Governance Challenges and Regulatory Compliance at Paytm Payments Bank

1. Introduction

The fintech industry has emerged as a transformative force in the global financial landscape,
revolutionizing the way individuals and businesses access and manage their finances. In India,
the fintech sector has witnessed remarkable growth, driven by factors such as increasing
smartphone penetration, digitalization initiatives, and a burgeoning tech-savvy population. At
the forefront of this fintech revolution stands Paytm, a trailblazing company that has redefined
the payments and banking landscape in India.

Founded in August 2010 by entrepreneur Vijay Shekhar Sharma, Paytm began its journey as a
mobile payments platform, offering users a convenient way to make cashless transactions
through their smartphones. Leveraging innovative technology and user-friendly interfaces,
Paytm quickly gained traction among consumers and businesses alike, carving out a niche for
itself in the competitive fintech market.

Building on its success in the payments space, Paytm ventured into the realm of banking with
the launch of Paytm Payments Bank on 28 November 2017 headquartered in Noida. As one of
India’s leading payments banks, Paytm Payments Bank aimed to democratize banking services
by providing accessible, affordable, and inclusive financial solutions to millions of Indians.
With features such as digital savings accounts, mobile banking, and seamless fund transfers,
Paytm Payments Bank sought to cater to the diverse financial needs of its customers, especially
those in the B2C and B2B space in the FinTech market segments.

However, alongside its rapid growth and expansion, Paytm Payments Bank, like many other
players in the fintech sector, faced inherent challenges related to corporate governance and
regulatory compliance. As a financial institution entrusted with safeguarding customers’ funds
and ensuring the integrity of the financial system, Paytm Payments Bank grappled with the
complexities of navigating regulatory frameworks, maintaining transparency, and upholding
ethical standards.

Corporate governance and regulatory compliance are paramount in the financial services
sector, where trust, credibility, and accountability are essential pillars of success. Effective
governance mechanisms help mitigate risks, protect stakeholders’ interests, and foster long-
term sustainability. For Paytm Payments Bank, adherence to stringent governance standards
and regulatory requirements is not only a legal obligation but also a strategic imperative for
building trust among customers, investors, and regulatory authorities.

Despite its innovative business model and disruptive technology, Paytm Payments Bank
encountered governance challenges that raised concerns among stakeholders and regulators.
Issues such as delayed response to regulatory issues, inadequate oversight, and conflicts of
interest among board members cast a shadow over the bank’s reputation and raised questions
about its commitment to upholding the highest standards of governance and compliance.

In light of these challenges, it becomes imperative to delve deeper into the governance
landscape of Paytm Payments Bank, examining the underlying factors contributing to its
governance shortcomings and exploring potential strategies for improvement. By addressing
governance challenges head-on and embracing a culture of transparency, accountability, and
integrity, Paytm Payments Bank can not only enhance its regulatory compliance but also
reinforce its position as a trusted leader in India’s fintech ecosystem.

2. Background and Context

Paytm Payments Bank, a subsidiary of One97 Communications Ltd., was established in 2017
as a key player in India’s burgeoning fintech sector. The inception of Paytm Payments Bank
marked a significant milestone in the evolution of digital banking services in India, offering
customers a seamless blend of technology and financial services to meet their evolving needs.

Founded by Vijay Shekhar Sharma in 2010, Paytm initially started as a mobile payments
platform, allowing users to make cashless transactions through their smartphones. With the
rapid adoption of digital payments in India, Paytm emerged as a dominant force in the market,
attracting millions of users and transforming the way people transact and manage their
finances.

In 2017, Paytm received approval from the Reserve Bank of India (RBI) to launch Paytm
Payments Bank, a new entity aimed at providing banking services to the unbanked and
underbanked population segments. Paytm Payments Bank was envisioned as a digital-first
bank, leveraging technology to offer customers a range of banking services, including savings
accounts, current accounts, mobile banking, and digital wallets.

The establishment of Paytm Payments Bank was part of a broader trend in India’s fintech
landscape, where traditional banking models were being challenged by innovative digital
solutions. Fintech companies, like Paytm, were at the forefront of this disruption, leveraging
technology to offer faster, more accessible, and cost-effective financial services to consumers
and businesses.

However, the growth of fintech companies, including payments banks like Paytm, has been
accompanied by regulatory oversight from authorities such as the Reserve Bank of India (RBI).
The RBI plays a crucial role in overseeing the operations of payments banks and ensuring
compliance with regulatory standards to safeguard the interests of customers and maintain the
stability of the financial system.

The regulatory framework governing fintech companies and payments banks in India is
governed by various laws, regulations, and guidelines issued by the RBI and other regulatory
bodies. These regulations cover aspects such as capital requirements, customer protection, anti-
money laundering measures, and governance standards to ensure the integrity and stability of
the financial system.

Independent directors play a vital role in overseeing the governance and compliance of
payments banks like Paytm. These directors, appointed by the board of directors, are
responsible for providing independent oversight, challenging management decisions, and
ensuring adherence to regulatory requirements. They bring diverse expertise and perspectives
to the boardroom, contributing to effective decision-making and risk management processes.

The background and context of Paytm Payments Bank underscore the dynamic evolution of
India’s fintech landscape and the critical role played by regulatory authorities and independent
directors in ensuring governance and compliance within the sector. As Paytm Payments Bank
continues to navigate regulatory challenges and drive innovation, maintaining a robust
governance framework will be essential to its long-term success and sustainability in the fintech
ecosystem.

3. Key Stakeholders

Paytm Payments Bank, like any financial institution, involves a diverse set of stakeholders who
play crucial roles in its governance and strategic decision-making processes. These
stakeholders encompass the board of directors, executive leadership, regulatory authorities,
shareholders, and customers, among others. Understanding the backgrounds and roles of key
stakeholders is essential for comprehensively assessing the governance dynamics of Paytm
Payments Bank.

Board of Directors
The board of directors serves as the governing body responsible for overseeing the overall
strategic direction and performance of Paytm Payments Bank. Led by founder Vijay Shekhar
Sharma, the board comprises experienced professionals with diverse backgrounds and
expertise in various domains, including banking, finance, technology, and regulatory
compliance. As stewards of the bank’s interests, the board members are tasked with making
critical decisions, ensuring regulatory compliance, and safeguarding the interests of
shareholders and customers.

Founder Vijay Shekhar Sharma

Vijay Shekhar Sharma is the visionary entrepreneur behind the inception and growth of Paytm
Payments Bank. With a background in computer science and a keen understanding of consumer
behavior, Sharma founded One97 Communications Ltd. in 2000, laying the groundwork for
what would later become one of India’s leading fintech companies. His entrepreneurial acumen
and innovative mindset have been instrumental in shaping the strategic direction of Paytm
Payments Bank and driving its expansion into new markets and product offerings.

Independent Directors

Independent directors play a pivotal role in providing impartial oversight and governance at
Paytm Payments Bank. Manju Agarwal, Shinjini Kumar, Ramesh Abhishek, and Pankaj Vaish
are prominent figures among the independent directors, each bringing a wealth of experience
and expertise to the board.

Manju Agarwal

Manju Agarwal has over 34 years of experience in Retail Banking at Operations, Policy and
Strategy level in State Bank of India, India's largest Bank. During her 34 years stint with SBI,
she has worked in various roles, important being General Manager (Network) Delhi, Chief
General Manager (Rural Business) and Dy Managing Director and Chief Operating officer. Her
last assignment with SBI was Dy Managing Director Digital Banking & New Businesses.

She has extensive experience in retail banking agriculture business and financial inclusion also
have extensive experience in digital payments. She also headed Merchant Acquiring Business,
Debit Card Strategy and Transaction, Rural Business in SBI including Financial Inclusion,
Govt Banking Business, a very large Network of branches and Centralised Processing Cells in
Uttarakhand and Western UP- was responsible for their business, administration and customer
service.
In the past, Manju Agarwal has been associated with the Companies like NPCI, Jio Payments
Bank, as a Director on their Board and as an advisor to MasterCard.

Shinjini Kumar

Mrs. Shinjini Kumar has spent over thirty one years in Indian financial services in senior roles
across organizations including the central bank consulting firm, multinational banks and
fintech. Prior to this she was the Country Business Manager for Citibank’s Consumer
businesses in Fudia, which included complete executive responsibility over Retail Banking,
resources, Wealth Management, Credit Cards, Small management Business Banking, Mortgage
etc. In her twenty six years’ experience prior to joining Citibank, she held senior positions in
Paytm, Pricewaterhouse Coopers India (Partner and leader, Banking and Capital Markets
Business, India), Bank of America Merrill Lynch (Country Compliance Head) and the Reserve
Bank of India (Various roles in Foreign Exchange Management, Currency Management and
Banking Supervision. Currently, she is co-founder of Five Salts Private Limited, a newly
incorporated company that is building a platform to facilitate more women to buy financial
products.

Ramesh Abhishek

A senior bureaucrat with an illustrious career span of four decades, Abhishek has been
instrumental in introducing and leading largescale & impactful initiatives for the Government
of India such as Make in India, Start-up India and Regulatory Reforms. He has led advocacy
on Intellectual Property, Industrial Corridors, Productivity & Competitiveness of MSMEs,
enhancing investments and large-scale business reforms. He has also led over 100 panel
discussions globally, and authored multiple publications & articles.

He steered some major projects like FDI policy and procedural reforms, which resulted in
attracting USD205 billion of FDI into India - Highest ever FDI inflows amid reduction in
Global FDI. Led India’s efforts to improve rank in World Bank Doing Business Index to
facilitated highest ever ranking, Strengthen investment promotion efforts of the country by
building a private company ‘Invest India’ to facilitate over USD20 bn of FDI and create a
pipeline of over USD135 bn. The efforts led to recognition of most awarded investment
promotion agency of the world.

He has an experience of 14 plus years at the Government of Bihar in various capacities where
he led large-scale transformative development programs, ensuring participating of
beneficiaries while working closely with communities, while ensuring a transparent process
through rigorous monitoring and evaluation.

In the past, Ramesh Abhishek has been associated with the Government of India in various
capacities like Secretary, Department for Promotion of Industry & Internal Trade,
Chairman, Delhi-Mumbai Industrial Corridor Corporation and National Industrial Corridor
Development, Joint Secretary, Department of Justice Member, E-Committee, Supreme Court
of India etc.

He also had international experience as Civil Affairs Officer, United Nations Mission in
Kosovo, UNMIK.

Pankaj Vaish

Mr. Pankaj Vaish has 38+ years of professional experience, with much of it focused on building,
scaling and running large businesses, and managing global operations. He has deep experience
in Technology Led Transformation, Management Consulting, People Management, Leadership
Development, B2B sales and Outsourcing. He is based in Bangalore.

During his 28+ years with Accenture, Mr. Pankaj built businesses from scratch and scaled them
globally, having held many regional and global roles. He began his career with Accenture in
1985 and was a founding member of Accenture India. When he left Accenture as Managing
Director in 2014, he was part of the global leadership team of the Communications, Media and
Technology (CMT) business, where his roles included MD, Asia Pacific and Global MD,
Management Consulting. Previously, he was MD of Accenture’s Global Delivery Center
Network for BPO, which covered 20,000+ people in 15 centers in 10 countries. He also
founded Accenture’s India BPO operations, growing it to 6,000+ people in 4 years. He was
center stage in the transformation of Accenture India into a global powerhouse, and was the
first India based employee to join the Accenture Global Leadership Council in 2006.

Mr. Pankaj is and has been an Independent Director on the board of many listed and unlisted
companies over the past 9+ years. He is a Certified Independent Director and a Registered
Independent Director with the Indian Institute of Corporate Affairs (MCA).

Mr. Pankaj is currently an Independent / Non-Executive Director on the board of 5 companies

– both listed and unlisted.
He has been / is on the board of companies across different sectors of the financial services
industry, including banking, housing finance, wealth and asset management, and micro finance
and MSME lending. This provides him with a broad perspective of the financial services
industry. In all of these companies, Mr. Pankaj has been instrumental in driving technology
transformation.

Mr. Pankaj also mentors growth stage technology product and consumer companies. His work
with these companies is focused on driving top line growth through creating attractive value
propositions for target customers and building the capability to deliver on that growth.

Mr. Pankaj has an MBA from the Carlson School of Management, University of Minnesota
and a B. Tech. in Mechanical Engineering from the Indian Institute of Technology, Banaras
Hindu University (IIT-BHU), Varanasi, India. He was a Gold Medalist at IIT-BHU, and has
been awarded the Distinguished Alumni award by IIT-BHU Alumni Association.

Collectively, the board of directors and independent directors at Paytm Payments Bank
represent a diverse and experienced group of stakeholders committed to upholding the highest
standards of governance, compliance, and ethical conduct. Their collective expertise and
leadership are instrumental in steering the bank towards sustainable growth and success in
India’s rapidly evolving fintech landscape.

4. Governance Challenges at Paytm Payments Bank

Paytm Payments Bank, like many other financial institutions operating in the dynamic fintech
landscape, has encountered several governance challenges that have raised concerns among
stakeholders and regulatory authorities. These challenges stem from various factors, including
regulatory compliance issues, conflicts of interest, and the complex nature of the payments
business.

One of the primary governance challenges faced by Paytm Payments Bank relates to regulatory
compliance. Independent directors on the board have raised red flags over the bank’s adherence
to regulatory requirements, indicating potential gaps in oversight and risk management. These
concerns have prompted questions about the bank’s ability to effectively address regulatory
issues in a timely manner and maintain transparency in its operations.

A critical area of concern for Paytm Payments Bank is the effectiveness of its anti-money
laundering (AML) measures. As a financial institution entrusted with safeguarding customers’
funds and preventing illicit activities, Paytm Payments Bank must implement robust AML
controls and procedures. However, questions have been raised about the adequacy of the bank’s
AML framework and its ability to detect and prevent money laundering activities effectively.

Another governance challenge faced by Paytm Payments Bank revolves around intra-group
transactions and the extent of control exerted by its parent company, One97 Communication.
The presence of related-party transactions and potential conflicts of interest raise questions
about the bank’s independence and autonomy in decision-making. Independent directors have
expressed concerns about the level of oversight and scrutiny applied to intra-group transactions,
highlighting the need for greater transparency and accountability in this regard.

Furthermore, the scale of operations and the unique challenges posed by the nature of the
payments business present additional governance challenges for Paytm Payments Bank. Unlike
traditional banking institutions, payments banks operate in a highly digitalized and fast-paced
environment, where transactions occur in real-time and at a massive scale. Managing
operational risks, ensuring data security, and maintaining customer trust are paramount
concerns for Paytm Payments Bank, given the rapid growth and adoption of digital payment
solutions in India.

Paytm Payments Bank faces significant governance challenges related to regulatory

compliance, anti-money laundering measures, intra-group transactions, and the scale and
complexity of its operations. Addressing these challenges requires a comprehensive approach
that focuses on enhancing transparency, strengthening risk management processes, and
fostering a culture of compliance and accountability within the organization. By effectively
addressing governance challenges, Paytm Payments Bank can build trust among stakeholders,
mitigate regulatory risks, and sustain its growth and success in the fintech landscape.

Regulatory Intervention and Response

The regulatory landscape governing fintech companies and payments banks in India is
characterized by a dynamic interplay between regulatory authorities and industry players.
Paytm Payments Bank, as a prominent player in the fintech ecosystem, has been subject to
regulatory interventions and responses that have significant implications for its operations and
governance framework.

Examination of the RBI’s Directive

On January 31, 2024, the Reserve Bank of India (RBI) issued a directive halting certain services
of Paytm Payments Bank, citing concerns over regulatory compliance and risk management
practices. The directive, which came as a surprise to many stakeholders, had immediate
repercussions for the bank, including restrictions on customer acquisition and certain
operational services. The RBI’s intervention underscored the importance of regulatory
oversight in ensuring the integrity and stability of the financial system, particularly in the fast-
paced and rapidly evolving fintech landscape.

Analysis of Previous Interactions with the RBI

Prior to the RBI’s directive, Paytm Payments Bank had engaged in various interactions with
regulatory authorities, including the RBI, to discuss governance, ethics, and supervisory
expectations. These interactions served as forums for dialogue and collaboration between the
bank’s leadership and regulatory authorities, providing opportunities to address emerging
issues, clarify regulatory requirements, and strengthen governance frameworks. However,
despite these engagements, concerns persisted over the bank’s compliance with regulatory
standards, leading to the issuance of the directive.

Overview of Proposed Amendments to Banking Acts and Regulations

In response to growing concerns over governance and investor protection in the banking sector,
the Finance Minister proposed amendments to relevant banking acts and regulations aimed at
strengthening fintech governance and regulatory oversight. These proposed amendments, if
enacted, would have far-reaching implications for the governance framework of fintech
companies, including payments banks like Paytm Payments Bank. Key areas of focus include
enhancing transparency, accountability, and risk management practices, aligning regulatory
standards with international best practices, and promoting innovation while safeguarding
consumer interests.

The proposed amendments signal a renewed commitment by regulatory authorities to foster a

robust and resilient financial ecosystem that balances innovation with regulatory compliance
and consumer protection. For Paytm Payments Bank, these proposed changes underscore the
need for continuous vigilance and adaptation to evolving regulatory requirements, ensuring
that the bank remains compliant and resilient in the face of regulatory scrutiny.

Thus, the regulatory intervention and response faced by Paytm Payments Bank highlight the
complex interplay between regulatory authorities, industry stakeholders, and governance
dynamics in the fintech sector. By analyzing the impact of regulatory directives, assessing
previous interactions with regulatory authorities, and anticipating future regulatory changes,
Paytm Payments Bank can navigate regulatory challenges effectively and uphold the highest
standards of governance and compliance in the pursuit of its strategic objectives.

5. Industry Perceptions and Challenges

The fintech sector has witnessed rapid growth and innovation in recent years, transforming the
way individuals and businesses access financial services. However, alongside its evolution, the
industry faces inherent challenges related to governance risks and regulatory compliance.
Understanding industry perceptions regarding these challenges is crucial for identifying areas
of improvement and strengthening the overall governance framework within the fintech sector.

Examination of Industry Perceptions

A survey conducted by the Fintech Association for Consumer Empowerment shed light on
industry perceptions regarding governance risks in the fintech sector. According to the survey
findings, governance risks, defined as weaknesses at the board level leading to poor oversight
and control, ranked relatively low in priority among industry stakeholders. Non-lenders ranked
governance risks 19th, while lenders ranked it 22nd, indicating a lower level of concern
compared to other factors.

Analysis of Influencing Factors

Several factors influence fintech companies’ prioritization of governance risks and regulatory
compliance. One such factor is the rapid pace of innovation and technological advancement in
the fintech space. Fintech companies often prioritize product development and market
expansion to gain a competitive edge, sometimes at the expense of robust governance practices.
Additionally, resource constraints and competing priorities may lead fintech companies to
allocate limited resources to governance and compliance functions, particularly in the early
stages of growth.

Moreover, industry perceptions regarding governance risks may be influenced by external

factors such as market dynamics, regulatory environment, and stakeholder expectations. In
markets where regulatory oversight is perceived to be lax or enforcement actions are rare,
fintech companies may deprioritize governance risks in favour of pursuing growth
opportunities. Similarly, market pressures to deliver shareholder value and meet investor
expectations may overshadow concerns about governance and regulatory compliance.

Exploration of Implications on Regulatory Expectations

The industry’s perceptions regarding governance risks have significant implications for
regulatory expectations and oversight. Regulators, such as the Reserve Bank of India (RBI) in
India, rely on industry feedback and market assessments to inform their regulatory priorities
and supervisory approaches. If industry stakeholders perceive governance risks to be low or
secondary to other factors, regulators may face challenges in effectively addressing governance
shortcomings and enforcing regulatory compliance.

Furthermore, industry perceptions can shape regulatory expectations regarding industry

conduct, risk management practices, and corporate governance standards. Regulators may
adjust their regulatory frameworks and enforcement strategies based on industry feedback and
market trends to ensure the integrity and stability of the financial system. However, if industry
stakeholders downplay the importance of governance risks, regulators may face difficulties in
implementing effective regulatory reforms and addressing systemic vulnerabilities within the
fintech sector.

In general, industry perceptions regarding governance risks in the fintech sector play a crucial
role in shaping regulatory expectations, oversight mechanisms, and industry conduct. By
analysing industry perceptions, identifying underlying factors influencing prioritization
decisions, and engaging stakeholders in dialogue, regulators and industry participants can work
collaboratively to strengthen governance practices, enhance regulatory compliance, and foster
a resilient and sustainable fintech ecosystem.

6. Conclusions

The fintech industry stands at a crossroads, poised for unprecedented growth and innovation,
yet facing complex challenges related to governance, regulatory compliance, and industry
perceptions. Through the examination of key issues such as regulatory intervention, industry
perceptions, and governance challenges faced by specific players like Paytm Payments Bank,
we gain valuable insights into the multifaceted dynamics shaping the future of fintech.

Regulatory intervention, as evidenced by the recent directive from the Reserve Bank of India
(RBI) halting certain services of Paytm Payments Bank, underscores the critical role of
regulatory oversight in maintaining the integrity and stability of the financial system. While
regulatory interventions are essential for addressing governance shortcomings and ensuring
compliance with regulatory standards, they also highlight the need for fintech companies to
prioritize governance and risk management practices to mitigate regulatory risks and foster
long-term sustainability.
Industry perceptions regarding governance risks in the fintech sector, as highlighted by the
Fintech Association for Consumer Empowerment survey, provide valuable insights into the
prevailing attitudes and priorities among industry stakeholders. While the survey findings
indicate a relatively low level of concern regarding governance risks, it is essential to recognize
the underlying factors influencing these perceptions, including market dynamics, regulatory
environment, and resource constraints. By addressing these factors and promoting a culture of
transparency, accountability, and ethical conduct, fintech companies can enhance industry
perceptions and build trust among stakeholders.

Furthermore, the governance challenges faced by specific players like Paytm Payments Bank
underscore the importance of effective governance frameworks and regulatory compliance
mechanisms in the fintech sector. Issues such as delayed response to regulatory issues,
inadequate oversight of intra-group transactions, and conflicts of interest among board
members highlight the need for continuous vigilance and improvement in governance
practices. By addressing these challenges and embracing a proactive approach to governance,
fintech companies can strengthen their resilience and credibility in the eyes of regulators,
investors, and customers.

In conclusion, the future of fintech hinges on the industry’s ability to navigate regulatory
complexities, address governance challenges, and align industry perceptions with regulatory
expectations. By fostering collaboration between regulators, industry participants, and other
stakeholders, we can promote a more transparent, inclusive, and sustainable fintech ecosystem
that drives innovation, fosters financial inclusion, and safeguards the interests of all
stakeholders. As we embark on this journey, it is essential to remain open-minded, adaptable,
and committed to continuous improvement, ensuring that fintech continues to thrive as a force
for positive change in the global economy.