Paytm's UPI Lifeline: RBI Asks NPCI to Consider TPAP Status, But With Conditions

The Reserve Bank of India (RBI) has thrown a lifeline to Paytm, allowing it to potentially continue offering UPI services through a Third-Party Application Provider (TPAP) license. However, the decision comes with significant caveats that could impact Paytm's user base and operations.

It has been further advised that in the event of NPCI granting TPAP status to OCL (One97 Communication Ltd), it may be stipulated that ‘@paytm’ handles are to be migrated in a seamless manner from Paytm Payments Bank to a set of newly identified banks to avoid any disruption. No new users are to be added by the said TPAP until all the existing users are migrated satisfactorily to a new handle," the RBI said in a media release on Friday.

The RBI further said that for seamless migration of ‘@paytm’ handle to other banks, NPCI may facilitate certification of 4-5 banks as Payment Service Provider (PSP) Banks with demonstrated capabilities to process high volume UPI transactions.

One97 Communication Ltd or OCL is the parent company of Paytm.

Acting against non-compliance of banking rules, the RBI had barred January 31, 2024. Paytm Payments bank from accepting deposits or credit transactions or top-ups in any customer accounts or any prepaid instruments such as wallets and FASTags.

The regulatory action impacted Paytm app which is used by millions for small ticket transactions.

Key Points:

RBI's Conditional Approval: The RBI has advised NPCI to examine Paytm's (One97 Communication Ltd.) request for a TPAP license. This would allow Paytm to process UPI transactions through partner banks instead of its own Paytm Payments Bank, which was recently barred from operating.

Seamless User Migration: If approved, Paytm must ensure a smooth migration of its "@paytm" handles to new partner banks to avoid disruption for users. No new users can be added until existing users are migrated successfully.

Restricted Growth: Paytm cannot add new users until existing "@paytm" handles are migrated, potentially hindering its growth strategy.

Partner Bank Selection: NPCI will need to certify 4-5 banks capable of handling Paytm's high transaction volume. This could favor larger, established banks, potentially impacting competition within the digital payments space.

FASTag and NCMC Impact: Holders of FASTag and NCMC issued by Paytm Payments Bank face disruption and need to find alternative arrangements by March 15, 2024.

Overall Impact:

While the RBI's decision offers Paytm some breathing room, the conditions attached could significantly impact its operations and growth potential. The success of this arrangement will depend on the smooth migration of users, the selection of suitable partner banks, and Paytm's ability to adapt to the new limitations. This development raises questions about the future of competition and innovation within the Indian digital payments landscape.