Indian fintech giant Paytm is in trouble after the Reserve Bank of India on Friday barred it from undertaking any banking activities post-February 29.

Founded in 2010 by Vijay Shekhar Sharma—who rose to prominence after demonetisation as the poster boy of digital payments—,Paytmhas now been restricted from all major banking services taking deposits, FASTag, and credit transactions.

Meanwhile, the Enforcement Directorate (ED) has also launched a probe into the company's potential foreign exchange rule violations.

As the news spread like wildfire, the Noida-based fintech giant tumbled on the bourses, wiping $2.5 billion off the company's value by Monday.

The development has sent shockwaves among its users. The company has over 300 million consumers in India, as per the Paytm website.

The firm had already been in rough financial waters after its stock market debut in 2021. Ever since, it has been trying to turn profitable and enter newer segments, building a large loan book. It is also cutting costs by laying off 1,000 over a few months.

Brand value 

With the regulatory crackdown, the Paytm brand has already taken a beating even as probes are still underway because the company’s credit operations have almost ceased and earnings streams have come to a halt, industry experts tell e4m.

Market experts speculate the firm may lose its license eventually in the wake of serious charges. If that happens, it would be a black day for India’s startup ecosystem in which Paytm has been a shining star with decacorn status. The company had been the title sponsor of BCCI’s international and domestic cricket matches between 2019 to 2022. It was the ticketing partner for the IPL playoffs and final in 2023.

The fiasco has come at a time when funding in the fintech space has been experiencing a downward trend. India’s fintech sector,  which is the third-highest funded ecosystem globally, received funding of $2 billion in 2023, a decline of 63 per cent compared to the previous year ($5.4 billion raised in 2022), according to a Tracxn FinTech Report.

“The crisis at Paytm will have significant implications on its brand value and overall performance as a business going forward," says brand expert Samit Sinha, who is the Founder and Managing Partner of Alchemist Brand Consulting.

Sinha points out, “Allegations of non-adherence to RBI rules and guidelines would be serious enough, but even a hint of financial impropriety for a financial services brand is extremely damaging to its reputation and shakes the confidence of both investors and consumers very badly.”

Besides, the news also sends a signal to the public at large that the company has fallen out of favour with the government. All these things out together would be a big blow to the brand going forward, he shared.

Incidentally, Paytm had bagged the title of the ‘Most Trusted Brand of the Year’ at the Rural & Urban Development Summit & Awards 2022 backed by the government of India.

Rivals to benefit 

Market experts say that the crisis at Paytm might benefit its rivals as consumers would flock to other fintech apps.

On Monday, shares of Jio Financial Services Ltd surged over 15 per cent following reports that Mukesh Ambani’s firm was one of the frontrunners to acquire Paytm's wallet business amid the ongoing crisis.

“The said RBI order against Paytm does appear to be causing a material movement of business/customers to other QR code platforms as well as UPI and wallet transactions. It’s a good opportunity for Paytm competitors to capture higher market share during this disruption period, which may be short-lived if Paytm can resolve quickly," says Aviral Jain, Managing Director, Valuation Advisory Services at Kroll.

From a B2B perspective, it’s more of a business impact than the brand itself though it does impact Paytm’s brand in the medium term. Gaining the trust of consumers takes years and it is critical for Paytm to provide additional confidence to prevent major damage to its brand during this disruption period, Jain notes.

With top executives on the frontlines, the biggest challenge for Paytm is to assuage jumpy investors and strike partnerships with banks for its UPI, wallet, and other merchant services. The company also faces the uphill task of migrating borrowers with loan repayments from Paytm Payments Bank to other banks.

But, even if it streamlines these issues, Paytm may face headwinds from wary financial institutions, which are already facing pressure from the apex bank to improve their net interest margins and curtail the high loan-to-deposit ratio.

Then, there is also the matter of a big communication gap with end-users, which could potentially lead to a retention problem in the long run. However, Paytm’s top executives claim to be on top of all this and plan to employ a multi-pronged communication and marketing strategy to allay such fears and transition users to partner banks.

VinayKanchan, a brand storyteller and author, has a different point of view though: “Paytm’s market share might fall momentarily depending on how the competition reacts. It’s possibly a good opportunity for them to exploit. In the long term, I don’t see the category suffering too much; however, it needs to handle this period astutely.”