Moneycontrol on Clubhouse: Future of Digital Payments in India

Dilip Asbe

I'm sure there are many new technologies like AI, blockchain will have a huge impact on payments in the next three to five years.

The second thing I look at there are large changes in the policy landscape and some of them, if you look at the standing instructions, the recurring payments, the limit to take it to Rs 5,000, it's a great move by RBI and I think 90% of volume actually comes below 5000 rupees transactions and technically, the customer experience is going to change dramatically.

So, some of the policy changes like this, the online dispute resolution, which has been launched by RBI, which is, again, a great game changer, the PIDF, the payment infrastructure development fund. I believe that, with PIDF I think we can expect the next three to five years, we will see a huge impact grounds up from rural India, in that sense on digital payments.

Sameer Nigam

I think in any market this large, you’re always going to have a combination of regulation that takes you two steps forward, one step back, right, because the checks and balances are happening

I think standing instructions is going to be another really big vehicle of change. Because a lot of use cases that today people use cards for, I think UPIs opening up for

I'm actually blown away by how fast people in the Tier 4 and beyond areas in the rural areas are adopting digital payments.

So, I think I think digital payments will truly sort of start catching up with telecom over the next three to five years, just as rate of adoption is phenomenal. I think the second thing that I'm looking forward to besides this, is the scale of this infrastructure development.

A lot of these recent changes, they're all geared around making sure that services run 24/7. And I think that actually is the main focus area, because now it's becoming a lifeline. For the first 50 to 100 million people, we don't actually carry our wallets often. We don't carry cards at all nowadays.

So, I think it's very important that systems are working at an industrial grade level.

Harshil Mathur

I think last one year has definitely been a tremendous year for digital payments, we saw a very deep adoption in the SME space, a lot of small merchants and businesses started using digital payments for the first time.

I think one thing we have to remember that our fight is still against cash and still against traditional economy and they still while it's sitting up in a big way, it still has a lot of mileage to cover. I think in that journey, the fight between cards, UPI, wallet, and all of those things isn't really as consequential as the fight between old economy versus new economy.

When I speak about future of payments, I think the end state for the kind of payment experience that should be there is very clear. The payment should, is not an experience a customer should even think about right. The end state has to be that payment should be invisible.

And I think there are two factors that will play a role there, first is that, how do we increase convenience and at the same time you have to manage it against security and fraud. And that's why you'll see that most circulars in the last six eight months from RBI having either around security or around convenience because both of those go hand in hand.

Vikram Vaidyanathan

Given that digital payment is going to be such a big driver of the digital economy, it can't be that the economic model of just payments alone is still under question by investors and it's still a question globally. And I think, where it hurts where payments companies can't make money from payments alone, and they have to look for other revenue models is that they don't then invest in security.

They don't invest in future innovation and payments. And we all know that there is a top payment player, which could potentially be a security risk. But actually, don't fault them for it. Because if their economic model is not clear, then they can't invest. And so far, at least, investors and both Razorpay and PhonePe have been very fortunate to have large investor groups who can actually fund them.

But everybody else, their economic model is still under question for payments. And for something that's going to be such a big pillar of the economy, I really think that needs a holistic solution.

THE MDR DEBATE: ENABLING AN ECONOMIC MODEL FOR PAYMENTS:

Dilip Asbe

I agree that payments have to have an economic model, right for the banks for the participants. And it is important for a few reasons. One is, the investments on the technology infra as Sameer rightly said that, if you're going to go a billion a day for a country like us, who's going to deploy this infra?

The second point is the customer service customer onboarding, I think this is going to be a continuous investment into this part to make customer experience better and better as Harshil said, this is a journey.

The third thing is cyber security and again, this is the area which keeps all of us awake, and if this is such a crucial area, how can we not invest to the fullest requirement? And for all these three things to happen we require the economic model. And the last but not the least is the is the growing the merchant acceptance.

So, I think, these are the areas where we require industry investments and the economic model on the payments is the only source of revenue in that sense.

Sameer Nigam

I think, any industry where you're assuming that you'll be powering a billion transactions a day requires tons and tons of capital, in fact it requires some pretty incredible and very expensive engineering talent.

If you're going to become less cash over the next four or five years to Dilip’s point, we need to invest in an exorbitant amount of capital infrastructure, we need to build some of the most secure systems.

Now, all of these are for payments alone. So, any notion that people have that, oh, you will get digital payments at large scale, and therefore you will start being able to actually do banking and insurance and other things is foolish, because you don't get banking licenses in one tap today.

They're expensive businesses to build out. They come with a completely different risk model. So, I don't think our investors are going to say, hey, you're doing so well in payments, start giving a loan to every Indian.. If payments infra is to shore up, every bank needs to invest, because at the end of the day transactions and data settle there.

I think there's a misguided notion in certain circles that, this gravy train will continue forever and people will keep plowing capital in into an industry that is by law not allowed to have a revenue model.

Honestly, a 30 basis points MDR structure would have actually generated more income for the industry at large.

BLOCKCHAIN & NUEs (New Umbrella Entity)

Dilip Asbe

In India, already have UPI, ensuring that interoperability is the basic principle before approving any other any payment system in that sense.

And obviously, if we are able to get the better performance, obviously there are many trials going around the world many use cases. But whether we can use the blockchain for a low-ticket transaction, whether it's a overkill, the answer is yes. The time will tell whether we are able to build up using blockchain or not, and we are working on some of the initiatives and it may take some more time to deal with that.

Coming back to NUE. I think the regulator is the best judge with what is the value add and other things, but definitely there is one statement which has been made by the regulator that the need of innovation in the payment system and Harshil also spoke about it before, that we need more innovation in the given system.

And I fully second that point, I've spoken about this openly before, obviously, the NUE conversation puts a lot of expectations on NPCI to innovate more, whatever we have done is done. But, I think, this is what I keep discussing internally that, we have to do more, and the country and the regulator and the government expects more.

Vikram Vaidyanathan

I think NUE is a great concept, well intentioned to actually drive innovation. But having been at Ground Zero, when all of this started with UPI, I think the fact that there were no agendas, except to drive penetration of digital payments with everyone who was involved at the beginning, I think played a big role.

Second, I also see NUEs today, at least the reality of how it is getting founded. And because I'm not involved with anyone, I can be politically incorrect.

Where I do think that it is ended up being a consortium with different agendas. But I wonder with so many conflicting agendas, and so many different consortiums, which have different agendas, is true innovation really possible? Because the first time that this happened, it was truly altruistic motives which drove that innovation.

Sameer Nigam

I did want to actually jump on to what Vikram becomes said on the NUE part. I think the environment in 2015, late ’15 early ’16 where India sat with NPCI, with the Reserve Bank, everyone rallying around the idea of open payment innovation, and open API's which is so revolutionary and fresh. I think so many of us, actually, as companies just started sort of building for UPI, to replicate that is going to be extremely hard given that UPI itself solves peer to peer offline and online payments. I still haven't seen a network like that globally. So, I'm not sure you're doing core network innovation on a new NUE.

I have a slightly different set of reasons as to why NUEs may thrive. The Reserve Bank has said these can be for profit models, like Visa and MasterCard remain today. And because they've said that the network needs to be interoperable with UPI. I can almost imagine all the capital shifting left or right of NPCI's core network, and the money starting to move there.

Second, I think there's a belief somehow that another NUE or set of NUEs will sort of really help us innovate on a lot of use cases. Again, I think retail payments even the list of initiatives NPCI has the market is not able to catch up. I mean, NPCI at a network level is already live at mandates, and so many other things. I think we should give them a round of applause.

So, I think an NUE for example, if that said, can focus on B2B payments. I would have said that sounds really, really interesting. NPCI is neutral. They are a neutral network because they don't lay on the edge. And I think that's not being looked at.

I hope, well before that ever starts happening, the government does actually sort of reassess its current position of stance and make NPCI’s business model viable. And the most exciting thing about in this whole NUE business was the regulator saying that, hey, there may be a case for NPCI itself to become for profit. And if that happened, I'd be sending Dilip, nice bottle of champagne saying, well done.

IMPACT OF NPCI MARKET SHARE CAP ON UPI

Dilip Asbe

I fully understand some of the comments coming on market interference and other things.

But there is a need for NPCI to take a risk view because we have seen the failures in the market and somewhere. I think that is the primary responsibility of NPCI as a network operator. So, if the situation of UPI never fails has to come it has to come by certain risk management measures and this SOP market share is one of them.

We believe in a consultative process and, while we may not have done open public consultative process, but we do have a steering committee mechanism.

Our belief is the market share should balance out with the new players coming in and the existing players growing up more and our assessment is if the denominator grows, obviously, everybody has a chance to play out in a big way and if our market -- if our circular actually ends up in actually the kind of curtailing the growth of UPI, obviously NPCI has put up in that circular that we will continue reviewing this.

And we will certainly go back and take the guidance from the RBI if there is a change in approach required, but our belief is as of now, we don't see any reason to that to happen and our belief is it will balance out. And in terms of bringing down the number of transactions instead of limiting the number of new users, players can do that by themselves. I think the players can actually cut down the promotional activities, the kind of gamification or the rewards, those kinds of things to ensure that the volume market share is maintained in that sense.

Sameer Nigam

I just can't imagine a world where I'm telling a consumer start using digital payments for all walks of life, leave your wallet at home. Oh, by the way, stop shopping midways, because you're out of transactions, that will never happen. But I understand that Dilip is coming from, we've obviously had tons of discussions at the steering committee level with NPCI.

See, I think he's spot on. There is a concentration risk that nobody wants to deal with when you talk about a billion transactions a day when only one or two players are being used. That said, we never applied that threshold when it comes to banks.

As an entrepreneur, I think it sucks that the most popular apps can't be used at some point by somebody else. In a zero MDR environment we stopped putting or investing any -- cashback we stopped in 2020, you can go back as users and check.

With this circular, you will stop investing in marketing on big events , .If you can't acquire users, you can't really market for the long tail. So, this year we are back on IPL. But next year, we'll probably have to stop.

If the biggest players in a category stop being incentivized both on the earning side, and on the growth side, that will seriously jeopardize in my mind, investments flowing in.

If MDR flows in and there's revenue to be had, I believe new entrants will come and the 30% hurdle will not be a problem anymore. If there is no MDR, and a 30% cap comes in, I think that will be a double whammy. If MDR comes back before that, and there's a 30% cap, I think we'll actually have a very competitive market. So, I think we can't look at one of these in isolation. There's a revenue model. And there's a growth trajectory that the industry has.

Dilip Asbe

So, Sameer, I think government has supported by announcing the digital incentives, obviously, the guidelines are awaited. But I believe that 1500 crore for the digital payment incentive and I'm just hoping that the majority of that comes to RuPay and UPI, which are actually impacted by the zero MDR decision. And obviously the first part of your concern, it takes care and second part Sameer, we are there. And I think we are looking at growth of UPI. So, I don't believe that the actions will go against that.

Sameer Nigam

I'm not worried on the growth side, because I know that you will always prioritize the growth. And within that, try and solve for the other things Dilip. I think it's important as industry players, we can say this, I think the 1500 crores is a bad signal. I'm waiting for a piece of that pie. Yes. But that's called desperation. That's not a business model.

The government being -- the person paying by top line is always a bad business model. The government should not be in the business of funding private sector startups. That's what we have people like Vikram and our investors for. I think at some level they know that too. So, I'm hoping again, this is a step in the right direction, but we go back to market forces prevailing.

Dilip Asbe

I think what we have requested -- this 1500 crore support may not be the end solution. But it's a step in the right direction that the ecosystem needs some cost recovery for the expenditures, the protection and growth of UPI and RuPay ecosystem.

I think if there is a mechanism to understand and identify on an annual basis or above or once in two years, what is the reasonable MDR for the ecosystem to take care of its cost of future investments, the growth? I think that is the best method to be adopted.

With respect to credit on UPI, I think it's an exciting area for UPI to grow, and I'm sure the ecosystem will have enough demand for that to be hosted on UPI.

I don't see any technical challenge per se. But obviously we'll have to look at rules, regulation charges and those kinds of things before we actually take a call on that.

Harshil Mathur

So, while the fund for promotion of digital payments is great, and it is a step in the right direction, it is definitely not something that can sustain business models. I think people like Vikram and others are not investing in companies like ours to make money through government incentives. The idea is that someday a free market will prevail, and we'll be able to earn whatever the business wants us to pay.

If the purpose of MDR is to promote merchant acceptance of digital payments, it has to be looked at as a nuanced approach on what segments want. In the online world, we see that merchants are very willingly eager to pay MDR as long as they can get access to the best infrastructure of digital payments because for them, if only payment fails and a customer opts for cash, that ends up being a lot more expensive. And I don't see a reason for government to pay MDR for a merchant to of the size of let's say something like Flipkart or Amazon, which has enough moat in the game to be able to pay themselves.

Vikram Vaidyanathan

I think we all agree that there has to be an MDR regime for promoting digital payments.

Sameer Nigam

If you look at payments, I think Dilip said something interesting, there's a queue in there. If the system is bursting as it seems, the answer is not another NUE, the answer is not everyone investing in all sorts of crazy initiatives.

The answer might also actually lie in saying you can't incentivize silly transactions. I think 50% or 60% of transactions on UPI today are less than a couple of 100 rupees. So, if you wanted to actually make sure that the industry scales well, we could start by regulation, like IRDA has saying, you can't incentivize individual transactions.

That is one way to make sure that people don't artificially co-pass the 30% cap. I'm fine. I'm saying this on record. If we were told, you can't incentivize somebody to make digital payments, otherwise, you can't go past 30%, that would be a bitter pill, but it'd be a bitter pill, I can swallow. As long as bad behavior or a natural sort of market behavior is being curtailed, I think that's totally fine.

I think the network and the regulator should both have the power to do that. IRDA does that in insurance, otherwise, people would be selling each of us COVID insurance with cashback incentives today. So, I think there are many ways in which you can, in fact, incentivize people to make sure that the system doesn't artificially bloat.

MDR alignment is important. Because if you're making money, and you're told that you need to behave yourself, it's something that I think a lot of startups would be very, very happy with that balance, right. It's like trying to get a banking license. If the regulator opened up banking on tap, you know that there's a bunch of serious startups that will get in there.

That know that will come with a tremendous degree of regulation that we are not subject to yet, but it's well worth it as long as the incentive model is there. So, I think these two can coexist.

NAVIGATING THE REGULATORY LANDSCAPE

Dilip Asbe

RBI’s views mostly are concentrated from two standpoints. One is the customer protection and customer grievance redressal and second is if there is a systemic risk arising. And I think the circular has been there for a long time now. I assume that six months are good enough for the ecosystem to kind of make the changes and ensure that the guidelines are followed in that sense. At least NPCI will ensure that all our systems are prepared and worked to provide this compliance to this particular guideline.

Harshil Mathur

I think most of these guidelines when they came out, they came out with alternates being provided by RBI. So, when it comes to recurring billing, RBI provided a stringent set of guidelines that as long as these guidelines are followed, they're okay with recurring billing continuing.

So, I think RBI has always tried to come out in whatever these regulations they have tried to come out with alternative ways so that the same experience can be given to the customer with the added security. The challenge is that the ecosystem is so far and wide that some of the implementation some of the things takes a lot of time.

But I think that the six months extension of recurring and similarly for the card and file storage as well RBI extended the timeline to December of this year, both of these extensions are done with the mind that the industry can prepare itself and ensure the customers get the same experience without any disruptions.

Dilip Asbe

I think even with this regulation, I think in India if you look at the payment system, the most progressive payment system in the world, while the West is continuing to look at NPCI and in terms of innovation what we have done in payment system last 10 years, I think even in this kind of situation, we must give a credit to the regulator and the government to build up the such an innovative policies and promote the innovation in the payment system.