If you remember, in 2017,the video of Paytm’s CEO and founder Vijay Shekhar Sharma went viral. You could see the excitement, as he was celebrating Paytm’s success. He famously said, “Those who are not with us, will cry.” But sadly, 7 years later, the situation has completely changed. Those who are with Paytm are crying.
Over the last few days, we saw a horrific crash of this company. On 30th January, the stock price of this company was at ₹760. Today, it has fallen below ₹380.What is the reason behind this?
Let’s understand the rise and downfall of Paytm in this blog.
Paytm began its journey in 2010. But initially, it was just a mobile recharging platform. An app through which you could recharge your phone and pay landline bills. The company gradually added more features to its app. It was only in January 2014 that Paytm Wallet was launched. With this, you could pay online using Paytm. By 2015, it was possible to pay for metro recharges, electricity, gas, and water bills. But the real jump in the company’s popularity was seen only after 8th November 2016. That day when demonetisation happened.”₹500 and ₹1,000 currency notes will no longer be legal tender from midnight tonight.”
The very next day after demonetisation, the frontpage ads in many newspapers across the country looked like this. “Paytm congratulates Honourable Prime Minister Shri Narendra Modi on taking the boldest decision in the financial history of independent India. Now, no ATMs, use Paytm.”
The first controversy about Paytm was raised here. People questioned whether Paytm has any link with the government. Using the Prime Minister’s face in this way while advertising their platform. And the decision of demonetisation, which was said to be secretive, was declared on 8th November at 8pm. So how did it happen that the very next day, in the morning newspaper on 9th November, this was the front page ad?
Did this company already know that demonetisation was going to happen? Whatever happened, one thing was clear. Paytm benefited a lot from this decision. According to Euro Money’s report, before demonetisation, Paytm had 125 million customers. But only after 3 months of the demonetisation, Paytm’s had approx 185 million customers. The CEO of this company, Vijay Shekhar Sharma, did not miss the opportunity to capitalise on this opportunity. Paytm hired more than 10,000 agents to distribute their QR codes to local shops and vendors.
Shopkeepers were encouraged in every city to use Paytm. The company was growing tremendously. But around this time, there were 2-3 other controversies. One was Paytm’s Chinese link. In 2015, a Chinese company named Alibaba invested $680 million in Paytm and 40% stake in Paytm company went to this Chinese company.
Alibaba’s founder is Jack Ma and Vijay had said that he was his hero. He had given a statement to the Financial Times newspaper. “I became totally interested in China, Alibaba, and Jack – all three things.” You must be aware of the recent relations between India and China. China is repeatedly intruding on the Indian border. In 2017, the Doklam border standoff took place. Many people had criticised Paytm for this. Claiming that the company pretends to be a patriot when they want to sell something. But they have been taking Chinese funding secretly. Because of this criticism, the Chinese stake in the company was reduced in 2023, Vijay transferred about 10% stake back to himself, and the Chinese stake in the company is around 13.5% as of now. In May 2018, the next controversy arose regarding Paytm when the investigative news agency CobraPost conducted an undercover operation.
Their undercover reporter went to meet the Vice President of Paytm, Ajay Shekhar Sharma, Vijay Shekhar Sharma’s brother. When he was asked if he would spread the propaganda of a political party through the app, he happily accepted. “There will be videos of Guruji too, there are other things as well, I give those to you later…”
“We’ll take care of all of that if RSS tells us to. Because loyalty to RSS runs in our blood.” He went on to say that when the government asked them for the data of some Paytm users in J&K,during the stone peltings, they happily gave the data to the government.
“When our operations were shut down in J&K -due to the stones…-The stone peltings, yes.the PMO called us personally asking us to hand over data to them,of the Paytm users.” But nothing significant happened with these controversies.
The company kept growing very fast. Generally speaking, there are many companies who don’t care about your data. They sell your data to other companies. Especially online, it happens a lot. Your data is used to create a digital profile so that you can be shown online targeted ads. A good way to avoid this is to use VPN. A VPN encrypts your internet traffic. In my opinion, one of the best VPN apps is NordVPN, which is also the sponsor of this video. One of the advantages of using NordVPN is that you can use it for content streaming. If a specific show, movie or video is banned in your location, you can bypass these restrictions by setting your location somewhere else through VPN. Recently, due to increasing customer demand, NordVPN has added a server in India. This is a virtual location server with Indian IP. And when you browse the internet with a VPN, your data is secure. You can’t be tracked online by other companies.
In 2017, Paytm launched Paytm Payments Bank. They started offering banking services. Payments Bank is like a bank to some extent. You can create a bank account, deposit money, and get a debit card. But compared to a normal commercial bank, there are some important differences. Payments banks focus mostly on digital services. There are very few physical branches of payments banks.
And according to RBI’s Rules, payments banks cannot offer credit card and loan services. Normal commercial banks like HDFC, SBI, ICICI,do not have any deposit limit. You can deposit as much as you want in those banks. But RBI has prescribed a limit for payments banks. You cannot deposit more than ₹200,000 in these banks.
All this is in detail here because the current state of Paytm is largely caused by Paytm’s Payments Bank. RBI, the Reserve Bank of India, is the central bank of the country. It decides the monetary policy of the country and also works to print money. All the banks and financial institutions in the country have to follow the rules and guidelines prescribed by the RBI.
So on 31st January 2024, the Paytm crash happened because the RBI imposed operational restrictions on Paytm’s Payments Bank. RBI said that Paytm’s Payments Bank kept violating our rules repeatedly. There was ‘persistent non-compliance’ by them. And that’s why RBI put restrictions on the bank.
After 29th February 2024,Paytm’s Payments Bank can’t accept any new deposits. There can’t be money top-ups in customer accounts. New customers can’t be on-boarded. And RBI said that all the nodal accounts with this Paytm Payments Bank should be closed by 15th March 2024. Nodal accounts are those accounts which are used by e-commerce and online services businesses. And as far as Paytm Wallet is concerned, you can use your existing balance but after 29th February, you can’t deposit any more money in it.
So, obviously, this is a major decision by the RBI. And such decisions are not taken in a jiffy. It’s not like RBI randomly decided one day to take action on Paytm and implemented these decisions. In fact, there is a very long history behind this. The truth is that Paytm has time and warned by the RBI before, but it still didn’t rectify its actions. In November 2017, Paytm’s Payments Bank was launched and in June 2018, RBI issued the first warning. An audit found that Paytm was not following the anti-money laundering regulations properly. And the identity of the customers who made their accounts with their bank was not being verified properly by Paytm.
The KYC, or Know Your Customer compliance wasn’t adhered to by Paytm. So RBI told Paytm to stop onboarding new customers until it fixes all these issues. Paytm took some action regarding this warning because in January 2019, RBI allowed Paytm to resume onboarding customers. The restrictions were removed. But after 2.5 years, in October 2021, came the next big shock. A fine of ₹10 million was imposed on Paytm. Because while filling in their licence application, they submitted incorrect information and documents. The issues that RBI had flagged before customers not being verified properly, regulations are not being followed properly, the same issues were seen again. Once again, customer onboarding had to be stopped.
In October 2023, another huge fine was imposed on Paytm this time, it amounted to ₹50 million. RBI hoped that after 2 warnings and 2 fines, Paytm would meet the regulatory requirements and start verifying its customers properly. But even after all this, Paytm did not take these seriously. And for this reason, on 31st January 2024, RBI had to take concrete steps. Since Paytm could not follow the rules and regulations properly, RBI had to stop its operations.
RBI’s findings were very shocking. According to CNBC, Paytm allowed hundreds of thousands of customers to open bank accounts with them without proper KYC documentation. There were thousands of cases where thousands of customers had opened multiple accounts using the same PAN card. In some accounts, transactions were worth millions of rupees.
Here, the risk of potential money laundering was evident. It is possible that money laundering was taking place through Paytm. Outlook reported that according to an analyst, Paytm had around 350 million wallets. Of which around 310 million wallets are inactive, no one is using these. And in the remaining 40 million wallets, most of them have no balance or very little balance. Because of this, they can be used like mule accounts.
A Mule account is an account that is used for illegal activities, like money laundering. After this, there are concerns about data privacy too. RBI said that Paytm’s parent company, One97 Communications Ltd, there is no operational segregation between it and Paytm Payments Bank.
There was cash flow between the two, which was not disclosed in the financial statements. So many rules and regulations were ignored. Is the arrogance of their CEO Vijay Shekhar Sharma responsible for this to some extent? He gave many interviews to media channels this arrogance was seen in his words in those interviews. “If you fundamentally believe that Paytm is #3 payment player, that is where the beginning of the problem is in understanding.”
“I’m surprised that people don’t know this in this country, but we make profit, so it is.”
“Somebody who has not met us and has an opinion on us is not my opinion to keep an opinion on that.”
After RBI’s announcement on 31st January, a commotion broke out. People started taking out the money they had invested in Paytm. So, Paytm’s stock crashed very fast. To calm people down, Paytm posted on its social media handles that there was nothing wrong. On 2nd February, Vijay Shekhar Sharma tweeted this. “To every Paytmer, Your favourite app is working, will keep working beyond 29th February as usual… For every challenge, there is a solution and we are sincerely committed to serve our nation in full compliance. India will keep winning global accolades in payment innovation and inclusion in financial services.”
As you can see, once again, patriotism was used as a shield here. ‘Don’t see us as a company, see us as patriots serving the nation.’ Using India as the shield Paytm tried to hide behind it. This reminds me of a quote. “Patriotism is the last refuge of a scoundrel.” You must have heard this quote. In my opinion, we should be wary of such companies which rely too heavily on nationalism. A few years ago, there was a phone Freedom 251. They printed India’s national flag on the back of the phone. It was sold as the ‘world’s cheapest phone’ but it turned out to be a big scam.
If a company’s products and services have intrinsic value, they sell it by promoting those values. But if they don’t have much to say about their products or services, then patriotism is used as a selling point. Urging you to buy their product just because they are Indian. Because they are an Indian company, they use it as the only reason why you should buy their product. Anyways, if we come back to Paytm, the question is, what will happen next? Internally, the employees of the company are facing a lot of uncertainty.
They are not getting much clarity from the leadership about what will happen next. Economic Times reported that an executive of the company told them that their business model might change. Now, instead of being a bank, they might try to become a third-party payments app. So they will have to change some things on the back end. And they will have to make the change in a limited time.
If you look at Paytm’s annual report, to check how much has it earned each year, you will see that it has always been a loss-making company since its shares were listed on the stock market. Look at this chart, in FY 2021, the company incurred a loss of ₹16 billion. In FY 2022, a loss of ₹15 billion. In FY 2023, a loss of ₹1.7 billion. The good news was that year after year the company’s losses were decreasing. So, it could have been expected that next year, that is, this year, in FY 2024, the company would earn its first profit.
But now, after everything that has happened, it seems difficult. The company expects that this year, the company’s loss could increase by ₹3 billion to ₹5 billion. Paytm has revealed this to the public, saying that they will now comply with the guidelines issued by RBI. But after this announcement, the company’s stock price fell further.
Actually, convincing people will be the biggest challenge for Paytm. An average person is very picky about choosing a company. And public’s trust plays an important role here. Once people choose their toothpaste, they decide that they will use that company’s toothpaste forever. They don’t change their mind easily. Here, they will be more cautious as this involves their money and banking abilities. Bringing customers back won’t be easy for Paytm. But convincing customers will come later. First, Paytm will have to convince RBI. That won’t be an easy task. But there is light at the end of the tunnel, a way to get out of this can be to have another company buy Paytm’s wallet business.
A Business Standard report suggests that HDFC Bank and Jio Financial Services might just do this. But Jio has denied this speculation saying that they have no intention of doing so. And anyway, before executing such a sale, they’d need RBI’s approval.