks. “The probability of a payments bank defaulting is very low,” says Abhishek Kumar, a Sebi-registered investment advisor (RIA) and founder, Sahaj-Money. Customers can withdraw from PPB accounts even after February 29.
 

Advice: If the regulator identified major non-compliance by the bank and acted after repeated discussions, the situation is clear. “Considering the RBI’s strict action, it would be advisable for bank customers to transfer their deposits to other banks before February 29, until this matter gets settled,” says Kumar.
 

Risks to stock investors
 

Analysts regard the RBI’s directive as a negative development for the One97 Communications stock. “There is a question mark on the company’s corporate governance practices. Custo-mer confidence has received a jolt. Mer-chants could be affected. The comp-etition is on the front foot. The entire brand has taken a hit,” says Ambareesh Baliga, an independent equity analyst.

He adds that these developments are likely to delay the date by which the company turns profitable.
 

Advice: Long-term, fundamentals-oriented investors should be cautious. “I don’t see serious investors investing in the stock for the long term,” says Baliga.

Debunking myths for merchants

Myth: Taking a QR code from a bank is the better option
 

Expert view: Banks, especially the larger ones, are perceived to be more reliable. However, fintech players tend to have higher transaction success rates as they are more competent at handling the technology, resulting in a smoother experience for app users
 

Myth: It will be hard for merchants/retailers to switch from Paytm to another service provider since their customers use Paytm

Expert view: UPI is an interoperable standard. Customers can make payments using any UPI app and retailers can receive them using any service provider

Myth: Ban on Paytm will cause immense hardships to retailers

Expert view: The regulator has placed curbs on Paytm Payments Bank, not Paytm’s UPI service