Top challenges and opportunities in the digital payments ecosystem in India

A major challenge within the Indian digital payments' ecosystem is the current pricing structure. The implementation of a zero Merchant Discount Rate (MDR) policy has rendered UPI and RuPay debit card transactions free for merchants, significantly boosting adoption rates. However, this situation raises concerns regarding the long-term financial sustainability of payment service providers. Although there has been an increase in adoption on the acceptance and issuance fronts, there is an urgent need to develop a viable financial model.

While the current model benefits merchants and consumers, it imposes financial burdens on banks and payment service providers, who bear these transaction costs. This imbalance may impede innovation and investment for these transactions. A well-designed MDR policy could generate the necessary resources for maintaining and enhancing payments infrastructure, thereby ensuring the ecosystem's strength and reliability.

2. Balancing regulation and innovation flexibility

It is important to strike a balance between regulation and innovation as there is a potential risk of hindering innovation if the regulatory framework becomes excessively rigid. In India, the payments regulatory environment is very intricate, with various entities managing different aspects of a payment's transaction. Regulators should ensure that select players that are not in the money flow of payment transactions, are not subjected to excessive regulatory burdens, enabling them to make meaningful contributions to the ecosystem as this complexity can result in overlapping regulations and heightened compliance costs for businesses. Emerging startups and FinTechs should be allowed to experiment and have innovation in their business models without being subject to excessive regulations.

To achieve this, the Government of India has launched the Inter-Ministerial-Industry Committee on Fintech (IMICF) to assess, streamline and offer support to the growing fintech industry in the country through proactive governance and policy reforms. Furthermore, creating a collaborative atmosphere where regulators and industry stakeholders engage with one another can lead to effective and balanced regulations.

3. Fraud and Customer Awareness

As the ecosystem expands, so do the opportunities for fraudulent activities, given which, enhancing customer awareness and education is vital for mitigating the risks. Initiatives aimed at improving customer behavior and awareness can greatly reduce the occurrence of fraud and enhance trust in digital payment systems in India.

For instance, the NPCI has proposed phasing out ‘collect’ calls for merchant payments to combat UPI fraud, suggesting that ‘push’ transactions, such as QR code payments, are more favored by customers. The increase in digital transactions has also resulted in the emergence of more sophisticated fraud techniques such as phishing, identity theft, and social engineering attacks.

Opportunities:

1) International expansion

Developing a worldwide network for cross-border payments could unlock new growth opportunities for banks as well as NBFCs. At present, cross-border transactions are primarily bilateral, facilitated by various initiatives from NIPL. However, establishing a more cohesive and streamlined international payment system could strengthen India's role in the global digital payments arena.

International expansion can also promote trade and commerce, simplifying the process for Indian enterprises to connect with global markets. Partnering with international payment networks and adopting universal standards can enhance the efficiency of cross-border transactions, lower costs, and attract foreign investments and collaborations, thereby create an infrastructure that is globally accepted for cross border payments.

2) Data analytics and reporting

There is a rich source of payments data with the operators / regulators on the back of payments transactions. The operators / regulator releases weekly and monthly reports and statistics around various payment system indicators and other metrics that capture both value and volumes of transactions that are currently happening in the country. This data can serve as a crucial asset for the key players that can yield valuable insights into the performance of different payment instruments, indicators and the overall vitality of the industry.

Disseminating this information through informative and intuitive dashboards to various entities in the payments sector and to the public can encourage healthy competition and push for newer enhancements and innovations by the players.

For example,

a) Analysing transaction data to identify regions with low adoption, allowing for targeted marketing and outreach initiatives by Banks and NBFCs.

b) Volumes processed by payment processors/gateways (monthly trends) along with downtimes or outage details can help businesses make informed decisions to choose the right partner.

c) Banks and NBFCs can leverage insights derived from data for refining and streamlining various internal processes, such as, enhancing end-to end digital journey for customer KYC process to boost number of full KYC customers

3) Allow proliferation of digital-only or digital-first players

The emergence of super apps and digital-only financial institutions offers a substantial opportunity for the Indian digital payments landscape. Global players have showcased the viability of banking and financial solutions that operate exclusively online. India has the potential to harness this trend by promoting the creation of similar platforms that provide a comprehensive suite of financial services in a single app. These digital apps can integrate various services, including payments, banking, insurance, and investments, thereby creating a unified solution for users.

In conclusion, the digital payments landscape in India is at an interesting juncture and although there are obstacles to navigate, the potential for growth and innovation is vast. By tackling key challenges pertaining to pricing models, balanced regulations and improving customer awareness, India can maintain its leader position in digital payments. At the same time, pursuing international expansion, harnessing data analytics, and embracing the rise of digital first apps can unveil new opportunities and propel the overall digital payments ecosystem.

(Mihir Gandhi, Partner and Leader – Payments Transformation and Fintech, PwC India.)

Views are personal, and do not represent the stand of this publication.