The Reserve Bank of India is playing a board game to regulate the Fintech industry. But which one?
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Good Morning P,
The board game Monopoly is one of the most misunderstood games ever made.
There’s a pretty good chance you’ve played Monopoly as a kid, just like me. Perhaps you still play Monopoly with your kids. It’s a fairly complicated game, but with a startlingly simple idea that anyone can grasp—roll a pair of dice, make investments, collect rent, accumulate wealth, win. It’s a game that describes what you need to do to win right there in its name, in one word. That’s how you win.
But that’s not how it began at all.
Before Monopoly became a family game that taught you important lessons like convincing your kid sister to buy Electric Company and Water Works while you saved up cash to buy houses at Park Lane and Mayfair to bankrupt her, put her in jail and make her cry, it was another game altogether.
The story of Monopoly originated as a game in the mid 19th century, and it was created by a strong-willed, progressive woman named Elizabeth Magie who’s lost in history. And it was created not to glorify and encourage capitalism and monopolies, but as a cautionary tale against it.
Elizabeth Magie was a bold, radical figure, even by today’s standards, and this is the 1860s we are talking about. To draw attention to mock the institution of marriage for women, she staged a publicity stunt by purchasing a newspaper advertisement inviting bids offering herself as a ‘young woman American slave’ for sale. When asked what she was hoping to achieve, Magie said, “We are not machines. Girls have minds, desires, hopes and ambition.”
Another of Elizabeth Magie’s causes was to highlight the evils of property ownership, especially by the powerful. And to do this, she did another form of a publicity stunt.
She created a board game.
In its initial form, the board game that she created had not one, but two variants in rules.
If you played by using the rules in the first variant, titled ‘Prosperity’, whenever someone acquired a property, every player gained. The game ended when the player with the least amount of money doubled their initial amount.
In the second variant, titled Monopoly, players won by acquiring a property and gouging rent from anyone who landed there, completely by chance, for no fault of their own. To win, you’d have to bankrupt everyone else you were playing against. According to an article I read about Magie, the purpose of two variants “was for players to experience a ‘practical demonstration of the present system of land grabbing with all its usual outcomes and consequences’ and hence to understand how different approaches to property ownership can lead to vastly different social outcomes. ‘It might well have been called “The Game of Life”,’ remarked Magie, ‘as it contains all the elements of success and failure in the real world, and the object is the same as the human race in general seems to have, ie, the accumulation of wealth.’”
Anyway, the reason I’m writing about Monopoly is to explain how the Reserve Bank of India has been creating regulations in India’s fintech sector, especially over the last few years. Unlike the original game, which has two variants with its standard rules, the RBI changes the rules as you play the game—switching between Prosperity and Monopoly, and sometimes, it goes further—by creating completely new properties and even making the board go backwards.
Let’s dive in.
If you pass Go…
Photo by Aedrian on Unsplash
The reason we are talking about the RBI today is because of something that happened last week. Back in 2019, the RBI issued a notification for processing recurring payments on payment instruments. You know, the kind that you use to make purchases, pay your bills, and manage subscriptions. After this, it asked the banks to implement them, and told them to do it before 1 April 2021.
By all accounts, the banks tried their best, but there’s a problem. Recurring payments is not a new payment instrument; it’s been around for a while, and entire international banking systems and merchants have built themselves around existing standards and practices. It’s not that easy to just throw it all out and overhaul it. And that was before Covid hit us.
So the banks went back to the RBI and said, look we aren’t ready, please give us some more time. And the RBI thought about it, and said…no.
Recurring payments are not just used to purchase subscriptions for Netflix and The Ken. An entire financial system consisting of small, micro and medium businesses are built on this, who use it to pay bills, utilities and collect payments. By one estimate, the payment volume for this in April, for consumers and businesses was around Rs 2000 crore.
And the RBI was saying: not ready? Don’t care. Let it burn.
So banks started sending out notifications to their customers informing them that their recurring transactions and subscriptions would fail from 1 April. So if businesses needed to continue paying their bills and accessing subscriptions, they’d need to go and do it manually every month.
Then finally, 8 hours before the recurring bomb was set to detonate, the RBI came in and hit the pause button. It allowed banks to continue to process recurring payments, and gave them six months to implement these changes. After this, the RBI released a letter. Here’s what it said.
There are two things worth noting here. The first is that it’s completely unclear to me what the RBI is trying to solve in the first place. Presumably it’s to reduce fraud, but it’s unclear how big of a problem is this in the first place. Surely it cannot be more than a few crores—a relatively minuscule number in the larger scheme of things.
The second thing to note is the tone of the letter from the RBI. Just look at this line, for instance.
It is, however, noted that the framework has not been fully implemented even after the extended timeline. This non-compliance is noted with serious concern and will be dealt with separately.
Forget the fact that India’s national financial regulator is treating banks the same way parents tell their misbehaving children in public to ‘wait till we get home’. Forget the fact that it’s India’s bull-headed insistence to make recurring payments as difficult as possible that’s historically made tech companies stay away from India. Fine. Forget all that.
Instead, let’s ask, what exactly is the RBI’s strategy to regulate the financial tech industry?
Well, let’s see what they did in the past.
The UPI catalyst
You know the story. It’s 2016. Cash is demonetised. And the big bet now is the United Payments Interface (UPI).
The UPI was developed by this entity called the National Payments Corporation of India (NPCI)—an organisation that’s owned by a consortium of banks and initiated by the RBI.
When cash became briefly illegal, the NPCI decided to go all in on the UPI as a way to promote digital payments. It wanted banks to build out apps for their customers to support transactions on UPI. But there were a few problems:
Banks weren’t too thrilled to get into UPI because they had other mechanisms which they offered to customers to help transfer money.
UPI would cannibalise the banks’ existing business of collecting transaction fees through debit cards and credit cards at PoS (Point of Sale) terminals.
Banks had no idea how to build apps.
Some banks reluctantly built UPI apps, but they were buggy and barely used. The only company that has invested time and effort to building a beautiful and functional UPI app was this small company called PhonePe. PhonePe wasn’t a company with a banking DNA. It emerged out of Flipkart. It had a tech DNA.
But after demonetisation, the NPCI was desperate to get widespread adoption for the UPI.
So it created its own with a company called Juspay. It was called Bharat Interface for Money—BHIM, for short. It then ensured it got the best marketing any app could get—a public, personal endorsement from the Prime Minister of India, Narendra Modi, who, at the height of demonetisation, went on air and told millions of Indians to download and use BHIM for payments.
They did. And because banks never really built a UPI app very well, and because UPI was interoperable—meaning one could use any app to transfer money regardless of the bank—slowly, banks started becoming less powerful and relevant.
So BHIM, in a way, ended up becoming a de facto banking app. For small banks with no tech capability, this was a welcome move; for the big banks, this was competition.
“BHIM poses a strong competition for banks as it is no longer relevant for banks to have an independent UPI-only app. It has taken that power away from banks,” acknowledges Rajeev Ahuja, head of strategy for RBL Bank Ltd.
Bhor underlines that by deflecting users to BHIM, banks could lose the ability to cross-sell and upsell their products. More than that, it is also about losing mindshare. In a way, it is the banks’ ‘dumb pipe’ moment. Telecom companies have long become pipes that offer no differentiation but simply carry information, and banks are dangerously in that territory now.
The unlikely story of BHIM, the upsetter of plans, The Ken
So, let’s recap.
A new financial interface emerges. Existing participants are unwilling to adopt it. So the banking regulator which had created an entity that’s owned by the banks themselves, creates a competing app, which eventually makes the bank offering into a commodity.
Just think about it for a moment.
The Wallet Destruction
In 2019, UPI usage was soaring. Many fintech companies were in UPI—like Google, PhonePe, and others. So the RBI decided to do something else.
This time, it decided to take on wallets.
Vaibhav Kakkar and Puneeth Nagaraj are lawyers from the firm L&L Partners. Here’s what they wrote in an opinion column for BloombergQuint back in 2019 about wallets.
According to one estimate, the market share of e-wallets in India is said to have fallen by 40-50 percent from October 2017 to March 2018. Though e-wallet transactions have continued to grow in terms of volume in the last year, they have been far outstripped by the Unified Payments Interface in terms of market share. The future looks bleak for e-wallets with one payments operator predicting that e-wallets could cease to exist in a few years. This is a dramatic shift for an industry that was once regarded as the future of fintech in India. The regulatory burden imposed by the RBI’s Know Your Customer guidelines is widely cited as the cause for this reversal of fortunes.
Carrying out offline verification of all their customers—a requirement of the KYC guidelines—has been costly to all e-wallets. But it has been especially difficult for smaller e-wallet operators who do not have the wherewithal to invest in a capital and resource intensive compliance process. News reports suggest that most e-wallet operators verified just a fraction of their user base to date. The fast-approaching March 1 deadline for offline KYC compliance increasingly seems like a cliff’s edge from which the sector may not recover.
E-Wallets: Death By A Thousand KYCs, BloombergQuint
They were right. The sector never recovered.
That was wallets. Then there were debit cards.
RuPay was pulled…until it was pushed
Imagine building another card network to take on Visa and Mastercard. That’s what RuPay was supposed to be. It was promoted extensively by the NCPI, but still, adoption was low. So what did the RBI do?
It slashed the Merchant Discount Rate (MDR) for RuPay debit cards to zero.
RuPay was created because the RBI believes that Visa and Mastercard, thanks to their stringent guidelines, were not making enough small cooperative banks digital. But by making the MDR zero, it effectively made RuPay into a cost instead of a revenue stream for banks.
This helped Visa and Mastercard.
Until they found themselves threatened by UPI.
So the RBI decided, hey, maybe it’s time to rein in UPI.
UPI and NPCI get competition
To make things more interesting in the fintech space, the RBI decides to create entities called NUEs (New Umbrella Entities) as competitors to NPCI.
And who gets to create these NUEs? Well, here are the applicants.
Multiple people aware of the development told CNBC-TV18 that at least five or six consortiums, comprising of multiple banks, corporates, fintechs, etc are keenly looking at the New Umbrella Entity (NUE) license as the deadline to apply ends today, March 31.
Global tech giants and Facebook and Google are keenly eyeing this space, and likely to partner with Infibeam Avenue’s SoHum Bharat and Reliance Industries’ digital services unit, Jio Platforms, CNBC-TV18 has learnt.
The second consortium includes Tata Group via its subsidiary Ferbine Private Limited, in which Kotak Mahindra Bank, HDFC Bank, Airtel Digital have already bought under 10 percent stake each. E-commerce player Flipkart, as well as Mastercard and PayU are also likely to be part of this consortium, as per two people in the know.
The third consortium includes another global e-commerce giant Amazon, along with ICICI Bank, Axis Bank, Visa, Pine Labs and BillDesk as partners, according to three industry executives who did not wish to be named. Axis Bank and ICICI Bank will each hold a 20 percent stake in the entity, and Amazon, BillDesk, Visa, Pine Labs will own 15 percent each, said a person familiar with the matter.
The fourth consortium includes Paytm, and at least 5 other partners, including Ola via its company Ola Financial. Vijay Shekhar Sharma, Paytm founder and CEO had confirmed the development earlier this month, saying, “It (consortium) will include a bank, small finance bank, payments bank, fintech company, tech company, NBFC – one of the most diverse NUE consortiums that we will see.”
While Sharma did not disclose the names of the partners, CNBC-TV18 has learnt that IndusInd Bank, Suryodaya Small Finance Bank, PolicyBazaar, Centrum Finance, fintech companies Zeta Pay and Electronic Payment and Services are likely to partner Paytm and Ola for the licence.
The fifth consortium may have India Post Payments Bank, Razorpay, a payment tech firm Financial Software and Systems (FSS), and cloud services firm Zoho, as per people in the know.
Others like US-based FIS and a few other fintech companies are also exploring their options and may apply, CNBC-TV18 has learnt.
New Umbrella Entity: 5-6 consortiums of banks, global tech giants, fintechs seek licence as deadline ends today, CNBC
Just so you’ve understood this correctly, the RBI has created these NUEs—which are formed by banks and financial consortiums to compete with the NPCI—another entity owned by the RBI and banks, actively crafting interventions that don’t benefit said banks.
I need to lie down.
What does this tell us about the RBI’s approach to regulation?
One thing that’s clear is that the RBI is not just a regulator, crafting and tweaking laws and guidelines to enable the market to figure it out. It has created entities like the NPCI, which does not hesitate to create apps, or set up entities like the NUEs or slash rates to benefit and push things it wants to push. It adds cards to the Community Chest that didn’t exist earlier. It changes how the game is played. And once in a while, it adds a new piece on the board.
Sometimes, this works out well — like in the creation and proliferation of UPI.
Sometimes, the changes to these rules are random and even disruptive — like a regulation to modify recurring payments as it exists.
In one sense, the RBI is playing Monopoly.
Another thing that’s clear is that the RBI does not like clear dominant winners. If you start getting bigger, chances are the RBI is going to create something to contain your size. That’s what happened with Visa and Mastercard, and with banks. It’s also happening with UPI, where the NPCI is placing limits on market shares of players.
In another sense, the RBI is playing Prosperity.
But mostly, it’s playing a variant that’s a mix of both.
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Praveen Gopal Krishnan
The Nutgraf is a paid weekly emailer that explains fundamental shifts in business, technology and finance that happened over the last seven days in India. In a way you’ll never forget.
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