Paytm's parent company, One97 Communications, might find it difficult to retain its vast customer base and stare at a migration nightmare after the Reserve Bank of India (RBI) restricted its associate Paytm Payments Bank Ltd (PPBL) from accepting fresh deposits in its accounts or wallets starting March 1, 2024, citing persistent non-compliances and continued material supervisory concerns in the bank. 

The company will completely move to other bank partners to service its customers and it has already received proposals from multiple large banks for the same, Paytm’s managing director and founder Vijay Shekhar Sharma said in an investors’ conference call on Thursday. 

However, that alone may not be enough for the company to stop its customers from migrating to other applications since many users use the platform for its ability to offer bundled services in one place. 

“The development could impact its customers' experience and potentially some break in continued service as they are pivoted to third-party bank-backed services. But more importantly, this will be a moment where many customers will lose confidence, and there is a chance they may choose to move all their services to other competing apps,” said Vivek Mandhata, Managing Director and Partner at Boston Consulting Group (BCG).  

Re-issue of FASTag and opening new accounts (for customers using savings accounts) could be one of the biggest pain points for the customers since the process of getting new FASTag is not that seamless yet, he added. 

Besides FASTag, since all the QR codes attached to the Paytm soundboxes of the merchants will also have to be changed, depending on the new banking partner, a cumbersome process is likely to upset the users. The parent company’s leadership team also admitted the operational challenges it will have to deal with in terms of getting the changed QR codes. Paytm has deployed more than 80 lakh devices across the country. 

Additionally, those users who have linked their loan repayment schedules or the autopay mandates to the PPBL will also have to de-link and migrate to other banking partners. 

The company said there are as many as 60,000 to 70,000 such merchants who have linked their payment schedule to PPBL. However, Paytm said it was counting on its 30,000 sales force on the ground to help them tide over the fresh bout of uncertainties caused by the regulator. 

The RBI’s recent directive was the second such one, which came a little less than two years after the central bank had asked Paytm to stop on-boarding new customers, citing non-compliance. A subsequent technical audit ordered by the central bank revealed "persistent non-compliance and continued material supervisory concerns in the bank.”  

The development also invited a sharp response from the likes of Morgan Stanley, who reduced the Price Target for Paytm’s share to Rs 690 from Rs 830, citing more regulatory uncertainty. 

The loss in confidence was also evidenced by the fact that the company’s shares hit a lower circuit at the bourses on Thursday as the stock slumped 20% from the previous day's closing to end the day at Rs 609 apiece at the BSE. 

“In recent years, we have seen regulatory curbs on HDFC, AmEx, Razorpay, etc., but in all those cases, the ban was on new customer onboarding, whereas here, Paytm’s ability to service its existing customers has also been impacted. The development will surely impact the firm’s overall business sustainability,” said BCG’s Mandhata.

India’s UPI turf is intensely competitive. Although Paytm remained the darling of merchants so far to receive payments, the current RBI diktat gives its competitors PhonePe and Google Pay an edge to consolidate their top two positions in terms of accounting for the highest market share in the overall digital transactions. PhonePe and Google Pay together hold close to 80 per cent of the UPI market.