India often ends up killing big industry via over regulation: Montek Singh Ahluwalia on digital payments

India needs to stay from overregulation of digital payments to achieve vision of the PM of the country

National, September 6, 2021: The growth of digital payments in India has truly positioned it as a global fintech leader. Over the last few years, the industry has spent a considerable amount of time and resources in changing customer behaviour from cash to digital payments, and this was especially accelerated by the pandemic, with online transactions growing 80% in 2020, and UPI transactions witnessing a 120% growth. The convenience and ease offered by digital payments continue to sustain the use of online transactions even after the lockdowns with the digital payments market expected to grow over three-folds to Rs 7,092 trillion in India by 2025 and the current 160 million unique mobile payment users multiplying by 5 times to reach nearly 800 million by 2025, accelerated by the policies of the government around financial inclusion and growing digitization of merchants.

Empower India, a leading think tank, organized a webinar moderated by Avimukt Dar, Founding and Senior Partner, and Shreya Suri, Technology Advisory Partner, Indus Law, to better understand the problems that the regulator is attempting to solve with the Pay regulations and propose recommendations to enable uninterrupted payments experiences for millions of customers.

Speaking on this, Mr. Montek Singh Ahluwalia, Former Chairman, Planning Commission of India, highlighted, “Overregulation of security and e-commerce will leave room for  only 3-4 big players who can comply. India often ends up killing big industry via over regulation. The Indian government should learn from other countries and how they have regulated such companies in the digital payments space in a balanced manner and not do it like China. Retaining flexibility is important for India to grow. If regulation is needed, it’s better if the big players compete with each other and foreign players and help the industry grow in India rather than kill the major players.”

Dr. Aruna Sharma IAS, Former Secretary, Govt. of India, also stated, “Data protection law should be like an umbrella, not just financial data but also personal data. The RBI has ring-fenced themselves by protecting financial data in their domain. When it comes to the data privacy issue, unless there’s a huge leak, the regulation should not operate in a heavy handed manner. We have a huge cash economy and digital payments is the only way to tackle that. RBI has the right to ensure financial data is not hacked and protect the data of the consumer but not the way they are trying to do by regulating merchants.” She also said, “We are trying to give customers a better experience with digitisation. With this new development, whereby customers would have to remember their card numbers, will make customers more liable to make mistakes and make the process much more complicated. The detection of financial crime or cyber crime is not a matter of worry. It’s the reaction time.”

Mr. Ram Rastogi, Digital Payments Strategist, was of the opinion, “The RBI has recently created a committee for regulatory review to look at all existing regulations. Tokenisation is creating a problem. It’s not our problem but one created by global tech payment giants who have such requirements. RBI is now engaging with policymakers to see the effectiveness of tokenization.”

Last year RBI proposed some changes to its payment guidelines which is likely to have a significant impact on the future of digital payments. According to the guidelines, starting September 30th, 2021, RBI requires banks to notify their customers before and after any recurring debit and this requirement is agnostic of the payment mode. While RBI has claimed to address the apprehensions and dissent raised by the stakeholders via their e-mandate guidelines that they claim will help businesses and their customers to easily manage all the recurring payments, they come with a fair share of drawbacks as the e-mandate only addresses a small section of the merchant community. Moreover, the RBI also released the Payment Aggregators and Payment Gateways (PAPG) guidelines to address data security and privacy concerns behind storing card-on-file (COF) data that does not allow merchant sites to save customer card details.

These guidelines create an unusual situation for merchants and payment aggregators who would eventually bear the brunt of consumer grievances while not being in a position to resolve the situation until banks and card networks work towards implementing their solutions. While security and privacy concerns are justified, these issues will have to be weighed against the practicality and convenience provided by digital transactions. If merchants and payment aggregators are not allowed to store card on file details, there will be no way for them to offer seamless payment solutions for recurring and single-click online payments, making it difficult for the end-consumers to enter the details manually for every transaction. This will make digital transactions tedious, time consuming, and inconvenient, and deter a large number of customers.

Compliance to these guidelines might also potentially cause frequent occurrence of fraudulent activities, result in transaction failures, reduce consumer choice and portability, hamper user experience and customer satisfaction, and limit product innovation. This not only creates challenges for payment aggregators and payment gateways but also banks, subscription-based services, a wide-range of merchants and small business owners, and even the consumers. At a time when India needs to leverage the momentum created in the past year to consolidate digital payments, these guidelines may deter consumers from online transactions. The emphasis should be on making vulnerabilities more robust rather than shutting off access completely.

Key discussion takeaways were as follows:

• Need for a more balanced regulatory framework that promotes the growth of digital transactions while ensuring that interests of the consumer and the industry are not compromised.
• Need to create an ecosystem that promotes ease of doing business as millions of small businesses have adopted digital payments in the last couple of years.
• Need to find an optimal balance between consumer security and convenience.
• Need for a robust policy framework that is risk proportionate and focused on important payment systems as opposed to measuring all industry players against the same yardstick.
• Need to take into consideration long-term effects on industry as India strives to become Aatmanirbhar and a $5 trillion economy.