NEW DELHI - The day after demonetisation – the infamous moment on Nov 8, 2016, when the Indian government suddenly pulled high-value notes out of circulation – Indians woke up to a full-page cover advertisement in their newspapers.

In it, Paytm, an emerging financial technology brand then, congratulated Prime Minister Narendra Modi on taking the “boldest decision in the financial history of independent India”.

Paytm unleashed more ads in the following days, telling harried Indians – controversially – “drama bandh karo, Paytm karo (stop the drama, use Paytm)”.

That early fillip from demonetisation is something the home-grown digital payment platform exploited fully to send its fortune soaring.

Paytm’s gross merchandise value – the total financial volume of the sales of its goods – jumped from 2.3 trillion rupees (S$37.4 billion) in financial year 2019 to 13.2 trillion rupees in financial year 2023.

The company’s ubiquitous melodic advertising jingle – Paytm Karo – even became a catchy soundtrack to the digital payments revolution in India that has unfolded since 2016.

But today, the Indian fintech poster boy is on shaky ground, with some even suggesting it could be taken over by another company to ensure its survival.

India’s central bank, the Reserve Bank of India (RBI), has asked Paytm’s banking division – Paytm Payments Bank (PPB) – to stop onboarding new customers and end its services due to “persistent” non-compliances.

Customers cannot top up or receive deposits into PPB accounts and wallets after March 15, though they can use the money in them till it runs out.

PPB has more than 30 million accounts, including those of vendors who accept payments using Paytm’s QR code stickers and point-of-sale terminals.

The bank also stands to lose its nearly 20 per cent share of India’s electronic toll collections market through the FasTag product. The RBI has said the bank’s FasTags cannot be recharged or topped up after March 15.

While the RBI has been taciturn, media reports suggest concerns around poor background checks of new customers, with claims that the same permanent account number (PAN) – a 10-digit unique alphanumeric code assigned to Indians, mainly for tax purposes – was linked to multiple customers.

In some cases, the same code was linked to more than 1,000 customers.

A report on CNBC-TV18 even suggested that 310 million of the 350 million Paytm Wallets were “inoperative”, raising the worry that these could be mule accounts used for money laundering.

These digital wallets held limited “ready-to-use cash” – up to 100,000 rupees – that customers could access with greater ease from their smartphones than the money in their bank accounts.

Paytm did not respond to questions from The Straits Times, but in its public statements it has denied the allegations and said it “is taking immediate steps to comply with RBI directions”.

It expects its annual earnings before interest, taxes, depreciation and amortisation to fall by five billion rupees in the “worst case”.

However, analysts reckon it could get far worse. Paytm, whose brand value has suffered irreparable harm, has lost 255.74 billion rupees in shareholders’ wealth, with its shares falling around 53 per cent since the RBI’s crackdown on Jan 31.

And with PPB’s accounts and wallets dying a slow death after the March 15 deadline, the bank could now even wind down, cutting Paytm’s credit ambitions and deepening the crisis for the company.

Paytm’s app downloads have also fallen as users drop it rapidly. Reuters, citing data from market intelligence company Sensor Tower, reported that app downloads fell by 20 per cent in early February.

Around 2,000 shops in the southern Indian state of Telangana even put up signs saying, “No Paytm, Pay Cash”, the Reuters report added.

This comes despite assurances from Paytm’s founder Vijay Shekhar Sharma that the app will remain operational, especially as an intermediary to facilitate quick online payments between non-Paytm bank accounts.

The Confederation of All India Traders, a body representing 80 million merchants, has asked traders to switch entirely from Paytm to other apps for their business transactions.

Mr Praveen Khandelwal, the confederation’s general secretary, told ST that the RBI’s “unprecedented steps mean something is wrong somewhere”.

“The charges against Paytm are serious… tomorrow if the RBI asks them to close their operations, what will happen then to traders and their money?”

Steering Paytm out of trouble is the core challenge for Mr Sharma, 45, who is no stranger to tribulation.

As a college student from a middle-class family, his inability to speak English fluently cast him as an outsider in his class, leading him to even consider dropping out of his engineering course in Delhi.

In just about two decades, though, after his stellar success with Paytm led him to be named the youngest Indian billionaire in 2017, he bought one of Delhi’s most expensive bungalows, valued then at around 820 million rupees.

Doing so allowed him to stride into an upscale neighbourhood, where the English spoken by the city’s elite was even more clipped than that of his classmates.

A key hurdle for his beleaguered company now involves helping millions of PPB account holders switch to other banks, something that will require it to share its earnings from transactions and deposits with its new banking partners.

The RBI has advised customers to move out of PPB before the March 15 deadline to avoid inconvenience.

Paytm has been in discussions with third-party banks to help merchants, whose transactions contribute half of Paytm’s revenues, shift out of PPB.

On Feb 16, Paytm said it had partnered Axis Bank to shift its nodal account, the master account for all customer and merchant settlements, from PPB.

But one fintech industry expert, who asked to remain anonymous, suggested that banks would not be easily forthcoming to partner Paytm, given its tainted image, unless they had received a “soft nudge” to do so from the RBI.

RBI governor Shaktikanta Das has adopted a harsh stance, saying there was no question of any relief for Paytm and that the bank’s restrictions are “always proportionate to the gravity of the situation”. 

Prior to its crackdown in January, the RBI had taken punitive action against the company at least four times over a series of lapses since 2018.

It is hard to say what the RBI’s further approach will be like, even though Mr Prasanto Roy, a public policy consultant, thinks the government “in (an) election year does not really want an iconic unicorn start-up to shut down”.

A worst-case scenario for the company could see the markets turn more brutal if further crackdowns ensue.

Mr Srikanth Lakshmanan, founder of Cashless Consumer, an online collective working to increase public awareness on digital payments, said Paytm could see its stock value go down further and the company could even be acquired by another company, which potentially means that the iconic brand is “going to die”.

Even if it survives this churning, Paytm will have to live with its value proposition significantly undermined, he argued.

Owning a bank linked to millions of its wallet consumers gave it exclusive access to customer data, allowing it to develop revenue-earning products. This is something that Paytm will now have to share with other banks.

In India, the government implements a zero-charge regime to encourage the adoption of digital payments, which means neither consumers nor merchants pay for much of online payment infrastructure and services.

“The only money to be made is on credit offerings, and over there if your data is dispersed then you do not have a unique value,” said Mr Lakshmanan.

There are also concerns that Paytm, like any other aggressive player, may have been cutting corners so as to not hold back its growth.

But fraud and lack of regulatory compliance are wider issues in Indian fintech that have been amplified in Paytm’s case because of its scale and expansion into rural areas, where checks can be weaker than in cities.

Digital payment fraud, Mr Lakshmanan told ST, has been a “parallel travel companion” to Indian fintech’s growth story.

In its bid to push digital transactions, the government has allowed for relaxed norms such as mobile one-time password-based onboarding. These relaxations, while boosting growth, have also enabled fraud.

“The mere act of offering digital onboarding exposes itself to this threat, where you could possibly get fraudsters onboarded very easily and that is not intentional but a by-effect,” Mr Lakshmanan said.

This persistent problem was highlighted in 2022 when Bollywood celebrity Sunny Leone reported that she had fallen prey to online theft, with her PAN card being used fraudulently for a loan of 2,000 rupees.

Meanwhile, the central bank’s regulatory crackdown has brought not just Paytm under scrutiny, but also the RBI itself as it tries to get a better handle on digital payments and fintech, over which it has had a somewhat laissez-faire approach.

Mr Ashneer Grover, founder of BharatPe, another fintech company, has criticised the RBI, describing its action against Paytm’s bank as an “overreach”, adding that the message conveyed by it was that “banks are (systemically) important, but fintechs are not”.

“It is demoralising for not just fintechs but global investors who will hesitate to pump in billions into a sector that can change overnight with knee-jerk notifications,” added Mr Roy.

India’s fintech sector has benefited from “lighter-touch regulation”, allowing start-ups to onboard hundreds of millions of new customers. But this has also prompted opposition from conventional banks, which have more onerous compliance mandates, and have seen their customer base whittled as unicorn start-ups acquire millions of their potential customers.

“The RBI therefore began to crack down on fintechs with the same compliance demands that it had of the banks,” Mr Roy told ST.

“This may sound fair, but the RBI is a banking regulator and is not really suited to payments regulation,” he added, suggesting that the government step in to create an independent payments regulator “that gives confidence to growing start-ups and investors”.