Paytm Forms Its Own Bank

India’s mobile payment processing firm Paytm is splitting into two, its co-founder Vijay Shekhar Sharma said in an interview with PaymentEye.

The split will involve Paytm creating its own payments unit called Paytm Payment Bank Ltd, while its parent company One97 will run the eCommerce side of the business. This news follows the recent announcement that the Reserve Bank of India had approved the creation of 11 new payment banks to help address financial inclusion. Because it’s more popular to own a mobile phone than a bank account (about 2 to 1 ratio), that’s why the mobile money banking has taken off.

Among those given permission was Sharma, who said he will create Paytm Payment Bank, which will be the company that oversees it primary product, Paytm’s mobile wallet. Alibaba-owned One97 Communications, which still owns a 49 percent stake in Paytm, will continue to operate the eCommerce business.

As Paytm looks to get deeper into the finance sector, Sharma explained why it was so important to gain approval from the RBI.

‘‘License brings us the third part of our business model: Pay, Buy and Save. And by savings, I mean that consumer deposits can now come, which will make payments far more seamless as the cash will be immediately available within your wallet,” he said in an interview. “Earlier, consumers did not have the incentive or the intent to keep balance in wallets. But now, with consumers getting interest on their deposits, it will be like any other savings bank account.’’

As announced last week, Alibaba-backed Paytm is venturing into offering financial services in India as a “payments bank” after receiving an approval from the country’s central bank. With its new license, Paytm would act much like a money transfer and payment service, such as Western Union, with many bank-like capabilities, such as offering savings accounts, issuing debit cards and providing online banking. However, unlike a typical bank, it won’t be allowed to roll credit line to customers or provide any loans.

For now, the company has been offered an “in-principle” approval, under which it would be observed for 18 months for compliance of regulations set under guidelines issued by the Reserve Bank of India, the central banking institution. Upon fulfillment of all the requirements in the next 18 months, the bank would consider offering a permanent license, which may even have provisions to loans.

The extension of a payments bank license is part of the Indian government’s extensive effort to restructure its financial framework aimed at tapping into the country’s vast unbanked market and moving the country to a more digitally driven financial ecosystem.

Along with Paytm, the government also extended the license to nine other companies, including three major telecom companies — Bharti Airtel, Vodafone and Reliance — and India Post, Aditya Birla Nuvo, Tech Mahindra, Cholamandalam Distribution Services, Sun Pharma and Fino PayTech.

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