Paytm gets a third party licence before Friday deadline, YES Bank to be its merchant acquiring bank

“National Payments Corporation of India (NPCI) has today granted approval to One97 Communications Limited (OCL) to participate in UPI as a Third-Party Application Provider (TPAP) under multi-bank model. Four banks (Axis Bank, HDFC Bank, State Bank of India, YES Bank) shall act as PSP (Payment System Provider) banks to OCL,” NPCI said in a statement released late on Thursday evening.

So far, Paytm’s UPI transactions were processed by Paytm Payments Bank alone, but now these four banks will handle Paytm’s UPI transaction volumes between them.

For these four banks, this collaboration would present the advantage of earning fees for facilitating settlements for crores of customers on behalf of Paytm.

The NPCI further said that YES Bank would also be acting as merchant acquiring bank for existing and new UPI merchants for One97 Communications Limited (OCL).

In addition, the “@Paytm” UPI handle for Paytm’s customers would also be redirected to YES Bank.

“This will enable existing users and merchants to continue to do UPI transactions and AutoPay mandates in a seamless and uninterrupted manner. OCL has been advised to complete migration for all existing handles and mandates, wherever required, to new PSP banks at the earliest,” NPCI said in its statement.

Paytm in an earlier concall had stated that nearly 20% of its nearly 4 crore merchants had bank accounts linked only to Paytm Payments Bank, and these would have to be migrated to another bank for the merchants to continue using Paytm’s services such as Paytm QR, Paytm Soundbox or Paytm POS machines and so on.

For Yes Bank, this would present a significant benefit. To begin with, Yes Bank is likely to maintain the escrow account for Paytm’s online merchants, along with Axis Bank, said a person directly in the know of the matter.

As far as Paytm’s offline merchants are concerned- which is likely a larger majority of its merchant base- Yes Bank will exclusively manage the escrow account for them, and any new offline merchants Paytm now acquires, added this person.

As per RBI guidelines, the Paytm merchants which maintained bank accounts only with Paytm Payments Bank were asked to move their bank accounts to non-PPBL banks no later than March 15.

As such, Yes Bank may not get any of the deposit of existing merchants, it us understood, unless some of them chose to shift their bank accounts to Yes Bank. In any case, the total deposit base of merchants with Paytm Payments Bank is understood to be under ₹3,000 crore, as per sources.

However, the benefit to Yes Bank would accrue from the fees that it earns for settlement of these merchant transactions it does for Paytm, the float in merchant accounts it would get access to which could be deployed to make additional income, and the bigger opportunity to be able to cross-sell financial products like loans to these merchants, the person quoted earlier told CNBC-TV18.

As per Paytm’s FY2022-23 annual report, Payment Services contributed 62% to the company’s total revenue of ₹7,990 crore for the year, at ₹4,930 crore.

In terms of its share in UPI payments, data from NPCI’s website shows that Paytm Payments Bank app processed 1405.69 million transactions in the month of February, worth ₹1,65,368.76 crore.

The total UPI transaction volumes for the entire ecosystem stood at 12.10 billion for month of February, making Paytm Bank’s share 11.61% of total volumes.

Hence, this TPAP license is be crucial for Paytm, and comes just ahead of the March 15 deadline set by the regulator for Paytm Payments Bank to wind down its banking activities, including wallets and FASTags.

CNBC-TV18 had earlier reported that the regulator is unlikely to change its stance on the bank when it comes to the restrictions imposed, or grant Paytm Payments Bank any relief.

Morgan Stanley in a note said it would watch out for updated commercials as Paytm Payments Bank’s business moves to other banks.

UBS said that its base case scenario was that Paytm could see a 15-20% churn in its existing merchants and customer base, along with some loss in GMV share.

It expects Paytm’s share in digital payments to come down to 17% in FY25 from 25% prior to RBI action, and forecasts a 5% decline in loan disbursements YoY and 2% decline in overall revenues in FY25..

Jefferies expects a 8-15% hit to payment value and app usage, and expects the quantum of impact on payments business to be limited to sub-20% from January levels.

It said that Paytm’s business model will now be similar to any other pure play payments company like Google Pay or PhonePe, and that it may have to dip into its USD 1 billion dollar plus cash reserves to retain customers and merchants.