[Exclusive] 2021: The Watershed Year for Digital Payments in India

Much has been written about the impact of COVID–19 on businesses and industry sectors over the last one year. As some sectors faced widespread slowdowns and even existential challenges, there have been some outliers such as edtech and digital payments which grew at an unprecedented pace. Digital payments had been already on a steady rise over the last few years on the back of supportive government policies and the pandemic transformed this growth into high gear.

These developments have not escaped the investors’ eyes, with the industry witnessing major foreign investment. The last few years have also witnessed a trend of consolidation between the major players and immensely rewarding exits to some investors. Recently Flipkart also hived off PhonePe as a separate entity, considering the size and potential profitability of the company, another testament to the fact that the Indian digital payments industry has come of age.

Amidst all this upheaval, RBI’s latest proposal to introduce pan-India new umbrella entities (NUE) for retail payments may be another gamechanger. These NUEs are being proposed as competitors to the National Payments Corporation of India (NPCI) and are also expected to interact and be interoperable with the systems operated by NPCI, such as RuPay, UPI etc. The RBI proposal mandates caps on the ownership by a single promoter/ group in such NUEs, and also permits foreign investment in these NUEs, though ownership and control must remain with Indians. And as the deadline for applying for setting up such NUEs approaches on 26 February, speculations abound that major corporate groups, group of PSU banks and foreign investors may apply for setting up an NUE.

On the regulatory front as well, the sector has seen several developments in the past which have kept market players on their toes. To foster competition, NPCI introduced caps on the number of transactions that a UPI app can process – at 30% on the total volume of transactions. This is expected to impact Google Pay and Phone Pe the most – who share almost three-fourth of the UPI market share between themselves. And while existing players have been given until January 2023 to comply with this, NPCI’s move has given market players enough reason to worry as this in some form also puts a lid on their growth ambitions. It is yet unclear on how this 30% cap is expected to be enforced, with all signs pointing to some sort of self–regulation by these players such as rejecting transactions or limiting customer enrolment. This may not bode well for customers who have already been complaining about outages. RBI has been forced to step in at times – as was the case in a recent directive given to a prominent bank to stop issuing new credit cards and halt the launch of any new digital businesses.

NPCI’s backstory is interesting. It is registered as a retail payments organisation with RBI and has long been viewed as a quasi-regulator, with powers over a host of entities involved in digital payment services. This was most evident in an ongoing case where an RBI affidavit in the Supreme Court stated that market players such as Google Pay, PayTM, Amazon Pay etc. operating on the UPI platform are required to comply with guidelines laid down by NPCI and not directly regulated by RBI. The affidavit also clarified that RBI does not govern matters relating to data privacy or data sharing of the customers, and has only mandated local data storage of customers in India. Further, in a 2019 ruling, the Central Information Commission also excluded NPCI from the ambit of RTI. In a bid to incentivize digital payments the government decided to eliminate the merchant discount rate on payments through RuPay cards and UPI, which has come at the cost of the banks’ profit margins and also attracted strong reactions from competing card companies such as Visa and Mastercard.

In the meanwhile, NPCI has taken UPI and various other payment systems beyond Indian shores, looking to introduce this concept in countries that have turned to India as a success in democratizing digital payments. And while NPCI was established as a non-profit entity, reports have surfaced around the government’s intention to change it to a for-profit entity.

If there is one thing that remains beyond doubt amongst all this, is the expectation that the coming year promises to be a gamechanger for the digital payments sector, as market players continue to search for the “next billion customers” in India.