MobiKwik payment gateway: India's version of Alipay falls off the wagon

Vijay Shekhar Sharma, founder of One97 Communications, addresses the audience with tears in his eyes on 18 November 2021 on the stage of the Bombay Stock Exchange. His company had just completed India's largest initial public offering (IPO) to date, raising $2.4bn and making Sharma and his company stars of the Indian tech industry.One97 Communications is best known for its parent company Paytm, a payment solution used by giants such as Uber and Indian Railway services. Leading investment firms including Jack Ma-backed Alibaba and Ant Group, Masayoshi Son led SoftBank and Warren Buffett's Berkshire Hathaway have backed the company. Despite the success of the IPO, Paytm is yet to turn a profit and its share price has fallen by more than 70% since its IPO.SoftBank, Alibaba and Berkshire Hathaway sold large stakes in the company due to concerns over Chinese participation and falling share prices. In the payments space, Paytm faces stiff competition from Google and Walmart's Flipkart. Analysts now see the company as a classic case of overvaluation due to hype at the time of the IPO. [In May 2022, Paytm lost the title of India's largest IPO, being overtaken by Life Insurance Corporation of India with a $2.7bn fundraising].

Today, regulatory pressure threatens Paytm's business model, with authorities banning its profitable banking and mobile wallet services. In his book Slip, Stitch & Stumble: The Untold Story of India's Financial Sector Reforms, Rajrishi Singhal, a former executive editor of The Economic Times, points out that Paytm's decline stems from a culture of pursuing growth at the expense of Paytm's decline stems from a startup culture that pursued growth at the expense of everything else. He mentions, "Paytm has been aggressive, pushing boundaries, an approach that dates back to its inception when revenues were more important than margins or actual profits. paytm has been somewhat cavalier about the regulatory framework."

In a statement to Fortune magazine, Paytm said, "Compliance has always been a cornerstone of our product development programme. We cannot launch products in the market without the necessary approvals to ensure that every new product is innovative and fully compliant with regulatory standards." However, in a bid to avert any financial crisis ahead of crucial national elections, the regulatory crackdown has made the future of the once fast-growing startup uncertain, potentially wiping out much of its pre-tax profits.

On 31 January, the Reserve Bank of India (RBI) accused Paytm Payments Bank, a subsidiary that holds all of Paytm's digital wallet funds, of "persistent non-compliance" and demanded that it stop accepting new deposits. on 1 March, the Financial Intelligence Unit (FIU) fined the bank $660,000 for using its funds for illegal activities such as online gambling. Paytm quickly severed ties with the payments bank, and last week, Sharma resigned as the bank's chairman. paytm is now trying to establish partnerships with third-party banks, such as Axis Bank, and has confirmed that it will continue to offer payment services after 15 March, the RBI's deadline for payments banks to cease operations. operations.Sharma told a conference in Tokyo that Paytm's woes could be blamed on advisers. According to Bloomberg, he said, "The important lesson I have learnt is that sometimes even teammates and advisors can misunderstand ...... It is important to solve problems on your own rather than relying on teammates or advisors to come up with solutions."

Singhal argued that without a payments bank, Paytm would be limited to facilitating transactions, a "revenue-less" business. At the direction of the RBI, Paytm filed a stock filing warning that the executive order to shut down the payments bank could bring down the company's annual earnings before interest, tax, depreciation and amortisation (EBITDA) by up to INR500 million, or about $60.4 million. Paytm achieved an EBITDA of $55 million in the nine months ended 31 December 2023.However, Sharma may have no choice.Singhal predicted, "If he wants to keep the Paytm brand alive, it will have to survive only as a Unified Payments Interface (UPI), as Paytm cannot continue to exist as a wallet or a bank."

Paytm is the latest Indian startup to hit a growth wall. Ed-tech firm Byju's, once India's most valuable startup with a market cap of $22 billion by the end of 2022, now faces allegations of fabricated numbers, toxic work culture, unethical sales practices and debt defaults (all of which the company denies.) On 23 February, shareholders of Byju's voted to remove CEO Byju Raveendran, who refused to resign.

Regulatory scrutiny of Paytm and its payments bank has been ongoing. The bank has been unable to sign up new customers since March 2022, and in October last year the RBI fined it $650,000 for failing to comply with "know-your-customer" rules, and in November officials banned Paytm from signing up new merchants. These actions are part of a broader crackdown on India's financial sector, particularly "shadow banking" entities that operate outside the traditional financial system. The ruling Bharatiya Janata Party (BJP) and Prime Minister Narendra Modi plan to campaign on India's robust economy as voters prepare for national elections beginning in April. Most analysts predict Modi will win a third term. Against the backdrop of India's booming markets, regulators are concerned that financial firms are courting trouble, Singhal said: 'The financial crisis will inevitably turn into a political crisis. I think [Paytm] is a risk the political system cannot afford."

The situation reminds Singhal of the early financial scandals in India that he reported on during his time as a business journalist and discussed in his book. For example, in the early 1990s, trader Harshad Mehta defrauded banks of funds to make speculative stock market bets. In that exciting environment, traders like Mehta "didn't know when to say no or quit," Singhal recalls. Is India's current bull market sowing the seeds of another scandal?Singhal warns, "The financial sector is not known for its historical awareness."