A moment of reflection for startup founders

If there's one lesson fintech stars can draw from Paytm's regulatory challenges, it's not to take their stardom for granted

Ever since the regulator issued the latest directive to Paytm Payments Bank on January 31, commentators and self-styled experts have had one thing to declare: This is the end of the road for the company. However, nobody has quite made it clear whether it would be the end of the road for the entire Paytm universe and the brand that has been the face of Indian fintech for years, especially after the government’s demonetisation move in November 2016.

Surely, Paytm’s rivals have acted swiftly to fill the gap that the Vijay Shekhar Sharma-run business may leave after the Reserve Bank of India (RBI) directive comes into action from March 1, but we are still a fortnight away from seeing the full impact of the regulatory action on the ground. If Paytm became the overnight default option for the masses in the cashless times post-demo, its demise could mean some collateral damage too —both in real terms as well as in branding and messaging for fintech within India and overseas.    

Meanwhile, if there was any doubt in anybody’s mind regarding the firmness of the RBI action against Paytm Payments Bank, Governor Shaktikanta Das spent considerable time during two unrelated events within days to dismiss such thoughts. In a seven-point explanation of the matter at the monetary policy press conference last week, Mr Das elaborated on the concept of supervisory or business restrictions when bilateral engagements with regulated entities for corrective action fail to yield results.

Then, on February 12, after a meeting of the central board of directors of the RBI, Mr Das, who had moved from the North Block to the Mint Road more than five years ago, again took questions on Paytm. This time, he clearly ruled out any review of the decision on the  bank. While pointing out that the proposed FAQs on the issue would deal with consumer-related issues and would not be a rollback of the RBI directive, the governor stated that the central bank is and will continue to be supportive of the fintech sector and promote innovation in the financial system. Mr Das was, after all, one of the key officials in the finance ministry overseeing the implementation of demonetisation while encouraging people to opt for fintech solutions at that point.                   

It’s significant that the RBI has clarified its stand, saying there’s no room for review, soon after the Paytm founder had met Union Finance Minister Nirmala Sitharaman in her office. The word that had come out after Mr Sharma’s short meeting with Ms Sitharaman was that the Paytm issues need to be discussed with the RBI, as that’s the right platform. If that was the feeler from the finance ministry, it’s been all quiet from other quarters in the government lately on the Paytm issue. The backroom talk on the possible replacement of Mr Sharma, either with an insider or an external person, as the chairperson of Paytm Payments Bank has been going on though.

When it comes to allegations, violations of KYC (know your customer) norms and the linking of multiple accounts with a single PAN have been spoken about by sources in the know. Money laundering has also been one of the allegations but not many details have come out on this very serious breach. Complicating the matter are disparate voices on investigation by the Enforcement Directorate (ED) into the Paytm issue. While the ED seems to have suggested that it’s waiting for information from the RBI, revenue department officials have indicated that the ED would take action according to provisions of the law if there are inputs on money laundering. Parallelly, the China story adds another layer to the Paytm saga — the government, it seems, is examining foreign direct investment (FDI) from China in Paytm Payments Services Ltd (PPSL), which is a payment aggregator subsidiary of One97 Communications. One97, which earlier had Chinese major Alibaba as a key investor, now has investments from the Ant Group — an affiliate company of Alibaba. PPSL’s application to operate as a payment aggregator under the guidelines on the Regulation of Payment Aggregators and Payment Gateways is pending with the central bank, following a rejection in 2022.

The Chinese links of the Paytm group should not come as a surprise. The rise of Paytm as a “desi” brand has been largely powered by Alibaba until the recent dilution of the stake by the Chinese conglomerate. Mr Sharma has been more than vocal about his close ties with Jack Ma over the years. Even so, Paytm has been celebrated as an India-made brand by traders and merchants, as opposed to the likes of Amazon and Walmart, which, by the way, owns another “desi” brand, Flipkart.

At this point, when most conversations on fintech lead to the end of the road for Paytm Payments Bank and maybe for the brand Paytm too, startup founders need to sit up and think about how not to take stardom for granted and how not to disappoint their fans who have stood in long queues for those precious selfies with popular entrepreneurs.