While the markets have already shaved off $2 billion in Paytm's valuation, the most significant consequence seems to be the growing mistrust and uncertainty among UPI app users. Image: iStock

Paytm crisis goes beyond company to leave an impact on fintech sector

It may affect vital areas of financial-technology industry, like risk management, regulatory compliance, business model viability, client trust and innovation

As the situation with Paytm becomes increasingly complex, the entire fintech ecosystem is feeling the pressure as valuations are dipping and investors are becoming wary of the sector. The street has already shaved off $2 billion in Paytm's valuation, but the most significant consequence seems to be the growing mistrust and uncertainty among UPI app users.

In response to these challenges, numerous startups have appealed to the Prime Minister's Office and the Reserve Bank of India (RBI), asking for a reversal of the measures taken against Paytm. This reflects a widespread belief that the payments bank's failure would have immense repercussions, too significant to understand at present.

At the same time, there has been enough criticism against the regulator as many believe it was well aware of the follies of the Paytm management but did not act promptly.

RBI directive to Paytm Payments Bank

To recall, last week the RBI issued a directive to Paytm Payments Bank, a venture co-owned by Vijay Shekhar Sharma and the parent company One97 Communications, to stop initiating any new banking operations by the end of February.

This directive encompasses a range of activities, including accepting deposits into customer accounts, issuing prepaid solutions like wallets and FASTags, and handling UPI and bill payment services.

Paytm Payments Bank is the repository for all major services provided by Paytm encompassing wallets, UPI, and deposit accounts. It serves as the base for over 330 million wallet accounts and over 150 million UPI handles belonging to Paytm.

Wallet was centre of controversy

But it was the wallet which was the centrepiece of the controversy that has been dogging the payments bank since it came into existence. According to analysts, the intricate ties between the company's operations and the payments bank have made it challenging to delineate responsibilities.

Meanwhile, the central bank has chosen to remain silent after issuing the directive to Paytm, but more is needed. If the crisis is deep enough for it to act firmly against the payments bank, the largest in its space, then it should reveal the extent of the damage caused to the fintech ecosystem because Paytm Payments Bank Ltd has an extensive user base and over 10 crore KYC customers and has issued over 80 lakh FASTag units.

Reports that RBI may cancel licence

There are several reports that the RBI might go ahead and cancel the licence of the payments bank, and to put an end to such speculation; the central bank would do well to clarify its stand on the issue now that the finance ministry has informed the CEO of the company Vijay Shekhar Sharma that it has nothing to do with the directive.

What is of more concern is that the valuation of fintech players will go down, apart from facing trust issues. The fintech players will need to review all their procedures with a toothcomb and act quickly to set them right if any problems violate regulations.

What this means for fintech in general

The crisis is more significant than Paytm's immediate operational and financial problems. It affects many vital areas of the fintech industry such as risk management, regulatory compliance, business model viability, client trust, innovation, and market adaptation.

Risk management and regulatory compliance: The fintech player can do well to have an in-depth look at how they can strengthen their risk management strategies and ensure compliance with evolving regulatory requirements. This could cover best practices for dealing with regulatory scrutiny, managing operational risks, and preparing for policy changes.

Business model diversification: Analysis of the importance of diversifying revenue streams and not relying too heavily on a single product or market segment.

Customer trust and brand reputation: Get insights into maintaining customer trust and brand reputation in the face of challenges. This could include strategies for transparent communication, handling customer data responsibly, and delivering consistent service quality.

Innovation and market adaptation:

· Discuss the need for continuous innovation and adaptability with the investors and whether they can stay ahead of market trends.

· Invest in new technologies.

· Adapt their offerings to meet changing consumer needs.

Financial sustainability and growth strategies: Examine financial plans to ensure long-term sustainability and growth. This might include an analysis of raising capital, cost management, scaling operations, and strategic partnerships.

Corporate governance and leadership: Exploration of the role of effective corporate governance and strong leadership in navigating crises. This could cover decision-making processes, leadership during uncertain times, and building a solid corporate culture.

Security and fraud prevention: Detailed guidance on enhancing security measures and fraud prevention tactics and using the latest technologies and practices for protecting customer information and transactions.

Partnerships and ecosystem development: Get insights into how fintech companies can build and leverage partnerships with other financial institutions, tech companies, and service providers to create a more robust ecosystem and offer comprehensive customer services.

The current situation serves as a crucial alert for fintech companies, reminding them of the importance of reassessing and potentially refining their strategies and operations.

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