2020 in review: Digital Payments policy initiatives in 2020 that could have a lasting impact

This article was first published on FirstPost, dated January 20th, 2021.

By Asheeta Regidi, with inputs from Reeju Datta

Globally, the pandemic has had a transformative impact on digital payments in terms of adoption and growth. India, despite the initial dip in digital payment transactions¹ and quick rebound in volume soon after, has recorded overall growth (CAGR) of 61% and 19%² in volume (approx. 5.93 -34.35 billion transactions³ ) and value (approx. Rs.920.38- Rs.1,623.05 trillion) respectively over the last five years (March ‘15-’20). The RBI’s persistent steps furthering digital payments have supported last year’s challenges and forced wide-spread digitization. The key initiatives last year, and their impact in the new year, are looked at here:

The changing face of UPI- Zero MDR, new revenue streams and the 30% cap

Last year started with zero MDR’s implementation⁴, changing UPI’s revenue potential and converting a previously incentive-based approach to a mandatory, no-profit approach.  Even now, industry meetings with the government⁵ for withdrawing the rule are ongoing. UPI transactions are nevertheless ever-increasing, recording 2.23 billion transactions of value Rs. 4 Lakh crore in December alone⁶, leading to a search for alternative revenue streams. Avenues emerging last year to further UPI include recurring payments via UPI AutoPay⁷, UPI based remittances and cross-border payments (via NPCI International Payments Limited (‘NIPL’)⁸, NPCI’s international subsidiary) and offline PoS payments via forthcoming NFC-based UPI payments⁹.

AutoPay’s launch together with its recent additional factor of authentication (‘AFA’) relaxation upto Rs.5000/-¹⁰ allows UPI based e-mandates¹¹ . A specific advantage it has over existing facilities like NACH, for instance, is for instant subscriptions for e-commerce/OTT services¹². NACH nevertheless remains relevant due to UPI’s cap (Rs. 2 Lakhs¹³), making other steps furthering NACH last year (enhancing e-mandate limits to Rs. 10 Lakhs¹⁴ , reviving eSign based mandates¹⁵) welcome. Next, beyond taking UPI and RuPay infrastructure to other jurisdictions, NIPL is also targeting building inter-regional partnerships enhancing foreign inward remittance via UPI¹⁶. An additional boost to UPI’s relevance for global remittances is UPI’s integration with Paypal’s Xoom¹⁷, allowing direct Paypal to UPI transactions. Separate steps last year are SEBI extending UPI for public issues (introduced in 2018¹⁸) to specified debt securities¹⁹ , along with introducing real-time API based PAN validation²⁰ there.

Last year also increased antitrust and privacy concerns, in particular with WhatsApp Pay’s now official entry²¹ in the UPI space. First, this came with NPCI’s 30% volume cap²² for all Third Party App Providers (TPAPs), to be calculated based on the total volume of transactions processed in UPI in the preceding three months. The NPCI’s soon-to-come Standard Operating Procedures²³ clarifying implementation will define how the cap will change the field for existing players (consider Google Pay and PhonePe’s dominance²⁴), which need to comply by 2023, and also the impact for users. An additional cap for WhatsApp Pay is of an initial registered user base of 20 million, which can be expanded in a graded manner.

Second is with WhatsApp Pay’s legal hurdles for entry, including ongoing litigation²⁵ before the Supreme Court on privacy²⁶ and its licensing as a TPAP²⁷ (this includes litigation against Google Pay²⁸) and a dismissed Competition Commission of India (‘CCI’) probe²⁹ last year, which are interesting to watch from a ‘Big Tech in Payments’ perspective. Yet another ongoing CCI probe³⁰ is into Google Pay’s placement, etc. on Google’s Play Store. While the Supreme Court made its reluctance to interfere with RBI authority clear in the cryptocurrency verdict³¹ last year, these cases combined certainly raise possibilities of increased judicial/antitrust scrutiny even in payments, given the changing landscape and Big Tech’s entry.

Furthering contactless payments- AFA relaxation, streamlining QR codes

The upcoming NFC based UPI payments can see the UPI vs cards battle move to the offline payments space, allowing competition with NFC based card payments at PoS (via QR codes currently). The move targets offline P2M merchants and also feature phone users, and other upcoming features may include bank-issued prepaid cards and vouchers on UPI.

Apart from UPI, other steady steps towards contactless payments also target safe PoS payments amidst the pandemic. Recently the AFA was relaxed to Rs.5000/-³² for contactless card transactions, a limit users can change at their discretion³³. The NPCI also introduced RuPay Contactless (offline) feature³⁴, for offline payments on a pilot basis, which also includes reloadable wallets within the RuPay card. Towards streamlining QR code infrastructure and increasing user convenience thereby, initial efforts implementing the Phatak Committee’s³⁵ recommendations are via RBI directions to payment system operators (‘PSOs’)- to shift to interoperable QR codes (Bharat/UPI QR³⁶) by March ’22, with no new proprietary codes hereafter. 

Enabling these new facilities will also entail changes for existing payments acceptance infrastructure, like moving to ePoS/universal PoS terminals, say which combine NFC and QR code capabilities. A digital PoS will also be popular for increased penetration, given its significantly lower installation costs and ease of distribution. Support also comes from the Payments Infrastructure Development Fund (announced last year³⁷, operationalized this month³⁸), so as to incentivize acquirers to deploy PoS infrastructure by subsidizing it.

New payment aggregator norms and the additional escrow account

Next, the new payment aggregator norms³⁹ in early 2020 were welcome, where key changes like the move to escrow accounts, permitting pre-funding and instruction based debits, collectively enable innovation and services⁴⁰ that were previously not possible, such as customized settlement timelines or allowing API based transaction banking (like instruction based payouts for refunds, vendor payments, etc.). One major issue of allowing only one escrow account was addressed to some extent through permitting an additional escrow account⁴¹. This was a specific challenge given the technological infeasibility to process lakhs of transactions with a single account while maintaining reliable service levels. 

24×7 RTGS and its business benefits

Another step was making RTGS 24×7⁴² last month, after round-the-clock NEFT in 2019⁴³. Together with round the clock eKuber (core banking system of RBI), another upcoming advantage is allowing settlement files of payment systems⁴⁴ (AePS, IMPS, NETC, NFS, RuPay, UPI) to be posted to the RBI throughout the year, instead of on RTGS working days alone. The aim is reduced build-up of settlement and default risks, better funds management by banks and increased overall payments efficiency. This is a particular benefit for businesses, allowing flexibility and efficiency even in large value payments. Consider for example its use for global trade, or for mutual funds where now the NAV (to be calculated on funds realization⁴⁵) for RTGS payments can be obtained the same day.

Fostering payments innovation- Sandbox, Innovation Hub

Next, after announcing six offline retail payments products for underserved sectors (NFC based offline P2M payments⁴⁶, feature phone based UPI payments⁴⁷, etc.) under the RBI regulatory sandbox’s⁴⁸ first cohort⁴⁹, the second now focuses on cross-border payments⁵⁰. The scope of innovation- enabling real-time international settlement, making varying domestic payment systems (wallets, m-money, cards, UPI, etc.) interoperable, creating a universal messaging mechanism (common language for payment instructions, infrastructure issues), lowering remittance costs, resolving conflicting privacy compliance issues, etc., makes this a promising space this year. 

There is also the upcoming Innovation Hub⁵¹, which internationally is often a center for informal and non-binding support to innovators and start-ups⁵², like addressing queries⁵³ on licensing requirements, regulatory barriers to a proposed innovation, etc. The Indian approach differs, with a stronger focus⁵⁴ on industry-level and international collaboration and research, than on acting as a point of advisory. There is nevertheless a focus on building internal infrastructure promoting research and increasing engagement with innovators.

The changing payments governance landscape- NUE, NPCI’s structure, SRO

Earlier, the most awaited change to the payments governance landscape was the independent Payments Regulatory Board⁵⁵. The focus has now shifted to the Umbrella Entities⁵⁶– for-profit companies with a retail payments focus, which are to act alongside the NPCI in a bid to reduce concentration risk and increase competition. Achieving interoperability between the promised multiple payment systems of all these bodies (NUEs, NPCI, RBI), and the changes thereby to the regulatory landscape for payments players are interesting aspects. There are also changes to the NPCI itself, a widened shareholding base⁵⁷ including fintechs, payments banks, etc., and it possibly becoming a for-profit company, which could entail changes to its approach like increased liquidity increasing its risk appetite⁵⁸, or increased NPCI-fintech tie-ups.

Lastly, the upcoming Self-Regulatory Organization⁵⁹ for PSOs will introduce mutually agreed upon and contractually enforceable behavioral and professional standards (like PCI-DSS’s framework, US’s FINRA⁶⁰) to the landscape. Aiming to foster best practices on security, consumer protection and pricing, this could bring in uniformity in industry standards and interpretation of regulation.

Promoting competition and innovation

Overall, the RBI has shown a welcome range in its focus last year, from financial inclusion, promoting innovation to easing payments in the pandemic. The promised innovation resolving cross-border payments is among the specific steps to look forward to in the new year, say to ease exports or enable productive investment. This year will also likely see an increased focus on interoperability, given the promised multiplicity of payment systems, and on consumer protection, privacy and security (say the upcoming Digital Payment Security Controls⁶¹), an essential aspect for promoting digital payments.

Lastly, given the sheer pace of UPI’s growth and the multiple steps to further it, it is hoped that the stance on zero MDR will be reconsidered, allowing the industry  direct revenue from the core transaction itself, freeing them to focus on merchant acquisition, etc. instead of having to do without or try and find alternative ways to monetise. Instead, more policies like the NUE, which support innovation and competition, are welcome.

1. RBI Publication: COVID-19 Pandemic and its Spatial Dimensions in India, dated October 27, 2020.
2. RBI Publication: Assessment of the progress of digitisation from cash to electronic, dated February 24, 2020.
3. RBI Annual Report for the year 2019-2021, Chapter IX: Payment and Settlement Systems and Information Technology, dated August 25, 2020.
4. Article by Asheeta Regidi: In the Aftermath of Zero MDR: Exploring new revenue opportunities for Payment Service Providers, Money Control, dated January 29, 2020.
5. Media Report by Advait Palepu: Indian Banks’ Association Meets With Government on MDR Issue, Medianama, dated January 11, 2021.
6. NPCI: UPI Product Statistics.
7. NPCI: Introducing UPI AutoPay.
8. NPCI Press Release: NPCI launches its subsidiary firm- NIPL, dated August 19, 2020.
9. Media Report by Tarush Bhalla: UPI to launch NFC-based payments, to challenge Visa, Mastercard in India, dated August 04, 2020.
10. RBI Notification: Processing of e-mandates for recurring transactions, RBI/2020-21/74, dated December 04, 2020.
11. RBI Circular: Processing of e-mandate in Unified Payments Interface (UPI) for recurring transactions, RBI/2019-20/139, dated January 10, 2020.
12. Article by Asheeta Regidi and Reeju Datta: The Indian Recurring Payments Landscape: Tapping Into UPI AutoPay’s Potential, Medici, dated August 25, 2020.
13. NPCI Circular: Implementation of Rs. 2 lakh limit per transaction for Specific Categories in UPI, NPCI/UPIOC-82/2019-20, dated March 3, 2020.
14. NPCI Circular: E-mandate scope & limit enhancement, NPCI/2020-21/NACH/Circular No.010, dated July 25, 2020.
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17. Media Report by Nirmalya Sen: PayPal’s Xoom Adds UPI Payments For NRIs, PIOs To Remit Money to India In Real Time, NDTV, dated December 22, 2020.
18. SEBI Circular: Streamlining the Process of Public Issue of Equity Shares and convertibles, SEBI/HO/CFD/DIL2/CIR/P/2018/138, dated November 01, 2018.
19. SEBI Circular: Introduction of Unified Payments Interface (UPI) mechanism and Application through Online interface and Streamlining the process of Public issues of securities under – SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (ILDS Regulations), SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 (NCRPS Regulations), SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008 (SDI Regulations) and SEBI (Issue and Listing of Municipal Debt Securities) Regulations, 2015 (ILDM Regulations), SEBI/HO/DDHS/CIR/P/2020/233, dated November 23, 2020.
20. NPCI Circular: Third Party Validation API using PAN in UPI, NPCI/UPI/OC No.80/2019-2020, dated February 28, 2020.
21. NPCI Press Release: NPCI gives approval for WhatsApp to ‘Go Live’ on UPI in a graded manner, dated November 5, 2020.
22. NPCI Press Release: UPI balances consumer experience with growth outlook with a 30% volume cap for Third Party App Providers (TPAPs), dated November 5, 2020.
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27. Media Report by Dhananjay Mahapatra: WhatsApp UPI license case: SC seeks reply from ayments body, The Times of India, dated December 15, 2020.
28. Media Report by Aditi Singh: Google Pay is not a payment system operator but only a third-party app provider: RBI tells Delhi HC, Bar and Bench, dated July 04, 2020.
29. Harshita Chawla v. WhatsApp Inc. and Facebook Inc., Case no. 15 of 2020, Competition Commission of India.
30. Media report by Tech Desk: Google Pay probe over dominance: What Competition Commission is investigating, The Indian Express, dated November 10, 2020.
31. Article by Asheeta Regidi: The Cryptocurrency Verdict: On the need for interim clarity as the RBI mulls over regulation, FirstPost, dated March 23, 2020.
32. RBI Notification:  Card transactions in Contactless mode – Relaxation in requirement of Additional Factor of Authentication, RBI/2020-21/71, December 04, 2020.
33. RBI Notification: Enhancing Security of Card Transactions, RBI/2019-20/142, dated January 15, 2020.
34. NPCI Press Release: NPCI strengthens RuPay Contactless with new features, dated December 16, 2020.
35. RBI Press Release: RBI releases ‘Report of the Committee for Analysis of QR Code’ for public comments, dated July 22, 2020.
36. RBI Notification: Digital Payment Transactions – Streamlining QR Code infrastructure, RBI/2020-21/59, dated October 22, 2020.
37. RBI Press Release: Reserve Bank announces creation of a Payments Infrastructure Development Fund, dated June 5, 2020. 
38. RBI Notification: Operationalisation of Payments Infrastructure Development Fund (PIDF) Scheme, RBI/2020-21/81, January 05, 2021.
39. RBI Notification: Guidelines on Regulation of Payment Aggregators and Payment Gateways, RBI/DPSS/2019-20/174, dated March 17, 2020 and updated on November 17, 2020.
40. Article by Asheeta Regidi and Reeju Datta: RBI’s new payment aggregators’ norms: Enabling innovation and customised services for merchants, moneycontrol, dated July 10, 2020.
41. RBI Notification: Maintenance of Escrow Account with a Scheduled Commercial Bank, RBI/2020-21/68, dated November 17, 2020.
42. RBI Notification: 24×7 Availability of Real Time Gross Settlement (RTGS) System, RBI 2020-21/70, dated December 4, 2020.
43. RBI Circular: Availability of National Electronic Funds Transfer (NEFT) System on 24×7 basis, RBI/2019-20/111, dated December 6, 2019.
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45. Media Report by Staff Writer: SEBI extends date for applicability of fund realisation based NAV to February 1, Livemint, dated January 02, 2021.
46. RBI Press Release: Regulatory Sandbox (RS) – First cohort on Retail Payments – Test Phase, dated November 17, 2020.
47. RBI Press Release: Regulatory Sandbox (RS) – First cohort on Retail Payments – Test Phase, dated December 24, 2020. 
48. RBI Press Release: Enabling Framework for Regulatory Sandbox, dated August 13, 2019.
49. RBI Press Release: Reserve Bank announces the opening of first cohort under the Regulatory Sandbox, Press Release: 2019-2020/1098, dated November 4, 2019.
50. RBI Press Release: Reserve Bank announces opening of Second Cohort under the Regulatory Sandbox, dated December 16, 2020.
51. RBI Press Release: Reserve Bank Innovation Hub, dated November 17, 2020.
52. European Supervisory Authorities Report: BoS report on Sandboxes and Innovation hubs, JC 2018 74.
53. Innovation hub, Australian Securities & Investments Commission.
54. RBI Press Release: Statement on Developmental and Regulatory Policies, dated August 06, 2020.
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56. RBI Press Release: RBI releases framework for authorisation of pan-India Umbrella Entity for Retail Payments, dated August 18, 2020.
57. NPCI Press Release: NPCI widens its shareholding base, dated November 26, 2020.
58. Media Report by Shreya Nandi: NPCI turning for profit could help key stakeholders, Livemint, dated December 27, 2020.
59. RBI Notification: Framework for Recognition of a Self-Regulatory Organisation for Payment System Operators, RBI/202-21/58, dated October 22, 2020.
60. About FINRA, FINRA.org
61. RBI Press Release: Statement on Developmental and Regulatory Policies, dated December 4, 2020.