Paytm Payments Bank punished for sharing data abroad, verification lapses

By Anup Roy and Saritha Rai,

Paytm Payments Bank, which processes transactions for India’s digital payments giant Paytm, was barred from taking on new customers because it violated rules by allowing data to flow to servers abroad and didn’t properly verify its customers, according to a person familiar with the matter.

Annual inspections by the Reserve Bank of India found that the company’s servers were sharing information with China-based entities that indirectly own a stake in Paytm Payments Bank, the person said, asking not to be identified as the details are private. Paytm Payments Bank, being a regulated financial institution, was required to maintain a so-called service level agreement with its technology vendor that would ringfence the entity from its owners, the person said.

Also Read | Taking immediate steps to comply with RBI directions: Paytm Payments Bank

The location of the servers wasn’t immediately known and there’s no implication that Paytm Payments Bank was storing information abroad. Paytm Payments Bank had also onboarded thousands of clients without adequate know-your-customer documentation and the concern was that some of these could have been mules for money laundering, the person added.

Paytm didn’t respond to a Bloomberg News email seeking comment on whether its servers were sharing information offshore or its compliance with KYC rules. An email to the RBI wasn’t immediately answered.

In a subsequent interview to CNBC-TV18, founder Vijay Shekhar Sharma said Paytm Payments Bank is fully compliant with India’s data-storage rules and the RBI hasn’t mentioned data-access concerns. Without detailing the RBI’s concerns, Sharma said no fine had been levied for KYC compliance and no issues were raised with the bank ownership structure, according to a report on CNBC-TV18’s website. “Concerns are IT related. They want systems to be audited by a third party and confirmed to them,” Sharma told the TV channel.

Paytm Payments Bank is a joint venture between Paytm and Sharma. China’s Alibaba Group Holding Ltd. and its affiliate, Jack Ma’s Ant Group Co., own shares of Paytm, according to exchange filings.

Also Read | Paytm tumbles after RBI imposes restrictions on payments bank

In a statement late Friday, the RBI had cited “material supervisory concerns” for its action, without elaborating. Shares of Paytm, formally known as One 97 Communications Ltd., tumbled as much as 14.7% Monday.

While the RBI had similarly punished companies including American Express Banking Corp. and Mastercard Inc. for flouting data-storage rules, the concerns around Paytm Payments Bank are particularly sensitive given India’s hostile political relationship with China. India has banned hundreds of apps linked to or originating from China over the past two years following a bloody clash at the nations’ disputed border.

In 2018, India’s banking regulator mandated that all payments providers “shall ensure that the entire data relating to payment systems operated by them are stored in a system only in India.” The bank gave entities, ranging from Alphabet Inc’s Google Pay to Walmart Inc.’s PhonePe until the year end to comply and appoint auditors. The regulator now wants Paytm Payments Bank to appoint a technology auditor in consultation with the RBI, the person said. The company is taking steps to comply with the RBI’s directive, including the appointment of an external auditor, the company said in a statement on Saturday. Existing customers will be unaffected.

The punishment will make it tough for Paytm Payments Bank to be upgraded to a small finance bank, limiting its ability to attract large deposits, according to Macquarie Capital analyst Suresh Ganapathy. ICICI Securities Ltd. cut its price target on Paytm to to Rs 1,285 from Rs 1,352. The stock closed at Rs 674.8 in Mumbai Monday.

Paytm Payments Bank has over 300 million wallets and 60 million bank accounts, according to its website. The bank said it has over 100 million KYC-compliant customers and has been adding 0.4 million users every month.

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