So, you would have read the Paytm news update by now. If you have not read it till now and you are a Paytm wallet user who tops up the wallet using credit cards, enlighten yourself first by following the link that describes the subject matter in detail… or continues reading for the summary.
Announcing Few Changes in Paytm Wallet
Paytm claim: Many people top up their Paytm wallet using a credit card and then, transfer the money to their bank account by using “send money” feature. This results in losses to the banks and Paytm as this is not a fair use of their service.
Agreed and fair point.
Paytm solution: For every transaction done using a credit card to top up Paytm wallet, Paytm will levy a service charge of 2%. But to be fair to users as per policy to remain 0% transaction fee platform, Paytm will refund this 2% service charge as a gift coupon to the user. This gift coupon can be used to make purchases using a Paytm app.
Does it seem fair? On the face if it. Yes… BUT … if you just apply a bit more brain, you’ll see the unfair practice very easily.
First Thing First: Let’s Analyse the Fraud Paytm is Trying to Solve
For people who are using credit cards to top up the Paytm wallet and then, transfer the money to their account, it does not deter them at all. For example: If I top up my wallet for Rs 10000/- using a credit card, I’ll pay only Rs 200/- as a service charge to Paytm, and that will also be refunded to me in the form of gift coupon. So, essentially, I have not lost any money. Now, compare this to withdrawing cash using the credit card. On cash withdrawals using credit cards, banks levy an interest rate of anywhere between 2-4% monthly and most banks also levy a one-time cash withdrawal charge of anywhere between Rs. 300/- to Rs. 700/-. This means, using Paytm Wallet service for money transfer is still beneficial as I get the refund in my Paytm wallet as gift coupon and I can still go ahead and transfer the cash from wallet to my bank account without any interest and bank charges.
Is it clear? If this is the case, then the fraudsters, Paytm is trying to discourage, are not discouraged at all. The only thing they do now is that they shop online for the refund gift coupon for that small amount.
So does it put brakes on the fraud? I don’t think so…
Now, given that Paytm is such a large organisation with brilliant minds at work, there are only two things possible: Either they are trying to fool the people in the disguise of fraud deterrent, or they are being plainly naive about it.
If they are brilliant minds and not so naive people, then what can be other motives behind this move by Paytm?
The Other Possible Motives of Paytm
Let’s take the example again: For every transaction of Rs. 1000/- on wallet top up using a credit card, the customer will pay Rs. 1020/- to the bank on every transaction. Now, as this 2% is service charge by Paytm, they need to pay 15% service tax (all taxes included) to the government. This means, for every Rs. 1000/- transaction, Paytm will pay Rs. 3/- to the government, but refund Rs. 20/- in full as gift coupon to a customer. Thus, Paytm will suffer a loss of Rs. 3/- per transaction worth Rs. 1000/-
Let’s say Paytm being a granddaddy of payment landscape in India decided to do it in the name of social good (using VC money). But what about Rs. 20/- that now lies as a gift coupon? As a customer what can I do with it?
Here Comes the Twist in the Story.
Paytm has a mobile app and an e-commerce platform paytm.com to pay utility bills and make any other purchases etc. like any other e-commerce store. Let’s say I don’t use a Paytm app at all. But I use the Paytm wallet to book my taxi using Uber or to order food using Zomato or any third party service. So, I’ll top up my wallet using a credit card to make payments on third-party apps. But when I’ll get a gift coupon back, it can be used for making purchases using the Paytm app only.
- This means I’m forced to shop on payTM e-commerce store to reconcile my own money that I never planned to do in first place. I’m forced to make transactions on Paytm mobile app or paytm.com only.
- My own money now has an expiry date (validity duration of gift coupon: 31st December 2017), and after the expiry date, it is rendered useless.
- Multiple gift coupons (of 2% refunds) can not be combined to be used for one single transaction. That means, to redeem each small amount, I need to make bigger amount transactions.
- If I use my credit card to add any amount less than Rs. 250/- to Paytm wallet, I’m not eligible to get the “gift coupon” too.
- Or if I do not transact on Paytm e-commerce store to claim my money, it will expire anyway and will become the property of Paytm wallet (payment bank ?? ).
The Result in the Scheme of Things
Using the excuse of solving or reducing the risk of fraud,
- Paytm now popularises it’s own app for purchases (utility bill payments, e-commerce purchases, etc.).
- Paytm increases their revenue with this means. For every Rs. 1000/- intended transaction by a user, they get Rs 1017/- (hoping they will pay taxes of Rs. 3/- to the government).
- For every extra Rs. 17/- (or 2% service charge), they drive higher revenue because of transactions on its own Paytm app. This, in turn, drives revenue for Paytm’s e-commerce business unit.
- For every unclaimed amount of Rs. 17/- (or so-called refunded 2% charge as gift coupon), Paytm can claim that as an income after a certain period of time. Again, this drives their revenue upwards for nothing.
- In the benefit of doubt scenario, Paytm is passing on the credit card transaction charge levied by the banks to the end customer in the name of preventing fraud.
- Paytm is now being a payment bank licensed by the Government of India, can now earn more interest on all the “extra” money they have lying in the wallets. Isn’t it a good revenue generator for wallets?
Now, In all of this, I could not see anything that prevents or reduces the fraud. You can argue that there are only a small number of credit card users in India as compared to the debit card/net banking users. But I am sure Paytm has a very large number of credit card users who associate their credit cards with Paytm wallet.
If Paytm is seriously preventing fraud, maybe they should disclose the extent of the fraud they will be able to protect by this method.
How Could They Stop the So-Called Fraud?
Paytm can easily block the money transfer of the amount identifying the source of the money. For example: If I add Rs. 1000/- to my wallet using a credit card, Paytm can identify the source of the transaction as credit card. Then, this amount can be marked as non-transferable to the bank account and can be used only online transactions. I am not sure if it is complex or simple. But this would have affected only the so-called fraudsters and the “normal” users like me would have remained oblivious to the problems and continued using the Paytm wallet as we are used to.
Is this all illegal? Maybe not. Paytm is a private business entity and they are free to levy any charge to the customer for the services they provide. As a payment bank, they have collected a transaction fee and also, provided offers to customers in the form of gift coupons from another entity called “paytm.com”.
Is this unethical or unfair? Maybe yes. Deceiving customers in the name of preventing fraud to maximise revenue and retaining the customer money for driving profits.
But, the Story Doesn’t End Here…
Visualising the increasing discomfort and displeasure among users Vijay Shekhar Sharma, Founder and CEO of One97 Communication – the holding company of Paytm, decided to lead the matter from the front. Sharma replied to the author’s article on Facebook, where he applauded the suggestions. However, at the same time, he took it as an opportunity to justify Paytm’s move in order to have a kerb on fraudsters.
Sharma clarified that to avoid any confusion Paytm users may have due to the employment of different strategies the company decided to keep it simple.
Below is what Sharma said,
Good suggestion, I answered many questions on my twitter handle @vijayshekhar and will give insight on why was this chosen in more detail.
Your suggestion is the most viable second choice we had. The call we took was to avoid colouring money from different sources. Users will confuse I have balance but can’t tx to bank or where is that balance gone (for some other restricted use cases).
Also gamers already had circumvented by doing P2P to some other account and then taking same money from next account to bank.
And so on so chain effect again leaves loophole.
Did you know we blocked these cards at first to see what all these guys could do. And this arrived on this solution.
We will probably auto apply this promo/discount code so that you can get net effect immediately.
That said, we may color-the-money from different sources and remove tx to bank feature for CC money. Just as you suggested. Thanks for suggestion!
Disclaimer: The article is originally published by Amit Goel on LinkedIn. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of Dazeinfo. Vijay Shekhar Sharma’s comments and statements are extracted from his social media profile.
Amit Goel has recently started a face to face 4-month comprehensive face to face program to guide people on 1:1 basis to help transition into the role of product management or make a change in career.
UPDATE: 11:30 PM: Paytm has suspended the plan of charging 2% on credit card transactions, after being criticised and questioned on its strategy to kerb misuse of credit card to cash withdrawal process via Paytm. More information on the latest development here.