The Reserve Bank of India (RBI) may be close to making a major policy error — the sort that could encourage monopoly formation and that has, in the past, seriously held back the growth of India’s digital payments infrastructure. In October last year, the RBI announced revised guidelines for “prepaid payment instruments”, or PPIs. As the February-end deadline for meeting the norms nears, digital wallet companies may be staring at the end of the road. Under these new and much more restrictive norms, PPIs, which include mobile wallets such as Mobikwik and Paytm as well as other enablers of digital transactions, will have to fulfil a much larger slate of know your customer, or KYC, requirements. In other words, operators of PPIs will have to force their customers to undergo a paperwork submission process that will be on a par with that required to open a formal bank account. The RBI has prohibited transactions between wallets, and it has prohibited the transfer of money from semi-KYC accounts to e-wallets.
Naturally, the Payments Council of India is upset. Not all players in the field are upset, though — the big incumbents, particularly Paytm and Mobikwik, seem less concerned. Mobikwik will spend over $60 million and use Aadhaar to update its user base, and Paytm has claimed it has allotted $500 million to the task. This energy on the part of the incumbents is not surprising. High paperwork requirements for new wallets will, of course, benefit those who currently dominate the market. In other words, the PPI norms can be termed anti-competitive.
The thinking behind the RBI’s action is clear, albeit faulty. The RBI is concerned about laundering and leakage through the new digital payments infrastructure. Yet enforcing full KYC norms on every e-wallet and transaction is like trying to kill a housefly with an axe. It is far from clear what spadework and preliminary analysis the RBI has conducted before introducing these norms. Has a risk analysis been prepared? Have size and possible linkages of small-ticket digital transactions been analysed? Have low-cost methods of monitoring been considered? It appears not. E-retailer Amazon, which is now leading those objecting to the new norms, has pointed out that 90 per cent of PPI transactions are very small. Why should these require full KYC? The operators are correct that KYC norms should be linked to risk perceptions, not to anything as arbitrary as the age of the e-wallet.
Given these very real and pressing concerns, the RBI should not just postpone the implementation of these norms, but also withdraw and rethink its guidelines. Such needlessly stringent requirements will greatly set back the cause of digital payments and cashlessness — a major policy thrust at the moment. The incentives to go back to cash will be strong for small transactions. Meanwhile, the RBI should bear in mind that it had come down strongly, almost a decade ago, against the mobile payments infrastructure. That nascent field was strangled at birth in India — but took off in other parts of the world, like East Africa, where it has greatly increased access to finance and raised welfare. The regulator should not repeat its mistakes.