Tech is the Best Way

PayTM KYC fiasco will haunt the firm for long

The Paytm wallet user wanted to complete his KYC. So, he was asked to go and do his biometric authentication at a small telecom retail shop, some two kilometres from his house. At the store, he gave his Aadhaar number. An OTP was generated, which he shared with the person at the desk. Then he put his finger on the biometric reader. He thought he was done, but the person at the desk said, wait, you will get another OTP. Voila! Another OTP arrived promptly. “This is when I got suspicious,” says the user [in Hindi]. “But I thought this must be some regulation. But then the man started asking questions, what is your income, father’s name, and I was like, why is he asking all this. The man was in a hurry and he started putting things on his own. Father’s name. M. Age: 25. And he said, okay done. When I reached home, I saw from the SMS that my Paytm Payments Bank account has been opened.”

Needless to say, the user went back to the shop. He was angry. He accused the shop owner of tricking him into opening a bank account he had no need for. “The guy said, sorry, I just work here and I have been asked to do two OTPs for everyone. I cannot close the bank account. Please complain to Paytm. So I complained with my reference number. After one week of following up, the account was closed. But the idiots have cancelled my wallet KYC also. I am never doing my KYC with them.”

We are in luck. There’s a third story. Bigger, better.


New Delhi, February 2018

The Paytm wallet user wanted to complete his KYC. So he visited the centre closest to him. At the shop, the checklist came up. Do you want to open a Paytm Payments Bank savings account. Yes or no. The person at the desk checked yes. “I was like, hello, hold on,” says the Paytm wallet user. “I don’t want a bank account. But the guy said this is mandatory. And I was like, if it was mandatory then there wouldn’t be a yes or no option. This guy did not relent. He said the KYC will be done only if the bank account is opened. I said no and walked out.”





Next, the user looked up other centres in his vicinity. There were about eight of them, so he decided to try one. He visited four other centres. All of them said no. There can be no KYC without opening a Paytm savings bank account. “I was like, at least try doing a no, maybe the KYC will be done. But these guys were like, no, it is mandatory. So I asked them, who told you it is mandatory. Where is it written? ‘We cannot do KYC without it.’ First I thought maybe one of them is rogue. But all of them said the same thing and refused. After that, I was like, screw it. I don’t need another bank account.”

These are not isolated stories. They are just the sliver of a larger, deeper malaise in the payments bank business.

This is the story of how in the last eight months, payments banks have run amok in the country. Both Paytm and Airtel. And in the garb of adding users, showing traction, meeting deadlines, adhering to changing banking policies, they have twisted and turned banking safeguards meant to protect the consumer. This is the story of people who have been tricked into opening zero-balance payments savings bank accounts across the length and breadth of the country. On the back of thousands of agents running wild, high on commissions.

This is the story of how the very idea of consent, a simple yes or no, has been smudged grey. From which, perhaps, there is no coming back.

But above all, this is a story of opportunism. Of two companies—Paytm and Airtel.

And a larger part of how the Reserve Bank of India’s (RBI) futuristic policy of financial inclusion through payments banks now lies in tatters. Where the regulator cannot be absolved. Because RBI along with Unique Identification Authority of India (UIDAI) played a key role in forming policies and then tweaking them; changing them. It added more chaos than was warranted.

When One97 Communications Private Limited decided that it is going to become a payments bank, it transferred millions of its wallet users to Paytm Payments Bank Limited (PPBL). A company jointly owned by Vijay Shekhar Sharma, the founder of Paytm and One97 Communications Limited. In May 2017.

And then it began wondering, now that that’s done, where do we start with the bank?

Go big or go home


Nobody loves banks. Few people, if any, wake up thinking let’s open a bank account today. It is a business that lacks pull, and for the longest time, it has thrived on push. The singular ability of a company and its greasy sales agents to pull in a customer, by any or all inducement necessary. Interest on deposits. A debit card. ATM network. Ease of opening and trouble of closing an account. Zero minimum balance…and so on and so forth.

In May of 2017, when Paytm Payments Bank started taking shape, its life was no different. PPBL already had data on millions of Indians. People who had willingly signed up for a digital wallet through which they were loading money, transferring money, paying for services and carrying out transactions. Both for ease and for cashbacks. The task before Paytm was, how do we convert a substantial portion of these wallet users into our payments bank savings account customers? And how do we get new customers?

And no, an automatic opening of a bank account for every wallet user would not work. Worse, it would be a complete violation of consent.

Let’s understand this part well. Starting 2015, Paytm has been asking its wallet users to get a KYC. In 2015, it started with why don’t you get your KYC done and become a VIP customer. Users who did this gave their consent to specific terms and conditions. To quote: “3. Promoter of One97 Communications Limited has received an in-principle approval from RBI in August 2015 to open a Payments Bank. I consent to migrate my Paytm wallet account (including the KYC information) to the Paytm Payments Bank…4. I hereby consent Paytm Payments Bank, its affiliates, and or partners to direct offers for bank accounts and financial products. My acceptance of such offer(s) shall be communicated through acceptance of specific terms & conditions either physically or digitally.”

Any Paytm wallet user who did his KYC, and there are millions of them, in the years 2015, 2016 and 2017 signed off on the above.

There are two critical points here. A. Sharing of KYC. B. Consent. Keep them in mind, because as things evolved, both of these went from black and white to grey.

Now, according to the RBI regulations, every payments bank savings account customer needs to have a KYC verification. The easiest route was through electronic KYC using Aadhaar card and biometrics. But this bit is important: in May of 2017, Paytm Payments Bank with a savings bank account still hadn’t started. Even as all this was happening, digital wallets were getting a regulatory treatment of their own. The RBI in a notification said that all digital wallets must have a minimum level of KYC for users to operate them. The first deadline for this was December 2017. Later, this was moved to February 2018.

Needless to say, Paytm, like many other wallet companies like Mobikwik, went on a massive KYC drive.

KYC of wallets and the impending savings bank account that would be launched soon, side by side, in the same company, was a mammoth task. Paytm couldn’t have done it all by itself. To carry out KYC of millions of users spread across the country, and in theory, twice, the company needed feet on the street.

Enter, agents.

In the second half of 2017, PPBL went on a massive agent recruitment drive, primarily aimed at doing KYC of its wallet users. Thousands of small retail shops selling prepaid SIM cards and photocopy centres spread across the country, almost within a few months, changed into Paytm KYC centres. On last count, there were 100,000 of them in operation. Fast forward to November of 2017, PPBL formally launched its savings bank account in New Delhi, in the presence of Union Finance Minister Arun Jaitley. Speaking at the launch, Jaitley said that a new chapter in history has been written with the launch of the bank. “This expands the horizon of financial inclusion in the country,” he said.

Except, the savings account needed customers. Those who would satisfy two conditions. A. KYC. B. Consent.

Now, in a simplistic world devoid of complex financial and privacy regulations, Paytm could’ve jolly well sent out a text or called up its existing KYC wallet user base, asking them for a Yes or No. And then the company would also have had to collect other details for opening the savings bank account. This would be both expensive and unreliable for a newly formed bank in a tearing hurry as not all wallet consumers would want a savings bank account.

PPBL took the easier path. On the backend, the company tweaked its KYC app, called Golden Gate. The app was primarily used by Paytm’s agents to do KYC for wallets. Now it had another item in its checklist: ‘Do you want a Paytm Savings Bank A/c? Yes/No.’ Yes for OTP and done. No for cool, no problem, you can continue using your Paytm wallet. Things were dramatically different on the field though. Every salesperson at PPBL corporate was tasked with a set of 10-12 pin codes to get as many new savings accounts as possible. To ensure that the 100,000 KYC centres carry this out with zeal, Paytm Payments Bank offered them Rs 50 ($0.72) for every new account opened. Credited in their Paytm wallet, every week on a Tuesday.

“The big push was on getting new accounts,” says an individual who followed what transpired at PPBL closely and requested not to be named. “Because the incentive structure of the system is like that. It is a systemic policy failure which is geared towards opening accounts, and not transactions. And this is not just Paytm, it is true for everyone. 70% of the accounts are dormant. The banking correspondents (BCs) opened as many accounts as they could. Zero balance accounts of people who in their life have not used Paytm or will ever have the money to transact on the app.”

But consent? “What about it? Consent is grey,” added the source.

“There are so many workarounds on consent. There can be positive consent. There can be negative consent. A guy in Uttar Pradesh gets a consent call in English. Press 1 for yes. What do you expect him to do? He doesn’t understand the language and presses 1. That’s considered consent, no?”

Sure. But that’s what happened when new bank accounts were opened. Whatever happened to the millions of wallet users who had already done their KYC? How did Paytm sell them the savings bank account? After all, the company already had their KYC information, all it needed was some sort of consent and boom, an account gets opened. “I don’t know how we got their consent,” says the source. This bit is grey.

Meanwhile, the agents’ commission idea took on a life of its own. Agents started recruiting other agents. Just like a multi-level marketing (MLM) scheme. Messages like ‘There’s Rs20,000 to be made every month. WhatsApp me if you want to become an agent.’ Sample this:

It is a fascinating video. A must watch. But what’s the commission? Rs 50 for opening an account—be it a wallet or a bank account. In the video, Shamshad comes across as a driven agent. “If you work hard, you can make more than Rs 500 ($7.24) per day,” he says in Hindi. Agents we spoke to say they open as many as 25 payments bank accounts a day. Shamshad told us that the Paytm Golden Gate App has stopped working and he cannot open new accounts. “Something has gone wrong,” he said. “Call me after 15 days.”

Not a surprise then that RBI, last week, prohibited Paytm from opening more bank accounts, as it found that third party agents were doing the decision-making for consumers to open bank accounts.

Now, timelines are important. KYC for wallets and KYC for Paytm savings bank account started going hand in hand after November 2017. This was tight. The 28 February 2018 deadline was looming—a deadline set by the RBI for KYC compliance for wallet usage. As more and more wallet users rushed to do a KYC, it opened the door to upsell the savings bank account. Or a loophole that you could not do a wallet KYC without getting a savings bank. The Ken could not independently verify if this confusion was created deliberately from the top at PPBL or it was just agents playing fast and loose to make as much commission as they could by opening bank accounts. It bears pointing out that there was almost no communication from Paytm Payments Bank to its users that to continue using the wallet, opening a savings bank account wasn’t necessary.

On 9 August, The Ken sent a detailed set of questions to Paytm. The company did not respond.

Anyhow, the confusion persisted. For the benefit of everyone, except users.

But what’s bad must only get worse. It was around this time, later half of 2017, that another payments bank imploded, and was caught indulging in unethical practices.

Enter, Bharti Airtel.

Airtel’s search for a hammer
Airtel Payments Bank was the first off the block in January 2017. It offered the best possible rate of interest at 7.25% for a savings bank account. It had a large network. With over 1,600,000 retail points, of which 300,000 were allowed to sell bank accounts. And those could all double up as retail locations selling bank accounts. Synergy for the win.

But within seven months of operations, in September 2017, Airtel broke the cardinal rule of consent. RBI found that its retail outlets, in the guise of re-verification of its mobile subscribers, were surreptitiously opening bank accounts for them without their explicit approval. People’s LPG subsidy started flowing into these newly opened bank accounts as the Aadhaar infrastructure was designed such that the newly-seeded bank account receives all the direct benefit transfers (DBT). This meant Airtel’s coffers suddenly swelled by Rs 190 crore ($27.3 million) thanks to the DBT monies that flowed in. At one point, the bank was opening close to 35,000 to 40,000 bank accounts a month. The company was fined Rs 5 crore ($723,650) by RBI and Rs 2.5 crore ($361,825) by UIDAI; RBI suspended it from adding new customers until July 2018.

As if its regulatory troubles weren’t enough, the bank has bigger problems as it has struggled to take off in the last 18 months.

Airtel Payments Bank’s true north was in tier-II cities and beyond, where it had a strong presence and could carry out true financial inclusion. And the idea was to beat full-fledged banks with the power of data and dint of execution. But they soon found that the government’s Jan Dhan initiative meant private and public sector banks carpet bombed Indian citizens with bank accounts. “The whole novelty of payments banks was lost when Jan Dhan accounts became ubiquitous,” says a former Airtel Payments Bank official. “It was not the case when the idea of payments bank was proposed. Because two-thirds of bank branches are in urban areas, but two-thirds of the population were in rural areas where banks did not penetrate. That’s why Airtel decided on doing payments bank.”

Airtel found the big banks’ presence hard to overcome. For instance, when Airtel Payments Bank tried to open salary accounts for B2B-like small chains, the big banks were there. Airtel Payments Bank tried pitching to employees of eatery chains such as Sukh Sagar, Sagar Ratna who were paid their salaries in cash, a savings bank account. “The big banks would not touch a customer whose salary was less than Rs 20,000 ($289), but they were now in the race with us to acquire accounts with salaries of even Rs 5,000 ($72) using Jan Dhan,” says the executive quoted above. And because all banks could now use Aadhaar-based eKYC to open bank accounts, there was no cost advantage that payments banks had over other banks. Eventually, even these restaurant chain employees moved to the big banks.

The whole premise that a retail shop can also sell a bank account was turning out to be a stretch.

“When a telco retailer says ‘Bank account le lo’ [take a bank account] it doesn’t sit well in the mind of the consumer,” says the official. Moreover, a bank account needs a very different type of sale than a SIM card. But the incentive structures which Airtel offered its retail outlets were not aligned with the thought of treating bank accounts with more care. Airtel paid its retailers between Rs 25 ($0.36) to Rs 50 to open a bank account, while it paid Rs 400 ($5.79) to Rs 500 ($7.24 ) for selling a SIM card.

Airtel also realised the need to have dedicated people to sell bank accounts. So it hired as many as 200,000 ‘promoters’ to work in retail outlets to push bank accounts along with SIM cards. And they were paid directly by Airtel. “The idea was only to open as many bank accounts as possible. But when a bank account is sold as a discount product or a push product, no one is really going to use it,” says the official.

This kind of selling is how abuse of consent begins. And that’s what happened.

Airtel Payments Bank did not respond to specific questions sent over email.

The fact that both Paytm and Airtel circumvented regulation to find a hack to customer acquisition begs the larger question. Did policymaking render payments banks DoA (Dead on Arrival)? And is this the reason why many of the licence holders ended up returning their licences? In the world of grey, there is a simple answer, yes. For now.

Falling through the regulatory cracks
RBI gave payments banks only three legs to stand on by denying them the ability to lend or to issue credit cards—the two things that banks make money on. When the Mor committee, in 2014, was tasked to find a means to achieve financial inclusion, it imagined a world with payments banks. A differentiated bank—one without the baggage of a branch-led model and having a digital makeup—that could go to every nook and cranny of India with bank accounts. Because all payments bank had another core business—like telecom, wallet, post office—with a wide reach. So, the idea was they should be able to do a better job of reaching the unbanked.

Bindu Ananth, who was part of the Mor Committee and is currently the chief of Dvara Research, a Chennai-based policy research institution, says: “Our vision was that telcos would be able to re-acquire their voice customers as bank customers through fairly simple and incremental processes (like sending an SMS to the existing user base). We knew that acquiring customers from scratch would be challenging and distort unit economics.”

But the very distortion they feared is what it has come to be.

With every successive regulation, payments banks were robbed of whatever little they had going for them.

First, the regulators came for the shared KYC. Acquiring customers starts with KYC and if the same entity, albeit for a different business, has to do KYC all over again for the same user, it made little sense. Both RBI and UIDAI saw reason in this. So in October 2016, UIDAI said entities can share the e-KYC as long they have user’s consent. In the same month RBI, too, released its guidelines for payments banks. It benevolently said payments banks, especially telco-led ones, can share KYCs between the two entities, of course with customer consent.

Nearly a year after that, in September 2017, came Airtel’s transgression of not taking consent for opening bank accounts. Soon after, in November 2017, UIDAI said there was misuse and misinterpretation of the 2016 rule that allowed sharing of eKYCs. So, it said entities must take explicit permission from UIDAI for sharing eKYC, effectively halting it. Also, RBI in Feb 2018 said telco-led payments banks cannot rely on KYC done by telecom companies, shutting it down once and for all.

Now, sharing of KYCs is central to payments banks in more ways than one. It avoids the repetitive cost of re-verifying a user, but it is also central for payments banks to stitch partnerships with other financial institutions for giving out loans, insurance, mutual funds, the works. Services it cannot provide on its own.

Look at the need-based partnership that the payments banks have to strike with a bank. Since payments banks can’t accept more than Rs 1 lakh ($ 1,447) worth of deposits in their bank accounts, it needs a partner bank to be able to store the additional deposits. So Paytm Payments Bank partnered with IndusInd bank in January to let its users open a fixed deposit bank account. It meant any funds over Rs 1 lakh could be instantly pushed to this fixed deposit, earning a better rate of interest. But this product went live, and then, very quickly, found itself dead. Why? IndusInd bank needed to do an eKYC of the user all over again to accept the additional deposits. Another young bank, which didn’t want to be named, had plans to partner with a payments bank to accept such surplus deposits. It’s still waiting for a resolution.

This is not the end of the shared-KYC confusion.

In 2016, RBI had an ambitious plan of building a central KYC registry—a one-stop shop for all bank account users’ KYC information. So, if a bank has done KYC on a person once, another bank need not repeat it. Technically, by RBI’s books, this allows shared KYC. But UIDAI has prohibited entities from sharing eKYC. Take that for a catch-22.

The shifting stance doesn’t stop here. It also extends to the OTP-based KYC, a digital nirvana of sorts for businesses to acquire customers. Users enter an OTP sent by UIDAI, and immediately, they’re KYC-ed. But RBI sees OTP as a stop-gap to KYC.

Customers KYC-ed through only an OTP will need to undergo the full and proper biometric-based KYC in the presence of an agent. This would mean businesses will need to reacquire every single customer who has a bank account just from entering OTP. Even so, financial institutions prefer OTP-based KYC. “OTP helps me instantly acquire customers. If I have to send a person to do KYC, I can only do X number in a day, but with OTP-based KYC, I can do 10X that amount,” says a senior banking official.

RBI, with its latest guidelines on 20 April, has further raised the bar on OTP-based KYC. It says users can open only one bank account using an OTP in non-face-to-face mode. So if you have a Kotak’s digital bank account, 811, you can’t apply for a Paytm Payments Bank account digitally, without the presence of an agent.

All of this means businesses, instead of spending the millions they have raised in figuring out the growth hacks meant to acquire users, build products and grow usage on the platform, are now busy finding hacks to navigate regulation.

“Payments banks have, since the beginning, asked for concessions on KYC,” says MS Sriram, faculty at Centre for Public Policy, IIM Bangalore, and author of the Inclusive Finance India report. “Their problem is that they don’t have a business model. So they are trying to cut any corners they can find. But KYC is not going to make their model any better. They can’t lend, but at the same time, they give an interest rate at par with a full-service bank. How can they make it work?”

Paytm’s transgressions are unlikely to go unnoticed by the RBI, which could only make it come down harder and put in place more stringent measures, forcing these businesses to undo and redo many of their business operations, yet again. And the only one unscathed by the one-step-forward-two-steps-backward policy changes so far is the Mukesh Ambani-owned payments bank, which is currently being tested in closed groups. That will be a whole new hellfire to fight. That is if, by then, there’s any fight left.

In all of this, financial inclusion finds itself in a strange, lonely place. Millions of zero-balance payments bank accounts that no one has any need for.
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