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In 2014, two years before the pilot launch of the United Payments Interface (UPI) which now enables fund transfer and other banking features across multiple bank accounts through a mobile application, then Governor of RBI Raghuram Rajan flagged the issue of expanding credit and the role of technology. Although the Indian central bank and the government had attempted to do that for decades, Rajan felt that there had been far less focus on easing payments and remittances.

In the years that followed, the launch of the UPI, the entry of fintechs and unveiling of multiple digital financial products helped fuel a boom in digital payments. But at a recent banking industry event, RBI Deputy Governor T. Rabi Sankar fired a warning shot to Indian banks, pointing out how much of the business transacted on the UPI platform was now dominated by non-banking entities. Such a disruption could be scaled up to disrupt other segments of banking business too, according to him. In his reading, local banks were missing a step.

Bankers are not likely to take kindly to such gratuitous advice or warning. But for the central bank, the concern may be on account of the fact that though digital payments, especially fund transfers, involve two banks, it is third-party payments app providers such as Google Pay, Phone Pe and Amazon Pay who have powered ahead. And that too when their role is basically that of an intermediary or a facilitator between the customer and the bank. At best, they have a supporting role.

NPCI data shows that Google or G Pay, as it is popularly known, PhonePe and Paytm Payments Bank, the early movers, together account for a market share of over 90 per cent on the UPI network. This when the digital payments infrastructure operator NPCI has put in place rules to limit market share of a payment app to 30 per cent in payment volumes. The NPCI was recently forced to extend the market share deadline by two years to December 2024.

Perhaps banks may not be too enthusiastic about this considering that these transactions on the platform are not charged. It is possible that a third-party payments app provider such as Google may be able to cross-subsidise this activity with revenues from advertising given the long-term business potential. For Indian policy makers, the concern arises from the dominance of big tech and fintechs in a payments space which is seen as critical to ensure wider access to financial services to a large swathe of the country’s population.

Indeed, earlier this year too, the RBI had voiced its concerns on this front. As Rabi Shankar had said earlier this year, though digitisation is promoted as a public policy, there is often the rise of dominating entities, be it big tech or infrastructural entities. For regulators, that poses the challenges of competition and concentration risks. With no clear answers on resolving such issues, policy makers or regulators are caught in a classic dilemma – whether to impose limits on market cap – as has been done here or stifling innovation.

There is certainly merit in the criticism on the diligence of Indian banks when it comes to adopting technology. Two decades ago, when ATM’s were being popularised, it was a regulatory fiat which forced banks to offer that service to customers of other banks. That was done by ensuring interoperability with the costs being absorbed by the central bank in the initial years.

It should worry any central bank or a government which owns several banks if growingly much of the innovations – of technology or business – come from outside the mainstream banking system. There is nothing which prevents Indian banks from joining hands to build a platform such as the one which NPCI reflects to provide connectivity between banks like what third-party payment app providers such as G pay or PhonePe do. As a major shareholder in many banks, it is for the government to nudge them to invest more in technology to equip these lenders to face the challenges of a future business disruption.

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