News of a Rs 10 Crore 'cash back' fraud at PayTM Mall - played out through a collusion of employees and 3rd party vendors - has come as a shock to many people.

After all, PayTM is the flagbearer of India's emerging Payments and Fintech space. Exactly the kind of company that's expected to have cutting edge systems and processes to avoid these sort of fraud.  

But, those of us familiar with pressures in high-growth start-ups are not surprised one bit. Revenue and growth targets often become the focal point of everyone's attention at the cost of several other important functions. Proactive fraud detection, unfortunately, becomes one such victim.

There are lessons we can learn from the PayTM Mall fraud episode.

  1. Fraud Detection is not a cost head

It's true that fraud can cripple a business. Hence, it is not a cost head that needs to be budgeted and minimized. In fact, it's a strategic investment that insures the company's future. Key criteria while evaluating fraud detection systems and technologies are reliability and speed, not cost and overheads.  

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A company that imbibes this as a philosophy will pay as much attention to avoiding potential fraud as it does to meeting revenue and profitability targets. These companies are much less likely to suffer such losses due to fraud.  

2. Fraud Detection is not just a regulatory compliance issue

In businesses that are under strict regulatory lens, fraud detection is treated more as a compliance requirement than a core business need. These businesses tend to pay more attention to what regulators demand, while slacking off on areas that regulators aren't looking at.

PayTM may have fallen in the trap of focusing on KYC requirements asked by the regulator and not as much on their employees' background verification. It's a costly mistake to make.

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A back of the envelope calculation tells me that background verification of all employees of PayTM would have cost less than half of the fraud detected in PayTM Mall alone.

However, credit is due to PayTM for having engaged E&Y to set systems that led to this discovery. I am sure this episode will lead to them building stronger systems to proactively avoid such situations in the future.

I also hope this serves as a wake up call for everyone else in the industry to do the same.


IDfy provides Digital KYC and Fraud Detection solutions to leading Fintechs and Payment Enablers. To find out more, please write to shivani@idfy.com