2020 in review: Key policy initiatives in digital payments for 2021 and beyond

Globally, the pandemic has had a transformative impact on digital payments in terms of adoption and growth. India, despite the initial dip in digital payment transactions and quick rebound in volume soon after, has recorded overall growth (CAGR) of 61 percent and 19 percent in volume (approx. 5.93 to 34.35 billion transactions) and value (approx. Rs.920.38 to Rs.1,623.05 trillion) respectively over the last five years (March ‘15-’20). The RBI’s persistent steps furthering digital payments have supported last year’s challenges and forced wide-spread digitization.

The key initiatives last year, and their impact in the new year, are looked at here.

1. The changing face of UPI- Zero MDR, new revenue streams and the 30% cap

Last year started with zero MDR’s implementation, changing UPI’s revenue potential and converting a previously incentive-based approach to a mandatory, no-profit approach.  Even now, industry meetings with the government for withdrawing the rule are ongoing. UPI transactions are nevertheless ever-increasing, recording 2.23 billion transactions of value Rs. 4 Lakh crore in December alone, leading to a search for alternative revenue streams. Avenues emerging last year to further UPI include recurring payments via UPI AutoPay, UPI based remittances and cross-border payments (via NPCI International Payments Limited (‘NIPL’), NPCI’s international subsidiary) and offline PoS payments via forthcoming NFC-based UPI payments.

AutoPay’s launch together with its recent additional factor of authentication (‘AFA’) relaxation upto Rs.5000/- allows UPI based e-mandates. A specific advantage it has over existing facilities like NACH, for instance, is for instant subscriptions for e-commerce/OTT services. NACH nevertheless remains relevant due to UPI’s cap (Rs. 2 Lakhs), making other steps furthering NACH last year (enhancing e-mandate limits to Rs. 10 Lakhs, reviving eSign based mandates) welcome. Next, beyond taking UPI and RuPay infrastructure to other jurisdictions, NIPL is also targeting building inter-regional partnerships enhancing foreign inward remittance via UPI. An additional boost to UPI’s relevance for global remittances is UPI’s integration with Paypal’s Xoom, allowing direct Paypal to UPI transactions. Separate steps last year are SEBI extending UPI for public issues (introduced in 2018) to specified debt securities, along with introducing real-time API based PAN validation there.

Last year also increased antitrust and privacy concerns, in particular with WhatsApp Pay’s now official entry in the UPI space. First, this came with NPCI’s 30% volume cap for all Third Party App Providers (TPAPs), to be calculated based on the total volume of transactions processed in UPI in the preceding three months. The NPCI’s soon-to-come Standard Operating Procedures clarifying implementation will define how the cap will change the field for existing players (consider Google Pay and PhonePe’s dominance), which need to comply by 2023, and also the impact for users. An additional cap for WhatsApp Pay is of an initial registered user base of 20 million, which can be expanded in a graded manner.

Second is with WhatsApp Pay’s legal hurdles for entry, including ongoing litigation before the Supreme Court on privacy and its licensing as a TPAP (this includes litigation against Google Pay) and a dismissed Competition Commission of India (‘CCI’) probe last year, which are interesting to watch from a ‘Big Tech in Payments’ perspective. Yet another ongoing CCI probe is into Google Pay’s placement, etc. on Google’s Play Store. While the Supreme Court made its reluctance to interfere with RBI authority clear in the cryptocurrency verdict last year, these cases combined certainly raise possibilities of increased judicial/antitrust scrutiny even in payments, given the changing landscape and Big Tech’s entry.

2. Furthering contactless payments- AFA relaxation, streamlining QR codes

The upcoming NFC-based UPI payments can see the UPI vs cards battle move to the offline payments space, allowing competition with NFC based card payments at PoS (via QR codes currently). The move targets offline P2M merchants and also feature phone users, and other upcoming features may include bank-issued prepaid cards and vouchers on UPI.

Apart from UPI, other steady steps towards contactless payments also target safe PoS payments amidst the pandemic. Recently the AFA was relaxed to Rs 5000/- for contactless card transactions, a limit users can change at their discretion. The NPCI also introduced RuPay Contactless (offline) feature, for offline payments on a pilot basis, which also includes reloadable wallets within the RuPay card. Towards streamlining QR code infrastructure and increasing user convenience thereby, initial efforts implementing the Phatak Committee’s recommendations are via RBI directions to payment system operators (‘PSOs’) – to shift to interoperable QR codes (Bharat/UPI QR) by March ’22, with no new proprietary codes hereafter.

Enabling these new facilities will also entail changes for existing payments acceptance infrastructure, like moving to ePoS/universal PoS terminals, say which combine NFC and QR code capabilities. A digital PoS will also be popular for increased penetration, given its significantly lower installation costs and ease of distribution. Support also comes from the Payments Infrastructure Development Fund (announced last year, operationalized this month), so as to incentivize acquirers to deploy PoS infrastructure by subsidizing it.

 2020 in review: Key policy initiatives in digital payments for 2021 and beyond

Due to the spread of COVID-19, businesses and consumers are moving away from using cash and checks for payments as cash is seen as a potential carrier of the virus. Image: Christiann Koepke/Unsplash

3. New payment aggregator norms and the additional escrow account

Next, the new payment aggregator norms in early 2020 were welcome, where key changes like the move to escrow accounts, permitting pre-funding and instruction based debits, collectively enable innovation and services that were previously not possible, such as customized settlement timelines or allowing API-based transaction banking (like instruction based payouts for refunds, vendor payments, etc.). One major issue of allowing only one escrow account was addressed to some extent through permitting an additional escrow account. This was a specific challenge given the technological infeasibility to process lakhs of transactions with a single account while maintaining reliable service levels.

4. 24×7 RTGS and its business benefits

Another step was making RTGS 24×7 last month, after round-the-clock NEFT in 2019. Together with round the clock eKuber (core banking system of RBI), another upcoming advantage is allowing settlement files of payment systems (AePS, IMPS, NETC, NFS, RuPay, UPI) to be posted to the RBI throughout the year, instead of on RTGS working days alone. The aim is reduced build-up of settlement and default risks, better funds management by banks and increased overall payments efficiency. This is a particular benefit for businesses, allowing flexibility and efficiency even in large value payments. Consider for example its use for global trade, or for mutual funds where now the NAV (to be calculated on funds realization) for RTGS payments can be obtained the same day.

5. Fostering payments innovation- Sandbox, Innovation Hub

Next, after announcing six offline retail payments products for underserved sectors (NFC based offline P2M payments, feature phone based UPI payments, etc.) under the RBI regulatory sandbox’s first cohort, the second now focuses on cross-border payments. The scope of innovation- enabling real-time international settlement, making varying domestic payment systems (wallets, m-money, cards, UPI, etc.) interoperable, creating a universal messaging mechanism (common language for payment instructions, infrastructure issues), lowering remittance costs, resolving conflicting privacy compliance issues, etc., makes this a promising space this year.

There is also the upcoming Innovation Hub, which internationally is often a center for informal and non-binding support to innovators and start-ups, like addressing queries on licensing requirements, regulatory barriers to a proposed innovation, etc. The Indian approach differs, with a stronger focus on industry-level and international collaboration and research, than on acting as a point of advisory. There is nevertheless a focus on building internal infrastructure promoting research and increasing engagement with innovators. 

6. The changing payments governance landscape- NUE, NPCI’s structure, SRO

Earlier, the most awaited change to the payments governance landscape was the independent Payments Regulatory Board. The focus has now shifted to the Umbrella Entities– for-profit companies with a retail payments focus, which are to act alongside the NPCI in a bid to reduce concentration risk and increase competition. Achieving interoperability between the promised multiple payment systems of all these bodies (NUEs, NPCI, RBI), and the changes thereby to the regulatory landscape for payments players are interesting aspects. There are also changes to the NPCI itself, a widened shareholding base including fintechs, payments banks, etc., and it possibly becoming a for-profit company, which could entail changes to its approach like increased liquidity increasing its risk appetite, or increased NPCI-fintech tie-ups.

Lastly, the upcoming Self-Regulatory Organization for PSOs will introduce mutually agreed upon and contractually enforceable behavioral and professional standards (like PCI-DSS’s framework, US’s FINRA) to the landscape. Aiming to foster best practices on security, consumer protection and pricing, this could bring in uniformity in industry standards and interpretation of regulation.

Promoting competition and innovation

Overall, the RBI has shown a welcome range in its focus last year, from financial inclusion, promoting innovation to easing payments in the pandemic. The promised innovation resolving cross-border payments is among the specific steps to look forward to in the new year, say to ease exports or enable productive investment. This year will also likely see an increased focus on interoperability, given the promised multiplicity of payment systems, and on consumer protection, privacy and security (say the upcoming Digital Payment Security Controls), an essential aspect for promoting digital payments.

Given the sheer growth of UPI and the multiple steps to further it, it is hoped that the stance on zero MDR will be reconsidered, allowing payments players direct revenue from the core transaction itself, instead of having to search for alternative ways to monetize. Instead, more such policies like the NUE, which support innovation and competition, are welcome.

This story was writted with inputs from Reeju Datta, co-founder of Cashfree. The author is the head of Fintech Policy at Cashfree.