For many decades, despite the government’s best efforts, a vast segment of the Indian market was underserved in terms of financial services, including basic banking services. In this context, and taking into account other inadequacies of the market, the Reserve Bank of India (RBI, India’s Central Bank) decided to create differentiated players that could offer specific services at affordable prices. The first such category of players was the prepaid payments instruments (PPI) providers, followed by payments banks and the small finance banks. The roles of each player were clearly defined by the regulator at the time of their announcement, and the related regulations reflected that philosophy.
RBI has consistently been proactive in designing the regulatory framework. However, it prefers taking small steps rather than making revolutionary changes. As newly introduced institutions and markets grow, the regulations are revised based on the experience gained, and the market developments. The results have been good so far. It has been possible because through their learning experience; they have not lost focus on the underlying thinking behind each step.
As a part of the demonetization drive in India in November 2016, digital payments took center stage and mobile wallets became an increasingly important and effective part of the system. The number of subscribers to the PPIs grew exponentially, and so did the transactions being conducted through them. Paytm, which is the largest wallet player with 89% of the market share, increased its subscriber base from 122 million in January 2016 to 147 million in December 2016, and further to 200 million by end of February 2017. About 1 billion transactions were conducted on this platform, contributing 26% of all digital transactions.* The total balance in its wallets at the end of February 2017 was Rs. 89.91 billion.**
The latest draft guidelines on PPIs, released by RBI in February 2017, reflect these changes. As PPIs become systemically important, the new guidelines seek to place a higher emphasis on safety and security of transactions, and on ensuring that only serious players remain in the market. This is clear from the hike in the “Net Worth” requirement from Rs. 1 crore to Rs. 25 crores. All the existing players are to meet this requirement by September 2020. Weeding out inactive accounts goes in the same direction. This intention is also reflected in the prescribed security, fraud prevention and risk management framework. Some of the important requirements are a separate login required for the wallet, inactivity timeout feature, cooling period on addition of a beneficiary, restriction on multiple attempts, etc. Making a customer liability framework compulsory is also a step in the direction of enhanced customer protection.
However, there seems to be another thread running through the new draft guidelines. Is RBI becoming uncomfortable with non-bank players, and setting the field for banks to be the dominant players in the market? Some of the guidelines appear to suggest this. All accounts would need to be full-KYC compliant. The existing light KYC accounts would have to be converted into full KYC accounts by June 30, 2017. However, the non-bank issued PPIs would continue to be closed-loop till otherwise announced, and no cash-out will be allowed. In addition, SFA (second-factor authentication) is going to be compulsory even for small-value transactions. If these guidelines are implemented, would customers like to opt for a wallet over a bank’s mobile app (unless the cash backs continue endlessly)? These steps are taking the entire ease-of-use out of the system. The entire wallet business was built around ease-of-use. Is this a conscious push towards the banks?
If it is what it appears to be, this would imply a conscious shift in policy and the underlying thinking, rather than a mere adjustment to the emerging market realities. Banks were not exactly nimble, innovative, customer-focused players in the payments space till wallets came into being. Is the stage being set for business-as-usual?