Untangling the knots of payments space in India

First demonetization and now Pandemic has accelerated the growth of the digital payments industry in India. Especially, there’s a race to digitize the small businesses, and the big tech companies like Google, Amazon, and Facebook are in competition amongst themselves.

Indian retail market is largely unorganized with a very strong hold on the grocery segment with the help of small stores called Kiranas. The organized retailers have been eyeing this market for some time now but have not been able to crack it yet. In space this big, there lies a unique opportunity to make these Kirana stores a part of the formally organized ecosystem.

Zero-cost payments with UPI

With the advent of UPI in the payments space, which offers zero-cost payments, for now, technology companies have found a new tool to assist them in this effort. UPI has managed to capture the P2P side of payments and is rapidly growing in the P2M space.

In February 2021 itself, the number of UPI transactions exceeded 2.2 Billion with the value of these transactions over 4.25 Lakh crore. Out of these 2.2 Billion transactions, almost 60% accounted for P2P transactions with approximately 85% of the total value of the transactions of the month.

Within this UPI space, QR codes are being used to facilitate the growing offline person-to-person-merchant (P2PM) payments. These merchants usually are the micro-retailers who are exempted from paying the interchange fee paid to banks called the merchant discount rate (MDR). Also, merchants with inward transactions of less than Rs 50,000 per month are exempted from paying any interchange fees to the banks. This although in the current scenario doesn’t seem much relevant as the government has continued with the zero-MDR regime for UPI payments for inward transactions exceeding Rs 50,000 as well.

There ain’t no such thing as a free lunch

While these zero-cost transactions with UPI provide convenience and assist in driving up the volume, it comes up with hidden incentives for the big tech companies.

The NPCI’s Circular 32 allows companies like Facebook, Google, and Amazon for Indian payment subsidiaries to share data with their parent companies. These conditions allow these big tech players to acquire and sell customer data for cross-selling of the products. It creates a perfect opportunity to build a new highly vertically integrated product that can feed their core businesses. For companies like Google, it’s their online advertising business while for Amazon, the financial data helps them in their core retail and e-commerce business. Also, with the new WhatsApp payments feature and updated privacy policies, Facebook has laid the groundwork for its new phase of revenue growth.

Layers of concern

When it seems that the advent of UPI will ensure healthy competition in the market for acquiring merchants, it’s not the case. This has led to a concentration of only a few players but with NPCI’s cap on market size of 30% for each player, these conditions are looking favorable for an oligopolistic market.

Another concern in the UPI ecosystem seems that despite there being more than 230 member banks, banks like SBI, HDFC, ICICI, and Axis seem to be the major performing banks.

Lastly, these banks are also the highest issuers of credit cards in the country and also control the software code for third-party applications to access UPI but with a zero-MDR regime, banks lose out on revenue for facilitating payments which put them at odds with the third-party applications.

NPCI and NUE

NPCI operates 11 other payment systems apart from UPI which puts it in a unique position and gives it the virtual monopoly over all retail payment systems in India. To curb the potential risks of holding this monopoly, the government has created a new concept of the New Umbrella Entity (NUE).

These NUE can be for-profit unlike NPCI and have caught the eye of some consortiums which include the likes of Reliance, Tata, Amazon, Flipkart, Google, Facebook, SBI, HDFC bank, etc.

Although, the guidelines for these NUEs state to ensure interoperability between NPCI’s systems, it lacks clarity on how it would be achieved. This for-profit business model of companies will also have to navigate the UPI ecosystem which offers payments for free currently. This contends with NPCI’s strong network effects and also raises doubts about ensuring fairness and competitiveness between for-profit and non-profit companies like NPCI.

There is also an overlap in the scope of activities of payments banks and the NUE companies. Payments banks that were started to deepen the retail payments in India by RBI are already struggling and with the advent of this, their future doesn’t look very bright.

Conclusion

The payments space in India seems to be tangled and there are expectations of many complications in the future.

In order to untangle these knots, government intervention seems highly necessary and clarity in the application of different laws dealing with competition, consumer protection, and data protection in this space is required.

Also, the question of whether the zero-MDR regime should be abandoned is troubling. One way could be to provide a cost-ceiling on transactions and allow the market forces to prevail in the payments space.