e-payments never had level playing field

The ongoing face-off between Paytm and messaging app WhatsApp over the latter’s launch of a UPI-based payments tool exposes chinks in the country’s digital payments armour.

For starters, Paytm’s founder Vijay Shekhar Sharma alleges that India’s largest digital payments company would petition the National Payments Corporation of India (NPCI) against WhatsApp’s money transaction features (now on a ‘beta’ or pilot mode), which Sharma feels is damaging to the well-being of India’s e-payments industry given the security risks and monopoly concerns involved. WhatsApp payments does not require a special log-in or Aadhaar verification, and Sharma says Facebook, which owns WhatsApp, is colonising India’s e-payment system and tweaking the Unified Payment Interface (UPI) to its benefit.

More than 20 crore people use WhatsApp in India. Paytm is one of the biggest beneficiaries of the current wave towards digital payments in India and, according to reports, is likely to see a valuation of about $10 billion when it goes public. Obviously, Paytm stands to lose much in terms of users and revenues once Whatsapp’s payment faculty facility goes mass-mode.

But is Sharma’s outburst just a knee-jerk reaction to a mighty rival’s entry into a race in which he has so far been holding a clear lead or is there more to it? To understand this, one needs to look at how the e-payments ecosystem has evolved in India.

Fast and changing

The e-payments space has gone through a lot of regulatory changes in the short period of its existence. The ‘history’ of this segment can be divided into two phases: pre-UPI and post-UPI. The UPI was developed in early 2016 by the NPCI to power India’s e-payments infrastructure, enabling centralisation of the digital payments system. Around 2013-14, a payments app would work directly with individual banks, as service providers such as Chillar tried. An enhanced model is beingused by Google’s now-popular payments app Tez. Also in the fray was the e-wallet model, where users would load money into a third-party kitty. Then banks had their own apps providing myriad services and functioning as an extension of branches.

When the NPCI started building the UPI, there were discussions in the industry around how a new architecture had to be developed and how banks could connect to it. Basically, there were two layers of connections. Banks would directly connect to the UPI and then there were apps that would connect to the UPI. At this stage two significant developments changed the game for the industry.

Game-changers

One, the Government asked developers to make their apps compliant with the UPI rules of NPCI. Which meant startups and other players building such solutions had to get verifications from the NPCI on almost all features of their applications and this situation reduced significantly the pace of work and innovation in the e-payments space. Innovations in the space started losing momentum.

According to the startups, every screen had to go through the NPCI’s verification. Many developers allege that this dramatically impacted the quality of their interfaces as the NPCI was not in a great position to understand the market, consumer needs and best practices.

And at this stage those who had access to power and were privy to exclusive information allegedly gained. In sum, the e-payments space ceased to be a level-playing field, an allegation Sharma has now levelled against the system. Soon, small players started losing the race. This didn’t seem to bother Paytm much at that time because the company was growing exponentially and the wallet model had found several takers.

Also, the absence of a level-playing field saw that big players who tied up with big banks and retailers could gain significantly. Access to information and API (application programming interface, which essentially means procedures and codes that help software interact with each other) was an added advantage. Startups then alleged that such unevenness in the sector would stymie all the natural progress and that if the Government did not step in to create a level-playing field, the sector would see unnecessary consolidation and would end up being controlled by a monopoly or two, jeopardising the very basic idea of digital and financial inclusion.

But nothing significant happened. Instead, the NPCI, a body set up with the guidance of regulator RBI and the Indian Banks’ Association, launched its own UPI app, Bharat Interface for Money or BHIM, on December 30, 2016 which started competing with the other payments apps.

This was unexpected, at least to the smaller players in the payments space. Now they had the regulator as the competitor. And once the Government started offering cashbacks to BHIM transactions in the Budget, whatever remained of the level-playing field, say the entrepreneurs, vanished without a trace.

Lack of balance

This topsy-turvy nature of regulation continues to torment the e-payments sector in India. Developers and activists say there was no need for the Government to throw its hat in the ring in a market that can be easily regulated and which would drive innovation and participation. Now, the e-payments sector is a confused affair. And it is quite natural that a MNC like Facebook, which is familiar with similar systems in other geographies and how to play them, is taking advantage of it. It can also offer a vastly different and smoother user experience given its API muscle.

Paytm’s worries have another aspect. The wallet model is not necessarily an organic or sustainable idea, especially in the post-UPI era, where a customer can directly interact with the bank via the UPI interface and easily transact, instead of parking his money in a wallet. Those who do not want to expose their bank accounts for low-value transactions may still prefer e-wallets.

And the Government, given its penchant for centralisation, may not like the wallet model much given that it still has components (like how the money is used inside the wallet) that are beyond the supervision of the RBI.

Now, all eyes are on the NPCI and how it is going to respond to Paytm’s petition. Curiously, it won’t be able to do much as WhatsApp’s pilot (‘beta’) project sits in a dicey area in terms of regulation. This is one of the reasons why small players allege that the system now looks like it doesn’t allow room for any Davids. The promise of the UPI was that everybody would have the same access and rights — be it Google or PhonePe or Chillar or Paytm.

Unless the Government takes urgent measures to fix the gaps, create a level-playing field and promote cutting-edge innovation, the e-payments space will fail to deliver optimum choices to consumers.

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