For two successive days in a row, since the Reserve Bank of India came out with tough strictures on Paytm Payments Bank, an associate company of One97 Communications, the stock of One97 Communications has fallen 20 per cent each day. Not only has it set a new low, but doubt is cast on whether the worst is over for Paytm. Little would one want to hazard a guess that the bottom has been discovered because the RBI circular essentially means that after February 29, 2024, Paytm Payments Bank cannot practically do any business. It’s a moratorium without being called so.

When payment bank licenses were handed out, and the fintech space started to crowd, Paytm rode on the strength of its payment bank. The bank licence armed One 97 with the back-end and front-end integration, helping it successfully ringfence its customers in every manner. That advantage has been stripped off.

The question is whether Paytm can be the same without its payment bank. Vijay Shekar Sharma, the founder and CEO of One 97, and his top management team made it sound like cutting the umbilical cord with Paytm Payments Bank would not be a big deal. But without the payments bank, Paytm has little to distinguish itself from peers such as PhonePe or GooglePay.

In fact, with having to touch base with other banks, Paytm’s battles are set to compound, and this time, it would be picking fights with biggies who have ample liquidity, network and years of credibility ingrained in their names.

At an annualised rate Paytm is expecting this curb to dent its operating profits by Rs 300 - 500 crore. But what is not convincing is whether the number is really contained within this range.

Questions remain on the fate of Paytm wallet and FASTag, how the continuity of its UPI works and thirdly, as a commission and service fee-dependent entity, will Paytm’s financials ever enjoy a bright sunny day?

Wallet and FASTag

With 90 million wallet users and 58 million FASTag users, Paytm is the market leader in the wallet business and commands a 17 per cent market share in the FASTag segment. While the margin contribution of these businesses isn’t meaty, what sets Paytm apart from the rest is the exclusivity of its customers. Paytm Payments Bank was licensed to do these businesses, and One97 was its front end.  Paytm wallets were preferred to demarcate customers’ bank balances and safeguard them from UPI and FASTag frauds.

Post the ban, to ensure continuity for existing users, Paytm it will have to migrate them to third-party banks. Simply put, the advantage that Paytm wallet offered is gone; from being a manufacturer of products, Paytm becomes a distributor. Therefore, it will fight the battle not only for profitability but also for sustaining its customer base.

UPI transactions

UPI IDs are distributed using Paytm Payment Bank domain name. While the management is confident that migrating the domain name shouldn’t be a challenge, and there is precedent in the past, YES Bank’s case was a short-duration issue and didn’t involve relinquishing the ability to do business. Here the problem is different and there are two parts to it.

If the UPI IDs are migrated to another bank, there shouldn’t be disruption for retail users. But what about the merchants where Paytm has one of the largest players among fintechs?

About 15 per cent of Paytm merchants transact with its payments bank. That channel is going to be shut. QR codes, wherever digital, need to be migrated to a new transaction ID, and banks hungry for small business opportunities would grab this with both hands.

The challenge lies with merchants using stickers or physical QR scanners. Paytm claims that this is not a huge base. But here again the competition is waiting to eat Paytm’s pie. By March 1, 2024, we should know how many merchants are stuck with Paytm.

Financial implications

Payments account for over 60 per cent of One97’s revenue, and the company is far from generating operating profits. While margins in the payments business may not be meaty, a change in model can alter the dynamics of Paytm’s ability to turn profitable at an operating level. RBI’s ban came when several fintechs, including LendingKart and KreditBee, were making a pitch to the IPO market. Their models are very different from Paytm. But the Street may perceive fintech as fintech, and tapping the capital market, let alone having a say in valuations, may turn into a tough ask.