The RBI, a couple of days ago, released its Vision 2019-2021 document for the digital payments ecosystem, where it identifies what it intends to achieve in the next three years, and the regulatory changes that will follow in order to achieve these goals. A summary of the document is available here. A few talking points for you to consider, based on the direction outlined in the vision:

1. NPCI is becoming all-powerful, but is not accountable:

1.1 No competition for NPCI: Competition is the first goal post of the four that the RBI Vision 2019-2021 highlights. However, no competition for the NPCI seems to be envisioned in the document. In fact the NPCI seems to the most prominent non-RBI vehicle for achieving this vision:

a. 15 of the 36 initiatives that the RBI intends to take in the next 36 months need the NPCI.
b. The idea of widening the scope of usage of cards is limited to domestic cards, and in that, limited to RuPay, which is an NPCI product.
c. Global outreach of payments systems appear to be limited to the expansion of NPCI-owned systems (CTS, NEFT, UPI)
d. The expansion of the usage of QR codes appears limited to only those of the Bharat QR code, which is a proprietary QR code owned and operated by NPCI

It’s over 2 years since the Ministry of Finance’s Watal Committee, rightly, wanted the NPCI to be classified as a Critical Payment Infrastructure Company (CPIC) by the Government of India, and be regulated by the Payments Regulator. Most importantly, the committee report had said that “There should not be any legal restriction on the number of CPICs that can be set up.” This would have prevented the monopoly that the NPCI currently has over several payments systems.

1.2 No recommendation for improving accountability and governance of NPCI: It’s worth noting that the NPCI enjoys regulatory exclusivity and is running several of India’s critical payment infrastructure products, but is still not accountable under RTI. The Watal Committee report had highlighted serious governance issues with the National Payments Corporation of India, pointing out that the private company, which is wholly owned by banks, needed to expand its shareholding, improve governance standards and address its lack of neutrality. MediaNama readers might recall the former CEO and MD of NPCI, AP Hota, disclosing that wallets then hadn’t been allowed on UPI because banks wanted a head start. The Watal committee report had said that: “Only bank-led PSPs (Payment Systems Providers) have direct access to payment systems. Non-bank PSPs can access payment systems only through a member bank“, highlighting that how the NPCI operates creates a dependency of other payment service providers on banks. The RBI has not addressed these issues.

The Watal Committee recommendation was that the RBI should issue regulations which require NPCI to have a time-bound plan to:

  • Move towards diffused shareholding where no individual shareholder along with persons acting in concert can hold more than 5% of the equity share capital.
  • Ensure that shareholding includes all classes of Payment Service Providers
  • Ensure that the board of the NPCI has majority ‘public interest directors’ – independent directors, representing the interests of consumers in payments markets and who do not have any association, directly or indirectly, which in the opinion of the regulator, is in conflict with their role.

2. No Payments Regulatory board?

The Vision 2019-2021 document talks about the creation of self-regulatory governance framework, and a Self Regulatory Organisation, for the payments system operators, “covering the entire gamut of digital PSOs, including retail products of National Payments Corporation of India (NPCI).” The Self Regulatory Organisation, the document says, “will serve as a two-way communication channel between the players and the regulator / supervisor. The SRO will of course work towards establishing minimum benchmarks, standards and help discipline rogue behaviour.”

What is the need for a Self Regulatory Organisation, when the digital payments ecosystem was to get its own Payments Regulatory Board? It seems as if this is the RBI’s method of trying to avoid the creation of the PRB. Those engaged with the Watal Committee will tell you how the choice was between recommending an independent regulator called Indian Payment Authority (IPAY), and an RBI-led Payments Regulatory Board. The former would have largely diluted the RBI’s control over the digital payments ecosystem, and the latter, less so because it would be under the RBI, and the word on the grapevine then was that the RBI refused to sign off on the Watal Committee report if IPAY was chosen over PRB. Self Regulatory Organisation(s) would leave the RBI in complete control.

The RBI also dissented to the way the PRB was being constituted as a part of the amendment to the Payments and Settlement Act. Is this their way of saying that there doesn’t need to be a PRB?

3. Cost of digital payment services is going to be reworked, but how?

As we had highlighted during Demonetisation, the idea of going cashless is of transferring the cost of managing money from the government to the citizen. The RBI is looking to shift the digital payments ecosystem from charging on the basis of the value of the transaction (i.e. taking a percentage), to a per-transaction fee model, where there will be a fixed minimum transaction-based pricing.

At the same time, the RBI is avoiding being prescriptive when it comes to pricing: they don’t intend to interfere in the pricing of charges to customers for digital payments, which means that entities like banks and bank-owned NPCI, can decide cost of transactions as per their will. The market power of NPCI and its owner-banks is such that it really isn’t a free-market operation: as a collective, they don’t have competition. Wallets are largely on the wane, and the network effects of UPI are very strong. Thus, we might be faced with a situation in digital payments that is similar to what we had with Internet access pricing before Reliance Jio launched.

It’s not clear as to how a per-transaction model will affect low-value payments, and merchants being charged a flat fee might either lead to them avoiding low-value payments or transferring that cost on to customers (as has sometimes been the case with MDR). The RBI will have to keep a closer watch on this, and perhaps an interventionist approach might have been better from the start, if the objective is to make digital payments more affordable for merchants and customers.

4. The RBI has woken up to consumer issues with digital payments

There is little that is done in the case of UPI payments that get lost in transaction, and one key challenge with digital payments is dispute resolution when there are connectivity issues. Payments entities are also not always helpful or responsive to customer complains. In this case, the RBI’s measures to address key consumer issues in digital payments are welcome:

  • They’ve asked for a reasonable turn-around time for customer complaint resolution. They could have done better by trying to prescribe a time-frame, because the word ‘reasonable’ is vague and arbitrary. The nudge towards “technology-driven dispute redressal mechanisms that are rule-based, transparent, customer-friendly and involve minimum (or no) manual intervention”, is welcome.
  • The setup of a 24×7 Helpline, the creation of an ombudsman for payment system operators, and improving consumer awareness are also welcome moves.
  • The RBI could have taken a staggered approach, in terms of the consumer redressal mechanisms mandated, depending on size of entity or volume of transactions processed.

5. Regulation of Aggregators is unnecessary

Regulating payment system aggregators, which are mere intermediaries facilitating transactions, is unnecessary. The actions of aggregators and intermediaries are limited by the banks that they are mandated to work with, and they are regulated through banks themselves. While regulating them independent of banks – which could come with assured interoperability across Payments System Operators and banks – would be a welcome move for payment gateways, given that the number of large payment gateways in operation in India is still fairly limited, one wonders if this is necessary: a license-based regime would end up limiting or restricting the entry of new players, and the regulatory cost attached could potentially render what has historically been a very low margin industry unviable. The RBI needs to tread cautiously here.