The Reserve Bank of India’s (RBI) recent monetary policy meeting gave a fillip to the fintech industry in India, as it moved to open up the access to the National Electronic Funds Transfer (NEFT) and Real Time Gross Settlements (RTGS) systems. Regulated entities like prepaid instrument issuers (PPIs)—more popularly knowns as digital wallets in India, card networks, and Trade Receivables Discounting System (TReDS operators), among others, will now be allowed to become members of its centralised payment systems (CPS) though with some caveats.
CPS are owned by the central bank where the RBI settles transactions. The membership is limited to banks and select financial institutions such as National Bank for Agriculture and Rural Development (NABARD), Export-Import Bank of India (EXIM Bank) and Deposit Insurance and Credit Guarantee Corporation (DICGC). In its bi-annual report in December 2019, the RBI had mentioned that it would want to open up CPS membership to non-bank entities, to reduce costs and make market-access to funds easier. “Internationally, central banks are expanding access to payment systems by enabling various types of non-banks to become members. Bank of England has permitted access to payment institutions and e-money providers. Switzerland has provided access to fintech and insurance companies,” the report said.
Though the RBI is finalising guidelines for the same, the announcement was met with cheer across the digital payments industry, particularly digital wallet companies. Digital wallets’ business was dealt with two blows when the RBI tightened its know-your-customer (KYC) rules in 2017 and with the rise of the Unified Payments Interface (UPI) which overshadowed the number of transactions on wallets and then eventually credit and debit cards as well. The new KYC rules were at par with the bank accounts, but did not carry proportional benefits and this recent RBI’s announcement will help in bringing parity between them.
Digital wallets built semi-closed systems for payments. They allowed zero-cost transfer of funds to wallets within their ecosystem but charged users a fee for transferring money to bank accounts. They are not allowed to offer cash withdrawals at ATMs. Digital wallet companies started to build vast merchant networks, onboarding small kiranas, and micro and small enterprises and developed their own proprietary QR codes and wallet transactions were not charged.
When the UPI was formally launched, it was decided that only banks will be allowed to function as backend operators and wallets and PPIs were excluded from the system “because banks needed time to catch up” to them. Now as the UPI also offered zero-cost fund transfers from bank accounts itself, it invalidated a key feature of digital wallets. RBI data shows that 22 digital wallet companies have surrendered their wallet licences or ceased operations since 2017. Companies like PayU and MobiKwik that operated wallets, survived by falling back on their payment gateway business and lending operations.
The RBI dangled interoperability with the UPI system, but by then the damage for the wallets was already done, as UPI cannibalised the growth of wallets and cards. Now, fully KYC-ed wallets will now be able to access the RTGS and NEFT systems in addition to cash withdrawals at ATMs. This might convince more users to go back to their wallets as there was concern among users that money stored in wallets would be inaccessible with merchants that are not a part of the wallet’s network. Further, with these new rules, it will be possible for wallet-to-wallet money transfer, for example, a MobiKwik wallet user will be able to transfer funds to an Amazon Pay wallet.
The opening of the NEFT and RTGS systems can help in opening up new avenues of business for fintechs. Online stock broking firms like Zerodha have to rely on banking rails to access the NEFT and RTGS systems for trades. Traders still prefer legacy systems like the NEFT to conduct their transactions due to its reliability and compliance with Securities and Exchange Board of India (SEBI)’s rules on getting a source of transfer. Further, trust in the UPI and Immediate Payment Service (IMPS) systems for the broking business is still very low. Though SEBI allowed the use of the UPI for allotment of stocks during the IPO process, it was met with disastrous results with many retail investors losing out on their applications. Now, with the RBI’s rules on allowing the NEFT and RTGS systems running 24/7 brings it on the same level as immediate systems like the UPI and IMPS. It’s actually one step better. Though payments on the UPI show users that money has been transferred immediately, they are reconciled and settled by banks in four to six intervals in a day, while settlements on RTGS is processed continuously on a transaction-by-transaction basis throughout the day. With this new proposal, RBI could be reducing their worries around settlement risks by widening the ecosystem.
Payment firms like PhonePe and Paytm have been trying to diversify their businesses since the Zero-MDR regime does not allow them to make money on payments through UPI. They have now started to offer other financial services like insurance and mutual funds. It isn’t too difficult to imagine that they would now want to enter the stock broking business. In fact, PhonePe, the current leader in the UPI space, is now looking to enter the stock broking business and has applied for a licence with SEBI.
Neo-banks in India now might be keen on acquiring a wallet licence from the RBI. A fully KYC-ed wallet offers pretty much all the functionalities of a bank account and RBI’s wallet regulations do not require them to have a physical branch. Wallets are also not required to adhere to capital adequacy requirements that banks need to maintain at all times. The regulations merely mention that wallets need to disclose and maintain their net worth.
In terms of regulation, theoretically, PhonePe is poised to become an actual neo-bank. It already has a wallet licence and has access to the UPI infrastructure through Yes Bank, ICICI Bank, and Axis Bank. It can push users for a fully KYC-ed wallet and allow inter-bank and inter-wallet transfers. Issuing a debit card for ATM transactions could well be on the cards. Access to NEFT and RTGS systems can help them grow their broking business without the need for a bank tie-up. It can offer loans to customers through other financial services, or it could even set up a non-banking finance company (NBFC) for its lending operations. It just needs to ring fence the wallet operations from the lending business.
It is unclear if there is going to be a renewed interest in digital wallets. But the future looks brighter with these new regulations from the RBI and might help in levelling the playing field between banks and fintechs in the country.
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Shashidhar K J was a Visiting Fellow at the Observer Research Foundation. He works on the broad themes of technology and financial technology. His key ...
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