Response to RBI Consultation on Authorisation of Retail Payment Systems
The discussion paper on the authorisation of retail payments is timed appropriately. RBI had recently formed a committee to provide a medium-term roadmap for deepening digital payments and a review of retail payments systems authorization, an analysis of the current market is useful to take stock and suggest measures for a sustainable, fairer cashless economy.
The response is divided into 3 parts.
- Comments on existing retail payments landscape and improving payment system regulation.
- Comments on Concentration of National Payments Corporation of India (NPCI) and methods of reducing the concentration risks and build upon existing infrastructure while fostering competition.
- Comments on multi-pronged approach.
As the issues being discussed are at a macro level, it would help to have further engagement from RBI to have a dialogue with all stakeholders (not limited to banks and payment providers / fin-tech startups, but also include governments, merchants, consumers as stakeholders) on specific topics that are focussed on narrow problems at a regular interval.
1. Existing Landscape
- The paper notes that the role of RBI as that of a regulator of payments and settlement systems and drawing the necessary regulatory framework for smooth functioning payment systems in the country. It is to be noted that RBI is also an operator of NEFT, RTGS and as well admittedly played a role of market shaper by promoting the market through a friend of state entity NPCI. It is to be noted that the phrase “public sector characteristic of NPCI” is misleading as it is a private non-profit, does not fall under Right to Information Act and benefits of having a centralized settlements agency have not always been passed to the consumer as banks still earn from payment systems. This paper is of key importance given this dimension where a majority of retail payment systems are operated by a private operator collectively owned by banks, insufficiently regulated by RBI given its a friendly entity leading to suboptimal outcomes.
- The Ratan Watal Committee in 2016 suggested RBI avoid conflict of interest RBI by not operating NEFT, RTGS and perform only the role of regulator. It also suggested forming a Payments Regulatory Board. Both these have not been acted upon and RBI will be better positioned in making progress and focussing more on its regulatory role, given that it has dissented for an independent Payments Regulatory Board envisioned as part of draft Payments & Settlements Bill, 2018. This consultation paper is a small step in the right direction, given too many decisions related to payments have not followed consultation process off late and has impacted multiple stakeholders significantly, particularly merchants and consumers and their preference to cash as result of sub-optimal regulation leading to lack of trust.
- A periodic review of each category of payment system will generally give room for improvements and necessary updates to regulations related to payment systems. While the operational nitty-gritty can be left to the payment system operator in most cases, RBI, as the regulator must review each payment system periodically (24-36 months) and make relevant updates to regulation taking inputs from all stakeholders on various aspects like service regulation, price regulation, safety measures, support for innovation. Increased regulatory transparency in terms of making metadata around regulatory reporting by payment system operators, payment system providers, and banks as publicly available open data on various parameters will make improvements to existing systems even when there is sub-optimal competition in the market.
2. Payments Systems Classification & NPCI Concentration
- The concentration of transactions over a single (private) entity is indeed worrisome and the advantages/disadvantages of the existing model haven’t been sufficiently explained and are not entirely binary as they have been stated. For example
- While it might be in theory easier for banks to integrate systems, have uniform systems, it is not necessary that having a single operator translates to efficient risk management practices and process sharing. It is also very important to not conflate operational standardization with technology standard.
- Economies of scale might not always translate to cheaper, accessible payment instruments for consumers and hence an open approach must be taken when it comes to price regulation of payments and depending on maturity, complexity, consumer need/base, a call can be taken on price regulation. Competition sometimes can provide a more efficient outcome for the consumer than a monopoly which operates with blessings of the regulator.
- Regulatory governance is a factor of capacity and singular / smaller group of entities to regulate does not again translate into efficient regulation automagically. While RBI has improved its capacity, there is a lot more that needs focus and there has to be constant effort to improve regulatory capacity and keeping the market small can’t be a good policy choice.
- The greatest threat due to a single entity is centralization of data and its impact on consumer privacy, the economic interest of the country, faultlines that can potentially be exploited by capturing a private entity and its impact on the state, cybersecurity threat which escalates the risk to a national security issue.
- While innovation can still happen at a technological level even in a single entity market, lack of competition will mean that niche market segments, lack of opportunity due to gatekeeping etc.
- While inefficiencies can stem from a single entity landscape, effective regulation needs to go hand in hand with increased competition should the inefficiencies get away and improve quality of service for customers.
- Even though there are both pros and cons in the existing setup, the case for reducing the concentration of NPCI outweighs in maintaining the status quo. Reducing concentration can be done in multiple ways and the following outlines some of the strategies. A detailed consultative study needs to be made to arrive at an optimal approach after consultation.
- Opening up retaining NPCI as is:- Reducing concentration can happen if more players enter specific markets that compete with existing retail payment systems through multiple operators. Identifying use cases and issuing use case operating procedure and having eligible players operate newer payment systems competing could help. While interoperability between multi-operator systems might be an issue, RBI must take a more active role in defining interoperability mechanisms. Even though BharatQR is an industry convergence standard, such initiatives must be actively led/supported by RBI. This could potentially bring in more investments while retaining the status quo for NPCI. A periodic review of concentration can suggest if this is making progress.
- Infrastructure based splitting:- Payment systems operators can be split into multiple categories and depending on the role, entry/exit criteria, capital requirements, the participation of bank / non-bank can be allowed. Should NPCI be split, it could be split into a Payment Infrastructure company providing physical infrastructure in terms of data centers, networks, clearing/settlement infrastructure as a service to any payment system operator and all payment systems currently operated by NPCI can move into single/separate entities. Newer Payment Systems can also use these payments/settlements infrastructure and utilize economies of scale in terms of operational cost. This makes the existing infrastructure built with public sector characteristic/intent, albeit owned by a private entity as a shared resource pool for any public/private entity alike and can be treated as making digital infrastructure to a broader industry. As we move into multi-payment operator environment, newer classes of entities such as risk provider, oversight provider can help expand the market.
- Product based splitting:- There have been suggestions to split NPCI based on payment systems it operates and even Padmanabhan committee suggested BBPSCU be housed as a separate entity. Although this can be considered for some cases, this approach does not counter the data centralization that will still be inherent in such newly created entity that owns a class of payments (such as GIRO payments, electronic toll collection). RBI must actively reconsider the design of these hyper-centralized payment systems and their data maximisation designs under the guise of interoperability as they violate the fundamental right to privacy and could also be a serious threat to the economic security of the country.
- Objective based splitting :- Another way of reducing concentration risk is by segregating class of payments based on the objective of payments, such as Government to Person, Bill/lending Collection, Retail merchant payments, P2P payments, emerging use cases such as toll collection, transit payments. Existing payment systems of NPCI can be held by respective entities and certain categories of payment systems can be fully open (emerging use cases like transit payments, IoT payments) for both banks and non-banks alike, with minimal price regulation thereby encouraging competition and certain other categories of payment systems that are semi-open with stronger regulation and in some cases bank only networks and some other socially important payment systems such as subsidy delivery (Aadhaar Payments Bridge) and financial inclusion payment system like Aadhaar enabled Payments System (AePS) to be held by a fully government-owned entity (wholly central government owned / joint ownership models like GST Council with states sharing ownership as cash transfer becomes key rail for welfare programs both by union and state governments.) to provide commitment to social objectives where sustainability of a market solution might be a challenge and a policy objective needs funding support for the policy, with higher accountability, transparency measures.
- While there might be a perception of a non-profit monopoly providing payments at lowest cost due to economies of scale, it must be noted that end consumer is not always being passed on the benefits / even aware of costs involved in the transaction. Ratan Watal committee’s recommendation to make transaction charges visible to end consumer needs to be acted upon. This change could potentially lead to a situation where regulator need not prescribe / explicitly favour a non-profit business model and businesses can compete freely and provide value to consumers. The regulator needs to invest, develop open standards for interoperability, ensure robustness through oversight with effective enforcement and participatory regulation making.
3. Multi-Pronged Approach
- The multi-pronged approach of avoiding concentration of payments with a single entity is a good way to improve the market and needs a strong commitment from the regulator. As a precursor to on-tap licensing of payment system operators, it would be best to publish regulatory principles and guidelines for each class of payment systems and measure existing operations against a principle-based regulation. This could then lead to players willing to enter a market request for a license.
- There needs to be clear segregation of areas where banks and non-banks must be treated at par and compete and other areas where banks lead the effort for stability and the segregation needs to be based on risk based evaluation that is carried out with reasons clearly stated, reviewed periodically (24 months).
- Capital norms must be proportional to the number of users an entity is signing up as that gives an opportunity for startups to innovate without having to load a disproportionate amount of risk.
- A long term plan to increase regulatory capacity is much needed to support expanding payments and settlement systems market and regulator must be aiming for highest levels of regulatory governance providing trust, confidence, stability to all stakeholders alike.
It is important to have a more diverse market with a lower concentration of select players for payments and settlements systems which is a key infrastructure for a digital economy. A principle-based regulatory approach with increased participation can improve the state of payment systems and their regulation. While competition is key for growth, care must be taken to separate social needs that are backed by policy objectives and an open, inclusive, innovation-friendly policy needs to be in place to help deepen the digital payments market and progress towards a fair and inclusive cashless society which provides convenience to consumers without having to trade privacy, put national security at risk and achieving social objectives sustainably.