Will Paytm Stop Working After Feb 29? Here’s Answers to All Your Questions

Paytm is a digital giant that controls around 13% of the market share in India. It has a wide reach, catering to 500 million Indians, with over 330 million digital wallets, 150 million-plus UPI handles, and over 30 million bank accounts. Paytm Payments Bank offers various Paytm services, including wallets, UPI, utility bill payments, and deposit accounts.

In a startling turn of events, the Reserve Bank of India (RBI) has imposed limitations on all services provided by Paytm Payments Bank (PPBL). These restrictions will take effect on February 29, 2024. Here's what the RBI has outlined in its directive and its implications for users.

The RBI's directive underscores that no additional deposits or credit transactions will be permitted beyond the specified date. Regarding fund transfers, bill payments, or UPI facilities, the RBI stipulates that Paytm Payments Bank must cease offering these services come March 2024. The RBI has taken this action under Section 35A of the Banking Regulations Act, 1949.

What Could be the Root Cause for This and What Is RBI's Stand?

In March 2022, the RBI prohibited Paytm Bank from onboarding new customers and mandated a comprehensive external audit of Paytm. Based on the findings of the compliance validation report prepared by these external auditors, it was uncovered that Paytm Payments Bank exhibited what the RBI termed as persistent non-compliance and ongoing significant supervisory concerns.

As a result, this necessitated supervisory intervention, and nearly a year later, the RBI is now implementing extremely strict measures, including forbidding any transactions after February 29, 2024. While the RBI has not specified any particular reason for its action, the severity of the stringent action taken by the RBI and the strong language used suggest there may have been significant and prolonged non-compliance issues. This serves as a warning to both users and shareholders of Paytm Payments Bank.

To give you some context, One97 Communications owns and operates the brand Paytm and holds a 49% stake in Paytm Payments Bank, with the remaining 51% owned by Vijay Shekhar Sharma, the founder and CEO of Paytm, according to the company's 2022-23 annual report.

The interconnectedness of these entities is evident across various dimensions. Paytm Payments Bank is accessible solely through the Paytm app, and funds from the bank are exclusively available through the app, with registration and login facilitated only via the app. Moreover, the Paytm app serves as the primary platform for promoting and distributing all bank services.

Furthermore, all of Paytm's 330 million-plus wallet accounts and 150 million-plus UPI handles are housed within Paytm Payments Bank. To address this, the RBI has instructed One97 Communications Ltd. and Paytm Payments Service Ltd. to terminate their nodal accounts with the bank immediately. Note that nodal accounts are specialised accounts for receiving payments from various bank accounts and transferring them to merchants.

Another area of concern for the RBI is Paytm Post-paid, a Buy Now Pay Later (BNPL) offering for retail users. While Payments Banks are restricted to accepting deposits and cannot extend loans, Paytm provided BNPL services in collaboration with other lenders, offering personal loans up to Rs 60,000 at 0% interest. This raised red flags as it involved Paytm selling products that the bank is prohibited from selling, leading to confusion among users.

Vijay Shekhar Sharma, the primary stakeholder of One97 Communications Ltd., holds a 19.42 per cent ownership stake, whereas Antfin, a subsidiary of China's Ant Group Co, possesses a 13.5 per cent stake. Some experts suggest that the presence of Chinese investment could be an additional factor influencing the government's decision, particularly considering the prior ban on Chinese apps in India.

In the latest news, sources revealed that the Reserve Bank of India is considering revoking the operating license of Paytm Payments Bank as early as next month once depositors' interests are secured.

The sources disclosed that the RBI could take action following a deadline set for February 29, after which Paytm Payments Bank will prohibit customers from adding funds to their savings accounts or the popular digital payment wallet. They cited violations, including the improper use of customer documentation rules and the failure to disclose significant transactions. However, they requested anonymity as the information is confidential.

It should be noted that no final decision has been made yet, and the RBI's stance may change depending on representations made by Paytm, the sources added.

According to the source, hundreds of thousands of customers of Paytm Payments Bank had not completed know-your-customer documentation. In some instances, a single identity document was used to register thousands of customers. Moreover, transactions exceeding regulatory limits, amounting to tens of millions of rupees, were being conducted in minimum-KYC accounts, sparking concerns about money laundering.

The possibility of revoking the permit will be perceived as a more severe measure compared to the action taken by the RBI earlier in the week.

What Implications Does This Hold for Users?

This action will affect a substantial user base, including 330 million wallets, 30 million bank accounts, 1.6 billion UPI transactions per month, and 8 million FASTags linked to Paytm Bank.

Simply put, as of February 29, you will lose the ability to top up your wallet, prepaid instruments, FASTags, or National Common Mobility Cards. Essentially, all account holders are mandated to deplete their balances and terminate their accounts. Following the announcement, Paytm's share price plunged by 20% on Thursday.

After February 29, UPI payments associated with a Paytm Payments Bank account will be discontinued. However, users with UPI addresses linked to any other private or public sector bank will not experience any changes. As for Paytm Wallet services, which rely on Paytm Payments Bank, they will encounter interruptions. Until February 29, deposits into the wallet will be accepted, and customers can utilise the funds until they are exhausted. Nevertheless, users can still transfer the wallet balance to any bank account without incurring additional fees.

User Onboarding

Come March 01, Paytm Payments Bank will halt the onboarding of new users. However, existing users will retain access to online payment solutions and offline services, including Paytm's payment gateway for online merchants. The offline merchant payment network will persist without interruption for existing merchants.

Deposits

After February 29, Paytm Payments Bank will no longer be open to new deposits. Existing users will only be able to add funds until the end of February.

Stock Market and Mutual Fund Services

Customer investments with Paytm Money are safe and secure. The company has stated that the recent RBI guidelines concerning Paytm's associated bank will have no impact on the operations of Paytm Money Ltd. or the investments of its clients in stocks, mutual funds, or NPS. Paytm Money Limited operates under SEBI regulation and is fully compliant with regulatory standards.

FASTag and Wallets

After February 29, no credit transactions or top-ups will be allowed for FASTags, prepaid instruments, and other Prepaid Payment Instruments (PPI). This restriction extends to NCMC cards used in metros and various sub-wallets designated for food and fuel. Existing balances can be used until depleted, but the addition of new funds will be prohibited after the end of February.

Users who possess FASTags issued by Paytm are advised to get a new tag from alternative issuers and deactivate their current one. Paytm handled approximately 58 million FASTag transactions in December of the preceding year. Given Paytm's significant presence as the third-largest player in this sector, a substantial user base will be affected.

However, as stated by Paytm, many FASTag users are linked with Paytm Payments Bank, with most having acquired their FASTags from other banks. The RBI has granted Paytm a one-month window to shut down its nodal accounts with Paytm Bank. The company is presently shifting these nodal accounts to other prominent commercial banks. Should the transfer of nodal accounts be finalised before the deadline, users can access their balances through third-party banks.

"There is a range of products offered by the Paytm app to users, and some products like FASTag, which are already provided by other banks, will remain available," stated Bhavesh Gupta, President and COO.

Loans

As stated by the company, loans acquired through Paytm do not pose any risk. These loans are facilitated by third-party lenders, and borrowers are required to continue their repayment obligations.

However, the bank operates as a restricted bank that can take deposits but is not allowed to lend.

What Does Paytm Have to Say?

According to a recent statement issued by Paytm, existing users will retain access to the platform's payment solutions, and its offline services will remain operational after February 29. "The Paytm Payment Gateway (serving online merchants) will maintain its provision of payment solutions to its current merchants. One97 Communications Limited's offline merchant payment network offerings such as Paytm QR, Paytm Soundbox, and Paytm Card Machine will continue without interruption, including onboarding new offline merchants," Paytm stated in its press release.

Paytm's founder and CEO, Vijay Shekhar Sharma, expressed gratitude to the company's customers on the social media platform X (formerly known as Twitter) for their unwavering support. He reassured users that the Paytm app will continue functioning as usual beyond February 29. His message said, "To every Paytmer, Your favourite app is working and will keep working beyond 29 February as usual. I, with every Paytm team member, salute you for your relentless support. For every challenge, there is a solution, and we are sincerely committed to serve our nation in full compliance."

As per Paytm, Paytm and its services will remain operational beyond February 29th, as the majority of its services are provided in conjunction with other banks. In the past two years, there has been a notable trend in fintech companies collaborating with multiple banks, a trend that is expected to intensify. Paytm collaborates with numerous banks, not just its partner bank, for various payment solutions. The company offers merchant acquiring services in partnership with several leading banks in the country and plans to expand its relationships with third-party banks.

What Does the Future Hold for Paytm?

Paytm is currently under pressure to safeguard its business, particularly its UPI operations, which command a 13% market share among both merchants and consumers. Additionally, offline merchants utilising the app face difficulties, as many of them have accounts with Paytm Payments Bank.

A critical issue arises from the process by which money flows through Paytm's ecosystem. When a user scans Paytm's QR code, the funds initially pass through Paytm Payments Bank's nodal account before reaching the merchant's account, typically held with Paytm Bank. Now, Paytm must not only transition the nodal account to another bank but also update the bank account information for its 37 million merchants. Failure to do so in time could result in merchants not receiving transferred funds, leading to their Paytm QR codes being replaced with alternatives.

Moreover, the National Payments Corporation of India mandates that high-volume payment apps, like Paytm, partner with at least three banks. Securing new banking partners and ensuring their systems are prepared within a tight timeframe presents a significant challenge.

The future appears daunting for Paytm, with expectations of a considerable downturn in its stock value in the short term due to the halt of several revenue streams following the RBI's directive. Besides, according to the sources, there is a possibility of the RBI revoking the operating license of Paytm Payments Bank.

Furthermore, customer migration to competitors may pose a challenge for Paytm in regaining their trust even after resolving regulatory issues.

Here Are Some Frequently Asked Questions (FAQs) by Paytm Users:

1. Are Paytm and Paytm Payments Bank the same?

There is a common perception that Paytm Payments Bank and Paytm are closely intertwined, but structurally, they are distinct entities. "It is an associate company. For Paytm Payments Bank, there are separate compliance, risk management teams, and other necessary structures," stated Madhur Deora, president of Paytm.

2. How long can Paytm Payments Bank users continue using their accounts?

Paytm Payments Bank users are able to utilise their savings account balances, wallets, FASTags, NCMC accounts, etc., until February 29, 2024. Subsequently, transactions using any Paytm Payments Bank products will not be possible.

3. Does FASTag functionality remain available on the Paytm app?

There are numerous FASTag users associated with Paytm Payments Bank, the majority of whom have obtained FASTags through other banks. The RBI has provided Paytm with a one-month period to close its nodal accounts with Paytm Bank. The company is currently transitioning these nodal accounts to other major commercial banks. If the nodal transfer is completed before the deadline, users will be able to continue using their balances via third-party banks.

"There is a range of products offered by the Paytm app to users, and some products like FASTag, which are already provided by other banks, will remain available," stated Bhavesh Gupta, President and COO.

4. Are my investments with Paytm Money safe?

The investments of customers with Paytm Money are safe and secure. The company assured that the recent RBI directives regarding Paytm's affiliated bank will not affect the operations of Paytm Money Ltd. (PML) or the investments of its clients in equity, mutual funds, or NPS. Paytm Money Limited is regulated by SEBI and fully compliant with regulations.

5. Will the Paytm Gateway continue to work?

As stated by the company, the Paytm Payment Gateway, serving online merchants, will maintain its provision of payment solutions to its current merchants. Paytm's offline merchant payment network services, including Paytm QR, Paytm Soundbox, and Paytm Card Machine, will continue without interruption, allowing for the onboarding of new offline merchants as usual.

6. Will it affect my recurring payments?

The company says that Mobile recharges, subscriptions and other recurring payments will continue to function seamlessly despite the RBI directive.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

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