Why is Paytm Payments Bank Banned by RBI?

Table Of Content:

In a recent development of events concerning the Paytm and RBI fiasco, RBI has imposed restrictions on many operations of Paytm Payments Bank Ltd. (PPBL). With this blog, we will uncover what led to these strict restrictions and what they include.

The News Headings!

According to the report by the news agency, PTI Paytm Payments Bank Ltd(PPBL) had lakhs of non-KYC-compliant accounts and in many cases, a single PAN Card was used to open multiple accounts.

"We don't want to discuss details of action on Paytm Payments Bank. This is supervisory action for persistent non-compliance. Such action is invariably preceded by months and sometimes years of bilateral engagement where we point out the deficiencies but also give time to take corrective action. As a regulator, we must protect the consumer," said the RBI governor.

What were the imposed restrictions to Paytm Payments Bank By RBI?

The restrictions are imposed on the lending branch of Paytm banks which include the suspension of deposits, credit transactions, fund transfers and top-ups. Moreover, services from the bank like fastags, repaid instruments, wallets and National Common mobility cards.

Moreover, banking services like bill payments, and UPI will cease in the upcoming months and also the Nodal Accounts will be settled by March 15 and all Paytm payments bank services will be suspended by February 29.

Paytm Payments Bank Banned: Why there has been a suspension of services?

Since the commemoration of PPBL, many notices have been issued to the company from RBI. The company faced many issues like failing with the KYC guidelines and suspending the new accounts. Here are the major reasons:

Money-laundering concerns: The total value of transactions happening goes much beyond the regulatory limits.
Dormant accounts: Out of 35 crore e-wallets, 31 crore were dormant accounts and only 4 crore remaining had some to no activity. This high number of dormant accounts can mean an increase in the mule accounts.
Irregularities in KYC: There were major faults in KYC which would put the users at huge risk.
Anti-money laundering violations: In 2021, RBI detected violations of anti-money laundering violations and the bank was warned about it but continued to persist.
Incomplete compliance: The compliance submitted by the bank was faulty and incomplete in many instances.
Audit: RBI instructed PPBL to onboard new clients in 2022 and appoint an external firm to do a comprehensive audit of the system. Many accounts were ceased by various digital agencies across the countries as they were used in committing digital frauds.

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What is Paytm Payments Bank?

Paytm Payments Bank is a separate entity that works as a Bank providing services such as savings accounts and debit cards. It is a branch of Paytm altogether but works for entirely different functions as a licensed financial institution.

Paytm Bank represents a novel concept initiated by the RBI, concentrating currently on limited services. While they are restricted from issuing credit, they are permitted to accept deposits up to a maximum of 2 lakhs. Although these banks can provide ATM cards, they are unable to offer loans and credit cards, distinguishing them from conventional banking services. The primary appeal of Paytm Bank to consumers is the ability to swiftly open a bank account at no expense.

What is the Future of Paytm Payments Bank?

Paytm Payments Bank Ltd. (PPBL) has paused its prominent services, resulting in unrest about the layoffs in the company. However, the higher management assured the employees about no layoffs in the company and the ongoing discussion with RBI to resolve the issue.

But as the company continue to face issues, people will be finding alternatives for digital payments. Here is the list of alternatives netizens are thinking of Paytm Banks:

Airtel Payments Bank
Jupiter
Kotak811
Jio Payments Bank
NSDL JIffy

If you use Paytm Bank, ensure you move your funds to alternative digital payments by February 29th to guarantee uninterrupted payment services.

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How Payments Banks are different from Regular Banks?

Parameters	Payments Banks	Regular Banks
Scope of services	Payments Banks are limited to the services they provide, they only accept deposits with savings and current accounts.	Whereas Regular Banks give all the services including credit and loans as well.
Deposit limits	The current deposit limit is capped at 2 lakhs.	There is no limit as such in regular banks.
Target Audience	The target audience for Payments Banks is unbanked individuals and to help them enter into the formal system of banking.	The target audience of regular banks is comparatively larger as they give services to individuals and businesses as well.
Initial Capital Requirement	The initial capital requirement is zero to minimal in the Payments Banks to make it accessible for everyone.	The initial capital is comparatively higher than Payments Banks and it totally depends upon the bank and type of account.
Cards	Payments Banks can issue only debit cards as there are restrictions for lending money.	Regular banks are free to give credit or debit cards with a variety of facilities.

How Do the Digital Banks Work?

Amidst the scenario, people's trust in digital banks has been shaken, they are questioning the foundation of this system and will be secure in the future. Let us unravel the concept:

Banks and Payments Banks initiate a UPA request, enabling consumers to access online banking facilities through a mobile app or the bank's website.

Upon approval of the request, credentials are provided to the consumer.

With successful registration, you gain seamless access to a wide range of banking services.

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Technologies Used in Digital Banks

We have discovered the framework of the banking services, let us now discover what technologies online banking uses for a seamless experience for consumers:

Technologies Used in Digital Banks

1. Cloud computing

Leveraging cloud computing allows banks to effortlessly expand their operations and provide a strong, adaptable infrastructure capable of handling vast quantities of data.

Benefits of Cloud computing:

Lowered infrastructure cost: With the help of a cloud-computing system, the infrastructure changes become more manageable and offerings become more scalable.
Greater operational efficiency: Enhanced operational efficiency is achieved when banking services are hosted on the cloud, benefiting from features such as quality control, disaster recovery, flexibility, loss prevention, and risk management. By utilizing cloud-hosting services, banks can significantly lower both fixed and variable costs while ensuring an uptime of 99%.
Access to software applications: Cloud computing allows banks to use programs such as CRM and ERP software applications since they have complete control over what data is entered into these apps, making usage completely secure.
Business continuity: Cloud computing helps banks to make their services future-proof by giving huge amounts of redundancy and backup at a low cost. Moreover, the cloud model gives the freedom to adopt service on a pay-as-you-go model.
Green IT: Another benefit of using the cloud in Banking is reduced energy consumption, hence reduced carbon footprint.

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2. Blockchain

It plays a primary role in ensuring that the transactions are happening transparently. It is used to secure ledgers and smart contracts in banking enhancing the security and efficiency of the transactions.

Benefits of Blockchain:

Decreased cost: With the help of blockchain, the banks will be able to enhance communication and coordination within a large organization. Therefore, you can remove the intermediates and reduce a significant amount for the industry as a whole.
Security: Blockchain will help in enhancing the security of banking systems with the help of advanced solutions for KYC. Moreover, the information can be shared with the stakeholders without involving any third party.
Easy money-transfer: Blockchain technology enables the direct transfer of funds by eliminating intermediaries such as SWIFT, connecting all lenders directly. Through the use of smart contracts, exchanges of currency are automatically managed between parties, minimizing the potential for errors during these transactions.

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3. Artificial Intelligence and Machine Learning

These technologies are used to personalise banking experience, fraud detection, track any unusual payments and risk management. Moreover, chatbots and virtual assistants help in enhancing the customer experience.

Benefits of AI and ML in Banking:

Better conversation with the consumers: With the help of chatbots and virtual assistants, the consumer can communicate in a better way with the bank as they communicate with online services like Amazon and Myntra. With the help of advanced bots, banks can respond to consumers 24*7 and resolve their requirements.
Customer sentimental analysis: Banks already have a wealth of information about their consumers and with the help of AI, they can process the already existing information and do a sentimental analysis. Banks can find out if the customers are happy with their services or not and they can analyse social channels to see the reviews and feedback that the audience is submitting.
ML- Driven Underwriting Process: ML-based underwriting helps in simplifying the complex process, for example, if a bank wants to check the creditworthiness of a consumer, underwriting analyses the credit score based on 10,000+ data points which helps in giving accurate information.
Personalised banking: With the help of AI, banks give a personalised experience to the customers. Learning consumer behaviour, requirements and financial goals AI can make the necessary insights and recommendations. This results in a higher chance of conversion.

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4. Application Programming Interfaces(APIs)

APIs help the software systems to communicate efficiently, they help banks to integrate third-party tools and give a seamless experience to consumers. They play a major role if the bank wants to implement a new service in collaboration with a third-party tool.

Benefits of APIs in Banking

Easier app development: While developing an app, the developers don’t need to integrate different applications rather with the help of API, it can be done at once.
More functional apps: The developers don’t have to feed data manually rather they can easily do it with the help of API.
Wider distribution: You do not have to do everything manually and all data can be integrated into a single system which makes the distribution much easier.

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5. Big Data Analytics

Banks use big data to process large amounts of information to get insights into user behaviour, risk and personalised service offerings. This helps improve customer service and enhance customer retention.

Benefits of Big Data Analytics

Personalised Banking: Big data, when combined with different tools and technologies can help in analysing customer behaviour intricately and then provide them with solutions accordingly. The trends studied may include shopping habits, investment habits and personal or financial background.
Segmentation of customers: With the help of big data analytics, banks segment the customers, and it is much easier to target the market campaigns towards them. It also helps them optimise their customer experience accordingly.
Effectively analyse the feedback: Banks can promptly address feedback, positively influencing their interactions with consumers. This responsiveness leads customers to feel valued, perceiving that their feedback is not only heard but also acted upon.

6. Cyber security technologies

Cyber security technologies like secure socket layers(SSL), two-factor authentication(2FA), biometrics and advanced threat detections to protect consumer’s data.

Benefits of Cyber Security Technologies

Safeguards consumers data: A single cyber-attack can dissolve a bank’s reputation, consumers can lose their money too, therefore banks must take the help of cyber security to protect the data.
Digitisation: With the increase in the adoption of digitisation, banks must protect themselves from the hacking of apps and other malpractices.

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7. RPA

Robotic Process Automation(RPA) is used to automate routine tasks like data entry and transaction processes which will also help in reducing human errors.

Benefits of RPA

Enhanced productivity: With the help of RPA, you can increase productivity efficiency as you can easily complete the tasks on a single command. According to Gartner, you can prevent 25,000 hours of unnecessary work with automation.
Faster loan processing: Banks receive several loan applications and it takes a lot of time for employees to examine, extract and verify information before processing loans. RPA Bot can help in extracting the required information for the processing of loans.

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