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Payment Systems in India: The Case for an Independent Regulator

About the author: Rashi Sharma is a 4th Year law student at the National Law Institute University, Bhopal. Her research interests are financial technology, insolvency law and competition law.

In August 2020 when the Reserve Bank of India released the framework for a pan-India umbrella entity to allow private for-profit companies to own and operate retail payment systems across the nation, it attempted to encourage a more competitive, innovative and inclusive retail and digital payment sector in the country. As retail and digital payments in India grow, particularly accelerated by the pandemic, the central bank has sought to subdue the over-dependence on the National Payment Corporation of India (NPCI) as the single retail payment system operator in the country. The new framework envisages a model wherein one or more New Umbrella Entities (NUEs) will be authorized to own and operate individual retail payment systems. With the deadline for completing the application process for the authorization of an NUE (31 March 2021) around the corner, this article will outline the steps which the central bank could take to further its objective of having a diverse and evolving retail and digital payment systems sector in the country.

NPCI under the new framework

The NPCI is a ‘not-for-profit’ company that is the owner and operator of key retail payments systems including all digital retail payment systems in the country. The NPCI, a collaborative effort between the RBI and the commercial banks to enhance uniformity and innovation in the market, performs a multitude of roles. It is an active market participant, a developer of payment infrastructure, a regulator, a policymaker and a largely profitable private not-for-profit body. For instance, the NPCI through its UPI payment system processed close to 2 billion digital payment transactions across the country in the year 2020. It was instrumental in approving the launch and expansive rollout of WhatsApp Pay on the UPI platform, which incidentally led to a major payment service provider (PSP) criticizing and alleging favouritism on part of the NPCI. Furthermore, in a restrictive step, the NPCI has also recently capped each payment service’s share of transactions on the UPI platform.

The RBI announcement has so far evinced a positive response from the market, with multiple banks, payment service providers and new market entrants such as the Tata and the Reliance Groups expressing interest to constitute the proposed NUE. As aforementioned, the NPCI being the single entity operating the majority of the retail payment systems in India has developed into a pseudo-regulator working alongside the RBI. So as new NUEs make way into retail and digital payments, the NPCI might also lose its present stronghold. In such a scenario, there is a need for a robust sector-specific independent regulatory body to build reliance and confidence in the retail and digital payment sector.

Potential consequences

It is pertinent to note that the new framework is silent on the position of the NPCI after the new NUEs enter the picture. Presently, the RBI’s initiative scratches the surface at best and has the potential to occasion greater regulatory challenges, which can be more effectively addressed by an independent entity overseeing the payment sector nationally.

Some potential regulatory concerns to be addressed are: First, as more PSPs with improved technology, innovation and outreach join the market, it will be desirable to have a single approval body that allows the new market entrants to seamlessly integrate their services with various payment systems as they seek to operate under the different NUEs. A case in point is the introduction of WhatsApp Pay wherein an NPCI consent enabling the payment service to operate on the UPI platform was crucial in launching the service that has the potential to bring millions of outlying Indians into the ambit of digital payments. Second, that even if the RBI has not resorted to forming only one NUE, having multiple payment systems operators in itself would not ward off the risk of high market concentration. Several domestic conglomerate businesses such as the Reliance and the Tata group and global tech giants like Google, Facebook and Amazon are keen to set-up independent payment systems. These businesses have a greater advantage in terms of access to consumer data and mobility across participants, which could potentially lead to greater market concentration. Regarding the threat of increased market concentration, it is also relevant to note that the new framework does not allay concerns about the possible lack of interoperability among the new entities. According to the new framework, a new NUE is only expected to be interoperable with the systems owned by the NPCI. Even if the new entities co-operate with the NPCI and the UPI system, two or more NUEs could likely act to restrict the ease of operation only within a group of certain payment systems and PSPs, which may not include the NPCI, consequently reducing consumer preference and diversification. More pertinently, the mandatory requirement for NUE’s to have interoperable systems with solely the NPCI and not the other prospective market participants is counterintuitive to the RBI’s aim of reducing reliance on the NPCI infrastructure.

Way Forward

To inculcate a thriving retail and digital payment sector, the central government along with the central bank must act on the RBI’s proposal and previous expert committee recommendations to develop an independent sector-specific regulatory entity that can address emerging issues in the retail and digital payment sector, which the current setup under the Payment and Settlements Systems Act, 2007 (‘PSS Act’) is not adequately equipped to address. The PSS Act does not address issues of innovation, interoperability and competition in the payment sector, particularly digital payments. Furthermore, the regulatory mechanism under the PSS currently revolves around the RBI and the Board for Regulation and Supervision of Payment and Settlement Systems, as the sole supervisory committee with a limited scope to oversee payment systems technical standards and is restricted to the implementation of the PSS Act.

Other financially developed countries such as Australia, Sweden and the U.K. actively promote increased interoperability and open access within the payment systems through independent regulatory mechanisms. Most notable is the Payment System Regulator (PSR) in the U.K. which is an independent statutory body tasked to ensure effective competition, innovation and consumer services in the sector. The PSR being a sector-specific economic regulator collaborates with industry and consumer groups to ensure markets deliver the greatest benefit to all participants. The PSR also has strong regulatory powers to issue guidelines, directions and set standards. It can require operators to increase access of payment systems to PSPs, meet business standards and ensure interoperability. Additionally, the PSR has concurrent jurisdiction with the U.K. Competition and Markets Authority such that the PSR has the power and jurisdiction to apply the anti-trust rules and principles to the payment sector. As the digital payments systems and payment sector develop to become more technologically sophisticated, the PSR is equipped to prevent anti-competitive practices such as concerted action and price manipulation among the participants. The PSR also offers sectoral expertise with deeper insight into the market dynamics and therefore allows effective implementation of anti-trust rules. The Competition Commission of India (‘CCI’), the Indian competition regulatory body has overtime failed to appreciate the nuances of digital markets. In the case of Samir v. Aggarwal, it failed to recognize the possibility of online hub and spoke cartels. Furthermore, the CCI in Harshita Chawla v. WhatsApp Inc. did not consider network effects, consumer behaviour, existing market conditions in the social media and digital payment service provider market, when determining the question on abuse of dominance by WhatsApp in introducing WhatsApp Pay beta Phase.

Therefore, by establishing an independent payment sector-specific regulator analogous to the PSR in the U.K., the Indian authorities can more efficiently achieve their vision of a diverse, innovative, inclusive retail and digital payment sector, one that can retain consumer and investor confidence.


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