Indian Payment System: Innovation? Startups? No, Thanks.
Payment systems are inherently complex. In India, they are more complex than they need to be. As innovative business models sneak their way into India and face-off with structural and regulatory challenges, the fundamental flaws in the design of financial framework will lead to significant economic and social losses. Now is as good as anytime, if not a better time to debate about these issues and drive the foundational changes necessary.
TL;DR: Ever felt like a second class citizen while trying to pay with your debit/credit card, while your fellow cash wielding friend manages to avoid the store owners ire? Hate dealing with any other payment instruments other than cash and hate that you’re dealing with cash? Surprised that <your favorite disruptive company name here> is embroiled in legal troubles? This is courtesy of the bare scaffolding that supports payments in India. It’s time to demand action from the regulators, to repair and rebuild the critical foundations that support newer innovations.
The recent notice issued by the Reserve Bank of India(RBI) against Uber skims the surface of the inefficiencies hidden in our payment system.
If there is a rule on the book, we don’t allow it to be violated simply because the innovation is cool — Raghuram Rajan
RBI’s oversight on monetary stability through money control is a different topic, it’s the regulatory strictness on payments that is of immediate bother. As Ajay Shah notes in his blog, there is indeed a better way to approach payment innovation, especially during the time when traditional systems are looking ripe for disruption.
It is abundantly clear that India is a dichotomy, now more than ever before. A significant swathe of society, living in tier 1 and 2 cities desire international standards of living, involving marginal improvements across a broad set of products and services. Another overwhelming group, living in smaller towns and villages look to achieving basic support and infrastructure. The spectrum stretches wide on various factors — living standards, earnings, literacy, culture etc. It is increasingly a burden on government entities to balance both demographics, while instituting regulations and policies.
India is a dichotomy and government entities need to embrace this.
RBI’s stance of increased weight for prevention of payment fraud compared to consumer convenience does indeed discomfort a set of demographic, impeding economic growth to a certain degree.
In the mobile payments space, the dichotomy seems to be accepted by RBI, allowing a small set of banking services on smartphones while crafting a separate set of guidelines for mobile financial inclusion initiatives through a feature-phone.
These are baby steps of course, as both guidelines tread cautiously and allow limited freedom for bank and non-bank entities. So, value added services are only gradually becoming available for the financially savvy, while telcos like Vodafone have to customize the m-Pesa Kenyan model for India.
RBI appointed National Payments Corporation of India (NCPI) is actively working on RuPay, a domestic network, competing with the global behemoths like Visa and Mastercard. RuPay Debit cards are being driven into existence through the financial inclusion scheme, gradually increasing in number and support. Even a few internet gateway providers already support RuPay. The key question, as Srikanth Rajagopalan mentions is that there is not enough penetration of POS systems for RuPay volumes to pick up. A card in consumers hand and an accepting device on the merchant side. Sadly, the roadmap for RuPay seems driven only to one side of this equation.
I can only imagine NCPI hoping that lower interchange fees are incentive enough for a merchant to install a POS system, but they will not be. Furthermore, does RuPay really improve services for customers well serviced by global networks? Maybe not, at least not directly.
The average consumer is now far too accustomed to the ease of cash and the handicap of all other payment forms. Most e-Commerce companies see increasing use of ‘Pay on Delivery’ despite availability of Credit/Debit cards. New age companies such as Uber bring a fresh air of convenience, only to be struck by regulation. Failing key changes in payment regulation, the payment system suffers and so does innovation in general.
e-Commerce in India is only half baked. You search for goods and order them, payment is mostly done on delivery.
A sliver of hope still exists as the entire financial regulation is being redrafted. Indian Financial Code (IFC), set to be released by the end of the year, aims to bring the checks and balances required for a regulatory body like RBI. The hope slowly simmers, that IFC can restructure the financial framework for the better. Even with IFC, the changes will take time to trickle down into the key issues that some of the businesses and consumers face today.
Will you still be able to pay for Uber without fiddling around your phone to enter passwords? Will you be able to shop anywhere, anytime from Flipkart, Amazon, Myntra and other retailers? Hopefully, and hopefully soon.
