Many founders and investors, in their reaction on public platforms, termed the Reserve Bank of India’s directive as harsh with a potential to affect millions of consumers and businesses.
On Wednesday, the RBI barred Paytm Payments Bank from offering all forms of basic banking services. It also asked Paytm and Paytm Payments Services, its payment gateway business, to terminate their nodal accounts with the bank.
Industry insiders and legal experts ET spoke with pointed out that the order might be aimed at the payments bank, but it has implications for the larger fintech industry.
“For the larger ecosystem, it gives out a clear message that investing in robust compliance architecture like KYC, AML (anti-money-laundering) procedures and information security systems is mission-critical,” said Aparajita Srivastava, partner, Ikigai Law.
After the press release from the RBI on Wednesday evening announcing the action against the payments bank, multiple large startups went into a huddle to find out if they need to relook at their own data systems and compliance machinery, people in the know told ET. Most of them started consulting their lawyers and advisors to understand if they need to double down on their information security systems too.
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Also read | Shock and awe: Founders decry RBI action against Paytm“We (fintech founders) thought that a licence from the regulator means you are safe, but that is not the case, we need to be more proactive in ensuring compliance going forward,” said the founder of a large fintech startup.
A second founder echoed similar sentiments, talking about how the last two years have created a sense of uncertainty among fintechs.
No one is spared the wrath of the RBI, he added.
“If Paytm with its massive human resources and capital could not get its systems fixed as per the expectation of the regulator, smaller startups will have more difficulty in getting things in place,” another founder said.
The impact of the ban could overflow onto the country’s Unified Payments Interface network, some felt.
Also read | Paytm management cites possible risk, compliance issues for RBI action
“The damage is likely to be more on Paytm’s reputation and user trust which is expected to lead to a shift in market share towards other players such as PhonePe and Google Pay,” said the second founder.
Increasing scrutiny
The RBI order needs to be understood in the context of the larger ecosystem and the recent actions of the regulator, not only on Paytm but the entire sector, said industry experts.
“The RBI has been pushing up its level of scrutiny on fintech companies and today’s (Wednesday’s) order on Paytm shows that even one of the oldest and most established fintechs can face regulatory action if it does not adhere to the highest compliance standards,” Srivastava of Ikigai Law said.
One of the startup founders cited earlier said the regulator has been acting sternly with violations for banks and NBFCs as well.
“The regulatory actions on Bajaj Finance, HDFC Bank, Bank of Baroda and now Paytm show that the regulator wants rules to be followed in principle as well as in spirit; any violations will attract penal action,” he said.
Risk premium goes up
The fintech sector in India has thrived on the back of massive venture money that has come in. But the regulatory scrutiny on the sector is bound to impact the stance of private investors.
Industry insiders believe investors will now think twice before taking a bold bet in the space.
“Such enforcement actions leave an exhaustion on the industry as a whole. We should expect risk premia on the fintech equity paper coming to the market to go up, and regulatory scrutiny on fintech entities to get stronger,” said Mandar Kagade, founder, Black Dot Public Policy Advisors.
“Without transparency around the exact reason for enforcement, we can’t say in what specific niche of the regulatory areas this scrutiny will manifest,” he added.