Digital payments: RBI's paper may push for participation of smaller players

Illustration: Binay Sinha
Why is India’s payment industry dominated by a handful of banks and a couple of fintech companies? What makes it so hard to make it big in the digital payments space in a country where only 12 per cent of transactions happens digitally even as the government has taken up digitisation as one of its major flagship programmes? These are a few questions that the central bank is perhaps trying to answer in the process of writing a policy paper, expected to be released by September, on increasing participation of smaller players in the payments ecosystem.

On June 6, the Reserve Bank of India said the retail payments market in the country is maturing and it is important to contain the concentration risk in retail payment systems from a “financial stability perspective”. The banking regulator said it seeks to promote pan-India payment platforms so as to boost competition in the sector.

According to industry insiders, the regulator is looking to level the playing field a little in order to promote innovation from all sides of the spectrum.

“If you look at the total payments space in the country, non-bank players form a mere 1 per cent of the total opportunity in the ecosystem. This is quite skewed because top 5 banks could have more than 80 per cent of the payments market share and maybe the RBI will seek to correct that,” said Naveen Surya, chairman, Payments Council of India. 

A high ranking government official said if one looks at the total value of transactions, the top 10 banks handle 90 per cent of the market, leaving precious little for everyone else to grab.

“The problem is that the payments industry in the current space provides extra motivation to banks and banking entities of all shapes and sizes to go out and acquire merchants,” said the person quoted above. “They get to keep merchant discount rate in card networks as well as on NPCI (National Payments Corporation of India) run systems while the wallets are left with almost no incentive to acquire since there is no access to even UPI and the cost of customer acquisition is quite high.”

Surya said the Payments Council of India (PCI), the industry association, will look to promote the entry of new players in line with the RBI’s intention to boost competition and discuss how to best represent industry objectives when it comes to regulatory issues that currently limit the industry’s growth.

Industry players like Mobikwik welcomed the RBI’s move and said the push to increase players in the space is in the right direction.

“It shows that the RBI is thinking about the next wave of growth in digital payments and also about digital financial services,” said Upasana Taku, co-founder, Mobikwik. “The next level of growth of digital payments is expected beyond the cities, in the towns as well as rural India. 

The digital payments ecosystem is a dynamic and with more players entering the business, it will aid financial inclusion in the country.”

An industry insider, who runs two payment start-ups, said mobile wallets are trying to become fintech companies to resist the blow delivered by the proliferation of the unified payments interface and the RBI’s e-KYC regulations. 

“You look at the regulations. They want us to be regulated like banks and have full KYC for a person who is transacting just Rs 10,000 a month. How will players survive if they spend Rs 300 per customer just doing the e-KYC, which expires in a year?” said the source. “The regulator should move from entity-based regulation to risk-based regulation.”

Many experts and recent reports from international organisations such as CUTS International suggest the RBI needs to regulate entities based on the risk they take by engaging in certain activities like domestic remittances or wallet transfers.

Instead, the central bank looks at entities as banks, fintechs and prepaid instruments, which leads to alleged distortion in the market as banks get preferred access to new services.

This is true for a number of cases. For instance, all card networks are inherently interoperable, while wallets still wait for the promised interoperability. Second, UPI has been around for more than two years but non-bank players are yet to be given access to India’s flagship digital payments system.

Companies say if the field has to be levelled, more access is required to new-age technologies.

“The payment systems industry in India is rattled because of a couple of regulations such as the need to maintain an escrow with banks, while the same can be done with the RBI directly and it reduces our dependence,” said Jitendra Gupta, MD, PayU. 

“Moreover, access to UPI is still limited to banks and non-bank players have to participate only through collaborating with banks which makes it an unequal game,” Gupta said.

Vivek Belgavi, fintech leader and partner at PwC, said interoperability is required to boost the payments industry.


Wishlist and complaints
  • Interoperability for wallets
  • Wallets also look forward to access to UPI and card networks
  • Fintech firms hope the RBI will tilt the regulations from entity-based to risk-based
  • Many private companies complain about preferential access given to banks when new payment systems such as UPI are launched
  • Companies are still sore about data localisation norms, which have put them on a tight deadline to move all financial data to India