On March 17, 2020 the RBI came out with Guidelines on Regulation of Payment Aggregators and Payment Gateways. These regulations come at a time when the financial sector at large is deeply affected by the COVID-19 Pandemic. On one hand, regulation imposes compliance costs on firms, sapping resources otherwise available for productive activities, such as innovation, or raising entry barriers, thus reducing competition and incentives for innovation[1]. However, regulations can also foster consumer trust, thereby increasing the demand of new technologies.
When faced with a situation where the firm that comes up with an innovation struggles with a regulatory hurdle, compliance innovation aids the firms to push ahead, without being on the wrong side of the law.[2] These regulations impose onerous obligations on an already struggling startup ecosystem, raises regulatory uncertainty, and affects competition in the ecosystem and in zero or near zero pricing regime due to Zero MDR, the ill timed and burdensome regulations poses significant sustainability, viability and livelihood of thousands of employees working in the sector.
This comes at a time when COVID-19 pandemic has weakened the economic health of the country. The application of the regulations that impose non monetary obligations effective from 1 April imposes additional and onerous compliance costs that drastically affect financials of the companies operating in this space. COVID-19 crisis has come at the worst possible time when the sector is already battling Zero MDR issues.
A major concern with these guidelines is the complete absence of a robust public consultation process. The discussion paper was a good start. However, it is essential to have draft regulations in the public domain to allow wide stakeholder consultation. It provides an opportunity for the industry participants to flag the issues, and provide inputs on the proposed regulations that come with legal implications. Moreover, the Ratan Watal committee report on digital payments had earlier recommended a 21 day notice for draft regulations being made available for public consultation. These guidelines have not followed this procedure, not giving due importance to industry voices.
The guidelines are applicable from September, 2020m which has not been informed to the wider industry. At the same time, the application window for license is open upto 30 June, 2021. While this will apply to all market participants alike, even in the midst of the COVID-19 crisis, the regulatory uncertainty raises concerns with additional load of compliance. Given the fact that the Guidelines are meant to be applicable from the 1st of April 2020, it suggests that all PAs must be in compliance with the provisions of the Guideline, most of which involve high costs to achieve. There is no objective criterion which has been stated for the passing/failing of an application for a license. Such lack of clarity makes participants vulnerable to the eventuality that they achieve compliance with the Guidelines, only to be rejected their license from the RBI, post which they must shut down their operations.
The Regulations impose an onerous burden on the startups in this sector. PA & PG activity is essentially a facilitating or intermediation activity of providing instructions between 2 KYC-ed FI of Authorised Issuers. PAs are not containers or issuers of authorised financial instruments. They essentially allow only credit or debit KYC-ed FI and are subject to instructions accepted by licensed banking and non-banking institution “issuers”. It would be beneficial if the RBI undertook an economic impact assessment study & competition assessment study of the regulation in order for the stakeholders to understand and assess the consequences of enacting such policy in the coming days and also ensure that regulations does not stifle competition and provide an advantage only to the incumbents large players.
The Regulations place the “small pure play payments companies” on unequal footing when compared to the large established payment players and banks. Unlike banks who have multiple revenues from the same customer (interest and fees income) model, PA/PG only depend on service fees from merchants on a high volume and low margin model. With COVID-19 and in a zero and low MDR environment, the additional burden of KYC/PMLA and OSV/IPV, reporting for all merchants is going to significantly add stress to the sector and challenge the survival of the Indian startup economy. We recommend that the regulations must be relooked taking into consideration the differences in scale and capacity of large established banks, and payment companies. Lighter KYC norms, would be beneficial. Application of stringent regulation across the board is ineffective, serves no end, and decreases ease of doing business. This will also ensure a competitive environment which can bring in economic development in a post COVID world. Moreover, it needs to be noted that the banks which act as PAs need no additional licensing.The banks have multiple revenue pools whereas PAs have a single revenue pool.This comes from the MDR or fees from merchant which with Zero MDR and now increased obligations makes it burdensome for the business models to sustain.
The Regulation has increased compliance requirements for PAs. The requirement for antecedent checks will place excessive burden on MSME’s while it will also increase the onboard costs for PA’s. We recommend a self certification mechanism up-to revenue threshold based on a progressive KYC approach that can be part of the board approved KYC/AML policy of PA.
From a Business Continuity Perspective for merchants and consumers, in light of recent events in the banking sector, it would be beneficial to allow a second bank as an escrow bank partner. This will help in contingency and risk planning measures for the benefit of merchants and consumers.
Where PA is responsible for delivery of goods / services, the payment to the merchant shall be not later than on a day later than the date of intimation by the merchant to the intermediary about shipment of goods. A payments intermediary who is only a small part of the entire value chain is not expected or cannot practically or operationally have visibility of all aspects of a merchant's business and least about status and confirmation of delivery of goods/services by merchants to consumers. This will require fundamental business model change for PA’s and also heavy costs to be borne by MSME to establish such linkages between logistics partners and PA and ongoing maintenance. Most MSME use postal services and small couriers who may not have sophistication and IT capability for such features. The payment aggregators are responsible for timely payments to merchants and merchants are responsible for delivery of goods/services. This requirement again could lead to exclusion of small sellers and only favour large format retailers and ecommerce marketplace operators.
At a time when the nation is battling the economic challenge of tackling COVID-19 it is imperative to support the growth of the ecosystem with liberal and less-stringent regulations. We need regulations which are more consultative, better timed and less onerous to facilitate the growth of the digital economy.
[1] Blind, K. (2012). The influence of regulations on innovation: A quantitative assessment for OECD countries. Research Policy, 41(2), 391– 400
[2] Stewart, L. A. (2010). The impact of regulation on innovation in the United States: A cross-industry literature review.
(Kazim Rizvi is a public policy entrepreneur and Founder of The Dialogue, a tech policy think-tank based out of New Delhi, and one of the leading voices on technology policy in India. Karthik Venkatesh is Research Coordinator with The Dialogue. The views expressed are personal)
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