Paytm’s smackdown has a full and final feel

No ATM. It is going from bad to worse for India’s top fintech. The payments bank of One 97 Communications, more widely known as Paytm, was on Wednesday barred by the regulator from receiving deposits after earlier being told to stop onboarding new customers. It’s a harsh punishment and crushes founder and boss Vijay Shekhar Sharma’s hopes of winning a licence that would have allowed it to lend. Worse, the reputational hit could now prompt other lenders to stop working with the $6 billion loss-making financial services company to distribute products.

The timing is awful. Paytm was starting to get its act together on some fronts. After struggling for years, in January it posted its fifth straight quarter of positive EBITDA, excluding share-based compensation on the back of cost cuts and growth in its financial services and subscription businesses. And as Paytm trimmed its ties with its large Chinese shareholders Alibaba and its affiliate Ant, steps widely seen as vital to winning a banking licence, the company’s shares rallied 43% in the past one year.

Although Paytm’s core payments business – accounting for roughly half of its gross revenues – is not majorly impacted, the Reserve Bank of India's action threatens to weigh heavily on the company's higher-margin activities. The 20% plunge in Paytm’s share price on Thursday morning implies investors also see problems with the company’s plan B to rely more heavily on other large established banks it already works with like the $140 billion HDFC.

That fear of reputational contagion is reasonable given the repeated regulatory failings. Although the payments bank has its own board and management, it is 51% owned by Sharma and 49% owned by Paytm. A 10% drop in loan disbursements would negatively impact revenue by 2% and EBITDA by 15%, Jefferies analysts calculate. They now reckon Paytm won’t turn a net profit until 2026, one year later than previously assumed, and that its earnings that year will be 65% lower than previously estimated.

All of this makes Warren Buffett’s small but painful exit from the fintech in November, locking in an estimated 20% loss for his investment firm Berkshire Hathaway, look well-timed. Paytm shares are now 71% below their initial public offering price in 2021. Unlike in China where hot tech companies have been wiped out by President Xi Jinping’s unpredictable regulatory crackdowns, India’s top startups are imploding all by themselves.