Is Paytm’s switch to compliance-first mode too late?

From getting the compliance team to attend product meetings to ensuring that every update or new product launch went through the rigours of the regulatory rules and restrictions, over the last one year or so, Paytm implemented a host of internal changes to toe the regulatory line, said executives at the digital payments company.

At the same time, Vijay Shekhar Sharma, the company’s founder, made it a priority for his team to focus on launching every industry update from the National Payments Corporation of India (NPCI) or the Reserve Bank of India (RBI) on priority, they said.


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However, with its payment bank unit already under the scrutiny of the central bank for almost two years, perhaps the efforts were a case of too little too late. While announcing the business restrictions on Paytm Payments Bank on January 31, the RBI called out persistent non-compliance as one of the issues with the bank. Industry insiders said if Paytm had implemented the strict compliance mandates earlier, perhaps it could have avoided such an action.

After the payments bank was put under an embargo back in March 2022, the Paytm leadership did make compliance a focus area, according to multiple people in the know. It also wanted to show the sector regulator that Paytm was ready to support all innovation the RBI wanted to introduce in the payments space.

Paytm Payments Bank launched both UPI Lite and RuPay credit cards on UPI on the Paytm app in February last year, within months of the RBI introducing it in September 2022.

“Compliance has been the cornerstone of our product development initiatives from the very beginning, not just in the last year. We ensure that every new product complies with regulatory frameworks, with our compliance team playing a crucial role in guiding the development process to meet regulations and obtain necessary approvals right from the start,” said a Paytm spokesperson responding to ET’s queries.

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While the company might claim its high compliance standards, it seemed to have fallen short of the RBI’s expectations.

During an analyst call a day after the RBI put the curbs on the payments bank, Sharma said Paytm’s risk management and compliance were world class, “except like what we have seen today is what is very sad and bad that we have this kind of outcome.”

Paytm compliance GFXETtech

Compliance first

Both the RBI and NPCI always had strict frameworks for any product launched on UPI or RuPay. And Paytm had to comply with every feature to ensure the product would go live. But given Paytm was positioned as a product company, it would focus on bringing innovation into its product journey, according to one of the people ET spoke with.

For the Paytm leadership, it was not about why should this product be built, rather why not, he added.

“Paytm was always a product and tech-led company, but over the last year or so the speed of product development had definitely slowed,” said an industry executive who has tracked Paytm closely.

Paytm was one of the first players to double down on QR code-led merchant acquisition. It also launched soundbox back in 2020, which was meant to make confirmation of payment easier for small merchants.

But after going public and many rounds of issues with the RBI, Paytm had to slow down, prioritise processes over quick hacks.

“The leadership realised that with the banking licence and with public investors, you cannot adopt a breakthrough strategy; one needs to innovate strictly within the compliance boundaries,” the executive said.

All the people spoke on the condition of anonymity.

Also read | Two independent directors quit Paytm Payments Bank board

Changing internal systems

For years, Sharma ran Paytm with executives who were engineers and technology professionals. But around 2019-2020, a churn happened at Paytm and a lot of senior industry professionals came in at crucial roles.

“The idea then was to start thinking like a financial services company and not as a fintech startup,” said one of the people quoted above.

Another person quoted earlier said that every update, every change now requires a sign off from the compliance team. Some of them attend product meetings regularly these days, he said.

He added that it was not like getting a tick from the compliance team just before the product was launched; they would be involved in the entire process from the start.

“This might have slowed down processes, but the thinking was it is good for the long run,” he said.

The Paytm spokesperson said the company has always prioritised compliance and adherence to processes to launch innovative products and that it took products to the market only after ensuring every new offering is in full compliance with regulatory standards.

Some people believe that Bhavesh Gupta, the current chief operating officer at Paytm, played an important role in making the company focus on compliance. Gupta, a career banker, knew regulatory restrictions and was focused on ensuring the embargo was lifted. But these people also felt that perhaps Paytm should have strengthened its internal processes much earlier.

Also read | Paytm’s Vijay Shekhar Sharma discussed exiting board, removing Paytm from bank name

A phase of rediscovery

Paytm is now at a juncture where it might need to don its innovation hat again.

“The focus is now to build partnerships aggressively and scale up the business through strategic alliances; it has worked well in lending and should work in other areas too,” said the person cited first in the story.

Through strong partnerships, Paytm can rely on others for banking support while it can focus on building innovative user interfaces. Like one of the persons added that Paytm might need to double down on brand building, but eventually it will have all the products like any of its competitors.

Roy Walsh

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