Paytm bank: Fintechs parse KYC processes as Paytm bank saga plays out

The developments around Paytm Payments Bank have become a wakeup call for the fintech industry, which is also saddled with many issues around the customer verification rules of financial regulators, according to industry insiders.

Founders and technology consultants are now increasingly engaging with startups specialising in digital onboarding of clients to understand what they can do to know their users better.

Industry insiders and startup founders pointed out that the KYC (know your customer) issues around Paytm Payments Bank might not be unique to one company; many startups end up taking shortcuts to onboard customers quickly. And once a company grows in size, managing risk and compliance becomes a big challenge.

Also read | ED tapped RBI for more info on FX violations by those using Paytm Payments Bank

On January 31, the Reserve Bank of India ordered Paytm Payments Bank to stop offering basic banking services from February 29.

“It is all about prioritising and if you want to be in a fintech business then you cannot shy away from the prerequisites of the sector,” said Sanket Nayak, cofounder of DigiO, an identity verification startup.

These companies that are often referred to as reg-techs help banks and financial services companies onboard customers digitally through compliant means.Systems around digital face matching, de-duplication of PAN cards, keeping checks on multiple users logging in with similar identity cards are basics, which are often bypassed by startups. And most of this happens during the growth phase of the company, industry insiders said.

“There are often basic issues like not matching the image on the PAN card against the customer’s selfie, or making sure that there are no duplicate PAN numbers, that are missed by startups,” said Wriju Ray, cofounder of identity verification startup IDfy.

Ray said there is typically very limited appreciation of risks by tech founders and sometimes they are less understood. This is where senior risk professionals at banks come in to add value. But not all startups invest in such executives or teams really early on, he added.

According to another founder of a fintech startup that recently received the payment aggregator (PA) licence, the RBI expects to see continuous improvement in terms of compliance at a startup.

“The regulators know that early-stage companies cannot have all checks and balances right from the start, but they always give time to set systems in place,” the founder added.

Also read | Paytm to staff: focus on moving business to other banks

While giving out the PA licences, the central bank probed all the applicants under multiple criteria of their KYC systems and customer onboarding guidelines. Players like Razorpay, Cashfree and several others that offered merchant payment services had faced regulatory concerns regarding lax KYC processes, people in the know said.

But over the last one to two years, with regular interactions, the RBI has pushed these startups to set systems in place to ensure these platforms do not get used by unscrupulous merchants for money laundering.

Like Nayak of DigiO pointed out that KYC is something that needs to be addressed at source before the customer starts getting service from the platform.

And with so many fintechs dominating the merchant payments space, proper KYC of these businesses is extremely essential to prevent fraud.