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Digital payments market will suffer from a lack of a revenue model say industry heads

“There is a market distortion” in the digital payments industry today between incentives for earning revenues and growth, according to Sameer Nigam, chief executive officer, PhonePe. While the National Payments Corporation of India (NPCI) recently issued guidelines for its market share caps on the Unified Payments Interface, Nigam believes that without a merchant-discount-rate future investments in the sector could be threatened.

Nigam was speaking during discussion organised by Moneycontrol on the Future of Digital Payments in India on Clubhouse, the audio-only meeting app.  Other participants in the discussion included Dilip Asbe, CEO, NPCI; Harshil Mathur, CEO, Razorpay; and Vikram Vaidyanathan, managing director, Matrix Partners India.

They discussed the proposed New Umbrella Entity (NUE) policy of the Reserve Bank of India (RBI), the need to invest in payments infrastructure and cyber security and what transformations would take place in the digital payments industry going forward. Here are the key takeways from the discussion:

Revenue models and investments

Vaidyanathan of Matrix Partners said that with India on the path to become a $5 trillion economy in the coming years, at least 20% of which will be a digital economy. “We are going to have $1 trillion of digital payments pretty soon, which means that PhonePe and Razorpay will definitely going to have $100 bunk chunk of this volume. They are going to be sizeable companies in the economy at large,” he said.

“Given that digital payments is going to be a big driver of the digital economy, it cant be that the economic model of just payments alone is still under question by investors and globally. Where it hurts is where payment companies, that can’t make money from payments alone and have to look for other revenue models, is that they don’t invest then in security, future innovation in payments and so on”—Vikram Vaidyanathan, managing director, Matrix Partners India

Asbe of NPCI said reasonable MDR collected from the merchant is the best solution. We have been requesting the government to introduce it as a stop gap arrangement, the Rs 1,500 crore support may not be the end solution but it is a step in the right direction.

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“I think the The payment system cannot be a huge profiteering tool nor can it be loss-making. In various developed countries there are new regulations on MDR on debit cards and other payment modes and most of the time, this regulation comes through the Parliament route. If there is a mechanism to identify on an annual basis or every two years the reasonable MDR for the ecosystem to take care of its costs, future investments and growth, I think that is the best method to be adopted”—Dilip Asbe, CEO, NPCI

Mathur of Razorpay said that while the fund for promoting digital payments is a step in the right direction, it is definitely not something that can sustain business models.

“The single bandwidth approach of MDR does not look at nuances. In the online world, cash is actually more expensive. So if the purpose of Zero MDR is promote merchant acceptance of digital payments, it actually needs to be looked at from a nuanced approach in terms of which segment wants what. We find that online merchants are very eager to pay MDR as long as they get access to the best payments infrastructure. I see no reason why the government should pay MDR for large merchants, who have enough of a moat in the game to pay it themselves”—Harshil Mathur, CEO, Razorpay 

Nigam of PhonePe said that it is foolish to think that the gravy train will keep going and investors will keep plowing capital into the space, without a proper revenue model. He said that the Rs 1,500 crore digital payments scheme announced by the government during the Union Budget for 2021 does not really help anyway, a 30 basis points merchant discount rate would have generated more income for the industry at large.

UPI market cap rules and guideline

“Any time a market is this large and is this fast paced in taking shape, you are always going to have a combination of regulations that take you two steps forward and one step back because the checks and balances are happening at one time,” said Nigam of PhonePe.

“There is a concentration risk that nobody wants to deal with when there are a billion transactions a day and only one or two players are being used. That said, the regulator has never applied similar thresholds to banks when State Bank of India accounts for 50% of UPI transactions. I do not think that alone justifies why we are doing this, but I understand why we need to. I am conflicted. As an engineer, I understand that there is systemic risk on accumulation of users at the application level but as an entrepreneur its sad that the most popular apps cannot be used by somebody else”—Sameer Nigam, CEO, PhonePe

Nigam added PhonePe stopped cashbacks over a year ago, but with this circular marketing spends on big events like the Indian Premier League may reduce because you cannot market when you cannot acquire new customers.

“This begs the question, if the biggest players in a category, which is only covering 200-250 million active users, are stopped from being incentivised on the earning side and on the growth side that will seriously jeopordise investments flowing in. If MDR flows in and there is revenue to be had, new entrants will come and the 30% hurdle will not be a problem because there is a lot of money to be made”—Sameer Nigam, CEO, PhonePe

Asbe of NPCI said that recent criticism of its market cap guidelines is welcomed, but the NPCI has seen failures and therefore needs to take a risk view.

“The primary responsibility of NPCI is to ensure UPI never fails as a network operator. This has to come through certain risk management measures. We believe in a consultative process, while we may not have done a open public consultation process, we do have a steering committee mechanism which we go back to frequently. Our belief is that market share should balance out with new players coming in and existing players growing up. Our aassesment is that if the denominator grows everybody has a chance to play out in a big way and if our circular actually ends up curtailing the growth of UPI, we will continue reviewing this”—Dilip Asbe, CEO, NPCI

Asbe added that individual UPI players can restrict their cashbacks, rewards and even place transaction caps for their users to keep their market share in check and that the NPCI has not restricted them from doing so.

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New Umbrella Entity for retail payments

Asbe of NPCI said that the conversation around NUE has put a lot of expectations on the NPCI to innovate more. “It is a great opportunity for us to do more to expand the market, but the final call resides with the RBI on how to take this forward,” he said.

Vaidyanathan of Matrix Partners said that the NUE is a great concept and well intentioned to drive innovation. He said that when UPI was created there was an altruistic notion among all stakeholders to drive penetration of digital payments. “I do think that each of the NUE consortium have different agendas and so I really wonder with so many conflicting agendas, if true innovation is really possible?” Vaidyanathan said.

Nigam of PhonePe said that in late 2015, with India Stack, RBI and NPCI, everyone in the ecosystem rallied around the idea of open payments innovation and open Application Programme Interfaces, which was revolutionary and fresh. “To replicate that is going to be extremely hard, given that UPI solves for Peer-2-Peer online and offline payments. I still haven’t seen a network like that globally. So I am not sure if you are doing core network innovation through a NUE,” he said.

“I have a set of reasons why other NUEs may thrive. The first, which would be a very sad day, is that the RBI has said these can be for-profit models like Visa and Mastercard remain today. And because they have said the network needs to be interoperable with UPI, I can almost imagine all the capital shifting left or right of NPCI’s core network and the money moving starting to move there. That opening is there, which is why you see every major business house vying to get into digital payments.” — Sameer Nigam, CEO, PhonePe

“The second, I think there is a belief somehow that another NUE or set of NUEs will help us innovate on a a lot of use-cases. I think retail payments even the list of initiatives NPCI has, the market is not able to catch up. If there was an NUE focussed on B2B payments, I would have said that sounds really interested. I think all names, and consortiums, are by definition a slice of the digital payments market today in terms of acceptance points or application players. Therefore, I think by design it will be virtually impossible for any one of these NUEs to convince other participants in the market to join given that there is a natural advantage to the person building the network because they are also operating on the edge.” — Sameer Nigam, CEO, PhonePe

Digital payments post COVID-19

Dilip Asbe, CEO, NPCI

  • Issues surrounding dispute resolution, online grievance redressal and liability management need to addressed, in addition to cyber security which is a crucial area.
  • Artificial intelligence, internet of things and blockchain will have a major impact in the payments industry in the coming three to five year
  • Digital payments in India is at an advances stage, so CBDC placement is very important since it kind of complements existing digital payments
  • RBI’s online dispute resolution framework and the payments infrastructure development fund will be game changers going forward
  • Limit on standing instructions and recurring payments being increased to Rs 5,000 is a great move and customer experience is going to change dramatically

Sameer Nigam, CEO, PhonePe

  • Digital payments will start catching up with telecom in the next 3-5 years as the rate of adoption is phenomenal, particularly in Tier 4 and rural areas
  • Policy changes to standing instructions will be a “big vehicle of change” from this year onward as use-cases for cards will be replaced by UPI
  • We need to invest an exorbitant amount in capital infrastructure, build secure systems and have the best risk and fraud detection system

Harshil Mathur, CEO, Razorpay 

  • Future end state for digital payments should not be an experience that customers think about, it should be invisible
  • Need to improve convenience with things like UPI Autopay, recurring billing
  • Better management of security and fraud as security and convenience go hand in hand

Vikram Vaidyanathan, managing director, Matrix Partners India

  • Underlying infrastructure for the financial services industry will undergo a massive change with a whole bred of fintechs re-building these systems.

NPCI’s payments performance

On Thursday, the NPCI published transaction data across its flagship platforms for March 2021

  • UPI: 2.73 billion transactions worth Rs 5.o4 lakh crore
  • Immediate Payments System: 363.14 million transactions worth Rs 3.27 lakh crore
  • Aadhaar Enabled Payments System: 77.8 million transactions worth Rs 22,697 crore
  • Bharat Bill Payments or BBPS: 35.24 million transactions worth Rs 5,195 crore
  • National Electronic Toll Collection or FASTag: 193.21 million trasnactions worth Rs 3,086.32 crore

The NPCI also announced that it had it officially set up its new entity NPCI Bharat BillPay Ltd from April 1 onward, which will house the BBPS system.

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