India Effectively Kills E-wallet Used By Over 300 Million

India's government has effectively killed an e-wallet service used by over 300 million people.

The service is called Paytm and, as The Register reported in early February, it is in trouble because its parent company of the same name started a bank that was found to have consistently failed in its obligations to prevent money laundering. India's government effectively shut down the bank and prevented Paytm's bank from funnelling new funds to users' wallets.

Users of the Paytm wallet were given a deadline of February 29, after which they would not be able to add funds, but would be able to spend the balance stored in their wallets.

Last Friday India's Reserve Bank extended the deadline to March 15.

But that extension came with confirmation, in an FAQ [PDF], that wallet users cannot add more funds from any source. Users can instead transfer balances to rival e-wallet products after appropriate know-your-customer checks.

To understand the impact of this change, imagine PayPal no longer allowing members to increase account balances. That's how big this will be in India.

Paytm also operates a payment network: the firm's point-of-sale terminals are a common sight across India. Payments made on those devices also relied on Paytm's bank.

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Paytm has arranged a third-party bank – Axis – to replace its own bank as the backer of its services for merchants. That's a critical step, as the service charges merchants for transactions they conduct. Merchants will be able to continue to use point-of-sale devices provided by Paytm, provided they also use another bank.

The Reserve Bank's updated advice came just days after Paytm created a committee to work with its board in hop[e of improving governance at the org. Clearly that wasn't enough to satisfy the central bank that Paytm should be allowed to continue operating in its current form.

Paytm CEO and founder Vijay Shekhar Sharma responded to the Reserve Bank's actions by sharing social media posts that advise merchants to beware offers to transfer balances, as scammers are already afoot. Sharma also shared posts about ongoing operation of Paytm's merchant services, and support from those expressing a desire that Paytm will remain a symbol of digital India.

India's Reserve Bank, however, seems determined to make Paytm a symbol of what happens to financial services players that don't heed its calls to improve their compliance regimes. That it has done so despite Paytm's massive adoption, and status as a local darling, speaks volumes about the regulator's resolve.

That stance is very much aligned with government policy to shrink India's cash economy and financial crime, in the interest of putting the nation's economy on a stronger footing. ®