In recent times, the payment and fintech sector witnessed a regulatory approach that tended to regulate business models. As the new government comes in, a need is felt to relook some of the policy positions and directions that might impact the industry, consumers and merchants alike from maximising the potential in India’s payments sector.
Low Cost And Interoperable Infrastructure
Digital Payments are dependent on smartphones. Out of the 813 Mn mobile phone users in India, around 300 Mn are smartphones and few are NFC enabled or enabled with QR code mechanisms, thus denying access to 85% of Indians.
To enhance access, policies should push for a more interoperable and universal method and lower the infrastructural-cost of hardware and software of digital payments in India. These efforts need to be complemented with investment in R&D, internet access, and incentives to attract users. While consumers are troubled with lack of interoperability and high processing charges, merchants grind on expensive acceptance infrastructure, transaction failures, and unaware customers.
Open Access Technologies
Recognising open access as a key facilitator of competition in payment systems, most legislations provide for open access and interoperability obligations. Jurisdictions, including Singapore, the European Union (EU), Australia, and Brazil, prescribe and enforce access and interoperability obligations in the context of payment systems.
The Indians sector should adopt open technological standards — and where that is impossible, reasonable and non-discriminatory licensing —to spur innovation and drive down costs. Open standards are particularly crucial for smartphone makers to avoid the patent thicket and bring low-cost devices into the hands of consumers.
Actor Neutral Regulation
We believe that RBI should consider removing disparity of separate regulations for banks and non-banks for similar products or services. For example, extant PPI guidelines only allow banks issued PPI to be used in cross-border and outwards transactions, whereas both banks and non-banks follow the process of KYC compliance.
Risk-Based Regulation
Payments regulator should seek to regulate the risk and not the entity. Policy solutions must be proportionate to the perceived problem or risk and justify the compliance costs imposed. This would allow regulators limited resources to focus on mitigating the highest risk activity and monitoring systemically essential activities to be submitted to stronger regulatory oversight.
There are multiple benefits to a risk-based approach.
- It makes the context assessment measures more difficult for fraudsters to understand and attack, thereby reducing the risk of cyber threats.
- It incentivises the payment providers to continue investing in robust risk- management systems by providing them with the necessary space to do so.
- In the age of a growing security threat which is ever changing and evolving, it ensures appropriate security response.
- It leads to an efficient usage of the regulator’s time by ensuring they focus on high-risk activities and not all activities as has been the case. This also allows for a more targeted and focused approach to tackling security challenges.
- It fosters the growth of e-commerce by deploying secure and convenient customer-friendly solutions.
Payments Infrastructure Neutrality
NPCI is a provider of critical payment systems and infrastructure and could potentially be classified as a Critical Payment Infrastructure Company (CPIC) by the Government of India (GOI). It should be noted that presently around 74.7% of the shareholding of NPCI is held by ten banks.
The remaining shareholding is owned by 46 banks, with cooperative Banks holding a total of 0.85% of the shareholding in NPCI. The current ownership structure of NPCI might conflict with its pivotal role in the digital payments ecosystem. Regulation should encourage non-banks to become members of NPCI.
The total scope of services offered by NPCI has made it dominant player in several areas, such as card payments, where it rolled out RuPay, and an exclusive player in many services that include IMPS and UPI services. By being the sole or dominant service provider, it sets the standards and the pricing, while at the same time it regulates for such services.
Banks and non-banks are expected to comply with the standards and pricing, which means that NPCI is both an exclusive service provider and also the regulator for the payments systems in the country. There is a need to separate regulation from business operations, which is recognised globally. For example, the UK has an independent run payments system regulator. We believe that the job of regulation and running operations should be distinguished and separated.
Competition is key to drive the scope of digital payments in India and the need to incentivise multiple players to participate is essential to enhance consumer choice, thereby improve the quality of services and making them more robust. Monopolisation of services is counterproductive to good quality and affordable pricing, and it is hoped that going forward there will be greater clarity towards this conundrum.
The article is co-authored by Harsh Bajpai, policy analyst and Kazim Rizvi, the founding director at The Dialogue.
This is the fourth article of a five-article series and is based on a recent study around Digital Payments in India, conducted by The Dialogue, emerging research and public-policy think-tank. Check all the articles here.