Fintech moves in the new year

The lingering after-effects of demonetisation were felt through calendar 2017. These were further buffeted by the introduction of the goods and services tax. Both events hastened the adoption of fintech, particularly digital payments. The trend is likely to be consolidated during 2018, with government and regulatory agencies expected to provide some policy actions and regulatory direction.

The government’s resolve was perhaps reinforced by EY Fintech Adoption Index 2017, which surveyed 22,000 respondents across 20 countries. India’s adoption rate is seen as among the highest in the world, second only to China’s. So, what can finance minister Arun Jaitley do in his last full budget that can further improve the adoption rate?

Some pending issues from last year’s budget need his attention first.

One, the 25-billion digital transactions target, spanning multiple platforms (Unified Payments Interface, Unstructured Supplementary Service Data, Aadhaar Pay, Immediate Payment Service and debit card), is likely to be missed. This will require the government to conduct additional research on what needs to be done, especially how best to ground such annual targets in reality.

The other pending issue is completing the formation of a Payments Regulatory Board, which was set up through an amendment to the Payment and Settlement Systems Act. While the new board was a follow-up to the Watal Committee’s recommendations, the composition of the board disregards the committee report’s spirit and intent. The board currently has equal number of representatives only from the Reserve Bank of India (RBI) and the government.

There are a host of other targets and promises that were made in the previous budget that either remain unfulfilled or about which updates are not available in the public domain—such as, using Small Industries Development Bank of India’s refinancing role to allow small and micro units to access formal finance, or accelerating financial inclusion using digital payments platforms. In the forthcoming budget, Jaitley will need to iron out numerous regulatory and infrastructure issues.

The first move should be to re-imagine the role of National Payments Corporation of India (NPCI). The company introduces itself as “an umbrella organization for all retail payments in India.” The NPCI was set up with the “guidance and support” of RBI and the Indian Banks Association for creating a reliable and robust payments infrastructure in India. Its shareholders are commercial and cooperative banks and its products are limited to only the banking industry. This is where the distortions set in.

Currently, NPCI is like the owner and major user of a common infrastructure facility and allows only select customers to use this resource. NPCI’s products should be given the tag of utility infrastructure, to be used as an open application programming interface by the fintech industry. This is likely to foster new products and innovation. In other words, if the government plans to use fintech to achieve financial inclusion, it cannot afford to exclude non-bank payment service providers from common utility infrastructure.

Second, administered merchant discount rates (MDR)—the rate which banks charge merchants for providing payment infrastructure—have been quite contentious, especially since they are seen as an intrusion into a commercial relationship between the card issuer (mostly a bank) and the merchant. The RBI’s latest regulatory guidance caps MDR charges to drive up merchant acceptance of digital payments. Two anomalies emerge which need some course correction.

The guidelines spell out differentiated capped rates, based on the annual turnover of the merchant. This might become cumbersome and subject to various abuses. There is another problem. The RBI’s moves can be viewed as a market development strategy for fostering greater acceptance of digital payments. However, in all such endeavours, it is desirable to spell out the sunset period. For instance, the Union cabinet has decided to subsidize merchants for all digital transactions below Rs2,000 for the next two years. Even if one ignores the policy’s overt political ambitions, there is a visible end-point for the exercise.

Third, the government must take a call on blockchains and crypto-currencies soon. The government and RBI have been repeatedly cautioning investors about risks of investing in cryptocurrency, especially bitcoin. Simultaneously, a committee under the secretary, economic affairs, in the finance ministry is examining all issues related to cryptocurrencies. Policy and regulatory action should try to remain a step ahead of market practices, especially since some Indian banks have already developed blockchain technology to deal with overseas clients. Axis Bank, ICICI Bank and Yes Bank have all separately developed, or tied up with technology companies, to use blockchain technology for faster cross-border remittances. For example, the State Bank of India has joined hands with 29 other banks and finance companies (including ICICI Bank) to fund BankChain, a blockchain based cross-border payments platform.

Finally, RBI’s guidelines on peer-to-peer (P2P) lending need further refinement to bolster the nation’s growing fintech credentials. The rules have confusing eligibility criteria, are ultra-conservative in lender exposure limits and allocate too much discretionary power to the central bank without spelling out specific trigger points for regulatory action.

Rajrishi Singhal is a consultant and former editor of a leading business newspaper. His Twitter handle is @rajrishisinghal.

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