The Reserve Bank of India has released a detailed report on the state of payments in India. Here are the highlights and what they mean for the future of payments in India.
Conventus Law: On July 01, 2022 RBI released its Report Benchmarking India’s Payment Systems against 21 other jurisdictions in the world (including advanced economy countries, Asian economies and BRICS (Brazil, Russia, India, China and South Africa nations). Can you give us a brief overview of the health of India’s digital payments
market as per the report?
Kritika Krishnamurthy, Partner at AK and Partners: The digital payment ecosystem in India has seen a meteoric growth over the years with Ministry of Electronics and IT reporting more than 8000 crore digital payment transactions till March 20, 2022 and with government’s push to Digital Indian programme, these numbers are only going to increase in the coming future. This trend can be attributed to the increased accessibility of internet even in remote areas of India and the sudden rise of e-commerce and online delivery after COVID-19.
RBI had previously benchmarked India’s payment systems against countries considered internationally robust last in 2019. The exercise and the constant evolution of regulatory landscape for online payments in India is proof of India being committed to promote digitization of its payments and promoting cash free economy. This has great significance for established foreign payment systems to consider India as a probable jurisdiction for its expansion in the mid-term.
I will briefly throw light on certain parameters of benchmarking and my take from a regulatory and sectoral perspective. India is among the top 3 countries in terms of number of debit cards issued and ATMs deployed. But it is lagging behind in the number of credit cards issued. RBI recently liberalised credit card issue by allowing established non-banking finance companies to issue credit cards in addition to banks. This creates an ideal environment for credit card issuers and supporting fintech systems to enter the market.
“India is a top 3 leader in oversight of payment systems and the regulation of costs of payment systems. This strong regulatory oversight has ensured that only serious players are playing the game and the market is streamlined. At the same time, RBI needs to reconsider its decision to regulate payment charges like merchant discount rate. ”
Kritika Krishnamurthy, Partner at AK and Partners
India is presently weak in availability of cross border remittance facilities. India is one of the top countries in the world in terms of number of international immigrant workers and students studying abroad. Time is ripe for payment systems and fintechs which promote faster and more streamlined forex remittance to enter the market. Blockchain and CBDC deployment can be a game changer. An alternative to SWIFT is deeply felt. India is a top 3 leader in oversight of payment systems and the regulation of costs of payment systems. This strong regulatory oversight has ensured that only serious players are playing the game and the market is streamlined. At the same time, RBI needs to reconsider its decision to regulate payment charges like merchant discount rate. Provision of UPI based free payment system by government owned National Payments Corporation of India (NPCI) has also disrupted the e-wallets market with many market players re-considering their business model. It shall perhaps be wise to going forward to restrict deployment of UPI based payments in those areas where India is presently weak in digital payments like payment of utility bills and public mass transport so that the e-wallets market does not go down a death spiral.
What are some of the other disruptive developments in the digital payments space recently? What new regulations do you expect to see in the near future for payment aggregators and gateways in India?
Q1 of FY 2022-23 was a landmark time for digital payments regulations in India. India issued Master Directions on various types of Cards. The master directions define and provide clear regulation of various types of cards like debit card, credit card, charge card, co-branded card, add-on credit card etc. Till now, there was no clarity on the definition of credit cards in India.
The regulations give a clear signal to the market- RBI shall not appreciate any bypass regulatory structures using fintechs and prepaid instruments to issue revolving consumer credit. To encourage only licensed players to issue credit cards, non-banking finance companies, one of the biggest users of the prepaid instruments route have been allowed to issue credit cards once they reach a certain net worth threshold.
Currently, RBI has come out with mandatory guidelines for payment aggregators (PAs) while Payment Gateways (PG) are given a light touch approach by recommending them to follow certain voluntary standards.
RBI, in the Statement of Developmental and Regulatory Policies dated February 6, 2020 has emphasised on establishing a self-regulatory organisation for registering, regulating and reprimanding payment system operators including PAs and PGs. This autonomous body will not only ensure expedited registration process but will also empower RBI to undertake futuristic and policy-oriented tasks. Further, RBI proposes to issue outsourcing guidelines for authorised payment systems in order to manage the attendant risks in outsourcing and ensure adherence to the code of conduct.
Additionally, RBI has issued a Framework for authorisation of pan-India Umbrella Entity for Retail Payments enabling companies with INR 500 crores minimum paid-up capital to apply for the above authorisation. We see this is as a laudable step that will permit PAs to widen their business horizon and participate as global partners in the digital payment space. RBI has recently issued draft guidelines for all information technology service providers to banks. The draft is presently open for stakeholder public consultations and inputs. Once these guidelines are put in place, fintechs servicing banks shall be covered by these regulations clearing the grey area of what is the ambit of their regulation. It shall also be the first step towards full fledged neo banks in India. We are on the cusp of a payment systems renaissance in India.
You mentioned new RBI registration for payment aggregators (PAs) rendering payment settlement services to merchants. What does that mean in practice?
Before, we get into the practical impact of regulation, let understand in brief how PA actually function. To explain, when a customer pays to the merchant for the goods purchased, he is directed to the payment page with various payments options such as debit/ credit card, net banking, UPI, cash on delivery etc. After choosing the preferred mode of payment, the payment is made and the amount is debited from his account. This payment does not directly go to the merchant, rather the same is transferred to a separate RBI regulated account, known as ‘escrow account’ of PA. At the end of the payment process cycle, this amount along with all the other payments made to the merchant are settled (i.e., the inflow and the outflow of cash) by the PA and transferred to the account of the merchant in a standard of T+2 to 4 days.
Before the early 2000s, only banks provided the PA services as part of ‘handling funds’. In fact, RBI had issued a set of directions for PAs way back in 2009. These directions defined PAs as ‘intermediaries’ and the accounts of PA were treated as internal accounts of the bank 1 with no elaborate compliance obligations on the PAs.
However, with the advent of various e-commerce websites like Amazon, Flipkart, Myntra and the likes, the e-commerce transactions and digital payments have increased. With the increase in such transactions, banks were no longer feasible. Thus, arose the opportune time for the private technology players to enter the market and provide technologically advanced and quick to integrate services. With rapid advancement of technology and advent of new development and innovations in the payments ecosystem, the Reserve Bank enhanced its focus on safety and security of payment systems.
RBI came up with Guidelines on Regulation of Payment Aggregator and Payment Gateway on March 17, 2020 (“PA Guideline”). While it is recommendatory in nature for the Payment Gateways (“PG”), it is mandatory for PAs to comply with. As per the Guidelines, all the non- bank PAs will now have to take authorisation from RBI to run the PA business. A minimum net worth criterion of INR 15 Crores for existing and new non-bank PAs is provided with the condition to increase the same upto 25 Crores, by 2023 or by the end of third year from the grant of authorisation, respectively. The PA Guidelines further prescribe stringent board approved policy for customer grievance redressal and dispute management framework, safeguards against money laundering and terror financing, IT framework, security and risk assessment and merchant on-boarding policy along with other regulations for bringing them in line with other regulated entity. In the first tranche of PA registrations, Razorpay, Stripe and Pine Labs have received RBI authorisation on July 08, 2022.
We believe that decision to regulate is commendable and will not only enable RBI to streamline and regulate the payment systems but will also ensure operational excellence with focus on resilience, reliability, security, integrity and cost efficiency by the PAs. This step by RBI will instil a sense of accountability amongst the PAs enabling them to contribute towards the envisioned less-cash society, reduction in customer data breach and increase in customer data protection. The guidelines obliging PAs to follow a set of best global practices will foster a sense of security and superiority in the minds of the customer and the PAs, respectively. Thus, creating opportunities of cross border business expansion and growth.
“It is quite evident that the future of payments is digital and data is the new gold of the banking industry. To tap into this market of increased digi-payments, the traditional banks are participating in the race to advance their financial service infrastructure by adapting and onboarding technology. A huge majority is already in discussions with various fintech. companies known for their cutting edge and competitive technology. ”
Kritika Krishnamurthy, Partner at AK and Partners
How do you see the future for the ecosystem of the payments with banks as well as non- banks in India?
It is quite evident that the future of payments is digital and data is the new gold of the banking industry. To tap into this market of increased digi-payments, the traditional banks are participating in the race to advance their financial service infrastructure by adapting and onboarding technology. A huge majority is already in discussions with various fintech. companies known for their cutting edge and competitive technology. Further, the Reserve bank of India has recently issued Guidelines on Establishment of Digital Banking Units with the efforts to accelerate and widen the reach of digital banking services. This has further motivated the banks to increase their reach of services and include areas which were untouched.
It is important to note that the same digitalisation has not reached the foreign exchange management. Currently, only AD category 1 bank and AD category 2 banks are allowed to undertake international wire transfers which require a period of 2-3 days for actual credit. There is a need to extend digitalisation support to this industry of banking where USD 80 billion was remitted outside India for higher education in 2020 alone.
Further, NBFCs, the banker to the unbanked have quickly adopted to the technological and digital aspects of banking. They have the latitude and the technology that differentiates their role in the banking industry and have contributed immensely in removal of the key bottleneck with respect to digitization of banking. If we see the history of banking, if can be said that NBFCs pushed banks to move towards the digital inclusion. NBFCs are the figureheads in the Uberisation of banking with products such as instant loans, payday loans, buy now pay later enabling customers to avail loans at a mere click and upload of documents while sitting at home.
As per the report released by the Internet and Mobile Association of India, the number of internet users grew by 4% in urban India reaching 323 million users in 2020, with continued digital adoption propelled by rural India, registering a 13% growth in internet users over the past year. Majority of these internet users are from rural area with less or no resources to avail credit facility. For these, NBFCs can be the torch bearer and not only provide easy loans to the needy but also acts as a protector against the unprincipled moneylenders.
To conclude, traditionally the payments space was occupied by the banks. However, with the entry of payment aggregators and fintechs, the payment is bound to evolve at an unmatching speed creating various opportunities for the end-users and the financial market players to reap maximum benefits. Moving forward, we look forward to a competitive and collaborative space between banks and non-bank entities within the digital payment ecosystem.
1 Directions for opening and operation of Accounts and settlement of payments for electronic payment transactions involving intermediaries <https://rbidocs.rbi.org.in/rdocs/notification/PDFs/DOIPS241109.pdf>