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This article was first published on ET BFSI
Digital payments are witnessing tremendous growth in the country, with the Reserve Bank of India (‘RBI’) anticipating numbers to go from 2069 crores in December 2018 to 8707 crores by December 20211. The increase in transaction turnover has been fostered by the introduction of many innovative systems, an increasing number of players, the introduction of UPI and UPI 2.0, and greater customer ease with digital transactions, to name a few. In fact, an SBI report anticipates a compound annual growth rate of 52% over the next 5 years2.
The crucial role that regulatory policy plays here, whether to support, encourage or deter the growth of digital payments, cannot be understated.
Here, 15 key initiatives taken over last year are looked at, along with their potential, impact and some further steps that will be needed in the new year:
Encouraging digital payments/ consumer friendly norms
- Zero MDR for digital payments
The latest news to take the payments world by storm is the zero MDR on RuPay and UPI based payments 3. First announced in the Union budget last year4, the implementation of this move now has met with severe apprehension from the industry. Concerns expressed include the resulting unviability of the merchants acquiring business, the possible withdrawal of PoS machines from smaller shops to cut losses, the impact on business models built around MDR and the funding to such services, etc.5.
This move was completely unanticipated6. Steps, if any, were expected to be along the lines of the recommendations of the Wattal Committee report7 and the Nilekani Committee report8, which had, for instance, advocated the removal of MDR caps and that its setting be made market driven. These reports had noted the crucial role of MDR and the need to minimize regulatory intervention. Thus, while the move was introduced with the intention to encourage digital payments, it is now expected to have the opposite effect.
- Making NEFT free of charge and 24×7
Next, recently in December the NEFT system was made available 24×79, and it was announced that banks cannot charge for NEFT transactions from January 202010. This move is expected to encourage digital payments by allowing large value transfers round the clock, bringing NEFT on par with the ease UPI and IMPS offers, as well as by benefiting small merchants through the relief of no charges11.
- Recurring payments on cards with AFA relaxation
Another important step was the initiation of e-mandates on cards in August last year12. This came with a relaxation of the requirement of the additional factor of authentication (‘AFA’) up to Rs.2000/-. This was an exciting step for the payments industry given the scope to automate payments like subscriptions to online video streaming via Netflix by consumers or to various as-a-Service services by enterprises. Further relaxation on the mandatory AFAs beyond the standard Rs.2000/- cap is a step that will go a long way in further reducing friction. This year, the NPCI’s promise of recurring mandates on UPI 2.013 as well is a step that bodes well for the payments industry.
Steps towards greater innovation and competition
- API banking and account aggregators
Turning to innovation, a key step taken was the release of the first set of technical specifications14 for all participants in the account aggregator (‘AA’) ecosystem. While the AA norms15 themselves were released some years ago, these specifications16 bring in the required technical clarity as to the how the interfaces between the various players in the AA ecosystem will work. Together, these norms lay the foundation for API banking in India.
The regulator needs to address the issues that have arisen, like the reluctance of some banks to share data17, security concerns and liability issues, etc., in order to fully capitalize on the advantages of API banking. The opening up of API access to fintech companies by other banks has nevertheless brought in innovation via API-banking-as-a-service platforms, outside of the AA framework. In the payments space, for instance, this has allowed payment gateways in India to create such platforms to implement the complex payment flows new-age business models have to deal with.
- The regulatory sandbox
A second key step this year was the release of the long-awaited enabling framework for a regulatory sandbox in August18. The framework has a clear focus on enabling digital payments, and in fact the first cohort announced recently19 has ‘retail payments’ as its theme. While a very welcome first step towards innovation and regulatory flexibility, there remains some ambiguity20 as to the extent of regulatory relaxation to be provided, a crucial factor for the eventual success and utility of the sandbox. The RBI’s approach in the first cohort, it is hoped, will bring in the required clarity.
- On-tap licensing for retail payment systems
With the aim of diversifying risk in retail payment systems and bringing in innovation and competition, the RBI opened up this space by allowing the on-tap authorization of new retail payment systems21 in October last year. The authorization is to be offered for BBPOU, TReDS and White Label ATMs specifically, with the mandate that payment system operators should ensure interoperability among different retail payment systems.
Building consumer trust and furthering security
- Tokenization norms
With the increasing digital payments, security risks are also on the rise and need to be addressed. In early 2019, the RBI thus allowed tokenization for credit card, debt card and prepaid card transactions22. This will allow the use of a unique token masking the actual card details, as opposed to sharing these at every point of sale. This step encourages the bringing in of global payment technologies like Google Pay23 (however, Apple Pay is yet to arrive in India24) and can give a boost to QR code based payments as well. At present, this facility is offered though mobile phones or tablets only.
- Limited liability for unauthorized PPI transactions
A number of initiatives for consumer protection target bank related transactions, but with an increasing number of non-bank players in the digital payment space, the RBI has taken some steps this year towards furthering customer trust here as well. One is the extension of the limited liability norms for unauthorized transactions in relation to non-bank issued prepaid payment instruments (‘PPIs’)25 in early 2019, thus including non-bank mobile wallets in its scope.
- A Digital Ombudsman
Another step towards consumer protection early last year was to introduce the Ombudsman Scheme for Digital Transactions26, which is intended to provide consumers with an avenue to have their grievances in relation to non-banks addressed. This scheme will not only bring non-bank players like PPIs in its scope, but will also apply to grievances with various service providers and intermediaries, like payment gateways and payment aggregators. The scheme, it is hoped, will emulate the success of the Banking Ombudsman27 for banking transactions.
Steps towards reducing friction
- Digital KYC and offline KYC
In view of the many KYC issues that had arisen, an important step by the Ministry of Finance in 2019 was the amendment to the Prevention of Money Laundering (Maintenance of Records) Rules, 200528 to allow digital KYC. This allows the use of an Officially Valid Document or an ‘equivalent e-document’, together with the capture of the person’s ‘live’ photograph.
The bringing back of a paperless form of KYC is a huge plus for the payment industry, which has been struggling with finding a viable alternative to Aadhaar based eKYC. One drawback here is that the digital KYC recognized under these rules doesn’t yet recognize completely remote KYC, since a visit to a customer touch point or the customer’s doorstep is still required to complete the process.
The reintroduction of few Aadhaar based KYC29, via offline modes and on a voluntary basis was another step that brought some relief.
Rescuing mobile wallets
- On-tap licensing for small finance banks
Last year also saw some steps in an attempt to give a new lease of life to the struggling payments banks industry (a recent RBI report reports a loss of Rs.626 crore in 201930). For one, the RBI announced the on-tap licensing of small finance banks31, which additionally allows payments banks to convert into these as well after 5 years of operation. This move allows payments banks to expand on the activities they can undertake, such as by being able to lend.
- New minimum KYC PPIs
A second step which will serve as a major relief to the mobile wallet industry is the recent introduction of a new category of semi-closed PPIs34 with a limit of Rs.10,000/- and which uses minimum KYC. Before this, the previously mandated full KYC had led to a substantial threat of losing customers, since this did away with the ease of setting up a mobile wallet, what had been a crucial factor in the immediate success of the model.
Other key initiatives
- Mandating FASTags
Another move which encourages digital payments is the mandating of FASTags35 on all vehicles for toll collections by the Ministry of Road Transport and Highways. The payments are to be made via prepaid wallets or bank accounts. This move however, has also been facing some resistance on account of the privacy and surveillance implications36 it entails.
- Proposed norms for payment gateways and payment aggregators
This year, the RBI with ReBIT has also issued a discussion paper examining various models of regulating payment gateways and aggregators37 directly for the first time. Currently these are regulated only indirectly and via the RBI guidelines on payment intermediaries38. Stakeholder feedback has been sought and the RBI’s take on this is still awaited. Among others, the proposed requirement for a net worth of Rs. 100 crores in the direct regulation approach is a concern.
- Clarifying the data localization norms for payment system data
The data localization norms for payment system data introduced in 201839 led to mixed responses, with some seeing them as restrictive and protectionist, and others as essential for security. The norms have been implemented regardless, and in April 2019, the RBI provided some much needed clarity on them via a list of FAQs 40. Among other things, this clarified that data with all banks, system participants, service providers, intermediaries and so on who form a part of the payments ecosystem is to be stored in India, a point that had been ambiguous in the first notification.
Looking forward to 2020
The government’s push towards digital payments is welcome. However, it is equally important to adopt policy that fosters innovation and market competition in the payments ecosystem. Developing payments technology, taking it to businesses and maintaining payments infrastructure have operational costs and there need to be clearly defined sources of revenue for payment service providers. The zero MDR rule brought in uncertainty here, much like the KYC issues did last year (which brought in an unanticipated increase in compliance costs).
Both these steps, in particular, negatively impact widely used business models based on existing/ expected policy, and are counter-productive to the intended purpose of incentivizing digital payments. Uncertain policy can severely hamper an industry, and a simple step like holding stakeholder consultations could have prevented this.
Looking to the future, several reports, be it the Nilekani Committee report, the Steering Committee report on Fintech41 or the RBI 2019-2021 Vision Document42, indicate the promise that 2020 holds. It is crucial that the regulator ensures that the steps taken are supportive of the payment industry.
- RBI document: Payments and Settlements Systems in India: Vision 2019-2021, dated May 15th, 2019.
- Media Report by Devansh Sharma: Digital transactions to grow at a CAGR of 52% in next five years: SBI Cards, LiveMint, dated December 3rd, 2019.
- Media Report: No MDR charges applicable on payment via RuPay, UPI from Jan 1: Sitharaman, The Economic Times, dated December 28th, 2019.
- Finance (No.2) Bill of 2019.
- Media Report by Ashwin Manikandan: Stakeholders believe, MDR waiver may hurt digital India, The Economic Times, dated December 31st, 2019.
- Media Report by Pratik Bhakta: No one saw zero MDR for digital payments coming, The Economic Times, dated July 11th, 2019.
- Medium Term Recommendations to Strengthen Digital Payments Ecosystem, dated December 2016.
- Report of the High Level Committee on Deepening of Digital Payments, dated May, 2019.
- RBI Notification: Availability of National Electronic Funds Transfer (NEFT) System on 24×7 basis, RBI/2019-20/111, dated December 6th, 2019.
- RBI Press Release: Furthering Digital Payments, dated November 8th, 2019.
- Media Report by Nilanjana Chakraborty: Will round-the-clock NEFT push digital payments in India?, LiveMint, dated December 23rd, 2019.
- RBI Notification: Processing of e-mandate on cards for recurring transactions, RBI/ 2019-20/47, dated August 21st, 2019.
- Media Report by Nidhi Rai: NPCI enhances UPI 2.0, allows customers to make recurring payments, Business Standard, dated November 29th, 2019.
- RBI Notification: Technical Specifications for all participants of the Account Aggregator (AA) ecosystem, RBI/2019-20/96, dated November 8th, 2019.
- RBI Notification: Master Direction- Non-Banking Financial Company – Account Aggregator (Reserve Bank) Directions, 2016 (Updated as on November 22, 2019), RBI/DNBR/2016-17/46, dated September 2nd, 2016.
- NBFC-Account Aggregator API Specifications, ReBIT website.
- Media Report by Arti Singh: Khul jaa sim sim: why Indian bankers are fretting about unlocking their data caves, ET Prime, dated May 29th, 2019.
- RBI Report: Enabling Framework for Regulatory Sandbox, dated August 13th, 2019.
- RBI Press Release: Reserve Bank announces the opening of first cohort under the Regulatory Sandbox, Press Release : 2019-2020/1098, dated November 4th, 2019.
- Media Article by Mandar Kagade: RBI’s regulatory sandbox framework is not bold enough, MoneyControl, dated April 22nd, 2019.
- RBI Press Release: On-tap Authorisation of Payment Systems, dated October 15th, 2019.
- RBI Notification: Tokenisation: Card transactions, RBI/2018-19/103, dated January 8th, 2019.
- Blog post by Megha Vijay: Our take on impact of RBI’s tokenization guidelines, Cashfree Blog.
- Countries and regions that support Apple Pay, Apple Support.
- RBI Notification: Customer Protection – Limiting Liability of Customers in Unauthorised Electronic Payment Transactions in Prepaid Payment Instruments (PPIs) issued by Authorised Non-banks, RBI/2018-19/101, dated January 4th, 2019.
- RBI Press Release: The Reserve Bank introduces Ombudsman Scheme for Digital Transactions, Press Release: 2018-2019/1802, dated January 31st, 2019.
- The Banking Ombudsman Scheme, 2006 (As amended upto July 1st, 2017).
- Prevention of Money-laundering (Maintenance of Records) Third Amendment Rules, 2019.
- RBI Master Direction: Know Your Customer (KYC) Direction, 2016 (Updated as on January 09, 2020), RBI/DBR/2015-16/18.
- RBI Press Release: Report on Trend and Progress of Banking in India 2018-19, Press Release: 2019-2020/1504, dated December 24th, 2019.
- RBI Guidelines: Guidelines for ‘on tap’ Licensing of Small Finance Banks in the Private Sector.
- Media Report by Saloni Shukla: Fino too wants to be small finance bank, The Economic Times, dated January 2nd, 2020.
- Media Article by R.Jagannathan: How RBI has sent payments banks on a road to extinction, LiveMint, dated December 24th, 2019.
- RBI Notification: Introduction of a new type of semi-closed Prepaid Payment Instrument (PPI) – PPIs upto ₹ 10,000/- with loading only from bank account, RBI/2019-20/123, dated December 24th, 2019.
- Media Report by Navneet Dubey: FASTag mandatory for all vehicles from Jan 15: Here’s how to buy, activate it, The Economic Times, dated January 14th, 2020.
- Media Article by Srikanth Lakshmanan: FASTag: Will Datafication of India’s Tolls Boost Highway Development?, The Wire, dated December 14th, 2019.
- RBI Press Release: Discussion Paper on Guidelines for Payment Gateways and Payment Aggregators, Press Release : 2019-2020/72, dated September 17th, 2019.
- RBI Notification: Directions for opening and operation of Accounts and settlement of payments for electronic payment transactions involving intermediaries, RBI/2009-10/231, dated November 24th 2009.
- RBI Notification: Storage of Payment System Data, RBI/2017-18/153, dated April 6th, 2018.
- RBI Frequently Asked Questions: Storage of Payment System Data.
- Report of the Steering Committee on Fintech Related Issues, 2019.
- RBI document: Payments and Settlements Systems in India: Vision 2019-2021, dated May 15th, 2019.