2021. It’s finally here. And if ever there was a time to quote Tennyson.
“Though much is taken, much abides; and though
We are not now that strength which in old days
Moved earth and heaven, that which we are, we are,
One equal temper of heroic hearts,
Made weak by time and fate, but strong in will
To strive, to seek, to find, and not to yield.”
– Ulysses, Alfred Lord Tennyson
2020 taught us to get-up, dust off and mosey along. Regardless of how 2020 panned out for you, we are glad to see you on the other side. The fintech sector certainly made it to the other side. It continued to innovate and strive. So, in our second edition of FinTales we bring to you fresh insights from the world of fintech. If you missed our first edition, don’t worry, you can read it here. Write to us if you (or someone you know) wants to subscribe.
Now let’s get to it.
RBI is high on ‘josh’ after opening applications for the second cohort of the regulatory sandbox, and introducing the new Digital Payments Index. NPCI is prepping for competition with the NUE. And MEITY could compensate industry for losses due to zero MDR for Rupay and UPI (hallelujah). RBI wants to fuel financial inclusion. WhatsApp is eyeing world domination. And KYC becomes easier. Also, SEBI relaxed mutual fund regulations for fintech. Most importantly, a cat-and-mouse game is afoot between digital lending platforms and RBI. Interesting, eh? Dig in.
Digital lending platforms under the RBI scanner
2020 was a gruelling year. Jobs were lost. Salaries slashed. And desperation for credit was real. People needed cash, quickly. And digital lending platforms offered much-needed credit. They provided easy, quick, no questions asked loans. A blessing for a pandemic-struck workforce. But this story soon turned dark. As the repayment dates neared, reports of abnormal interest rates, hidden charges, unethical recovery tactics, unauthorised data use, harassment, and fraud surfaced.
Lending platforms usually partner with regulated entities like banks and non-banking financial companies (NBFCs). They are not directly regulated by the RBI. So, in June 2020, the RBI reminded banks and NBFCs that they must follow the fair practices code (FPC) and outsourcing guidelines, while lending through these platforms. Still, some lending platforms remained non-compliant. Self-regulatory efforts from Digital Lenders Association of India (DLAI), Fintech Association for Consumer Empowerment (FACE), and Google’s effort to ban apps from its Playstore also met with limited success. And malpractices continued.
In December 2020, RBI cautioned against unauthorised digital lending platforms. And on 5 January 2021 it fined Bajaj Finance INR 2.5 crore for flouting the FPC and the outsourcing guidelines. The following day reports on RBI looking into the source of funds for micro-lending apps surfaced. Kerala is also looking to ban predatory loan apps. Finally, on 13 January 2020, RBI constituted a working group (WG) to take a close look at the digital lending sector. This group will assess outsourcing standards, suggest consumer protection measures, and recommend robust FPC and data governance standards. The WG report will be released in 3 months (by April 2021) and regulations may soon follow.
It is critical that the RBI’s policy on digital lending platforms looks to weed out malicious lending apps. Predatory interest rates and unfair loan terms must be kept in check. And since the (Indian) personal data protection law is still in the works, the RBI must step-in to stop predatory uses of customer data. But the RBI must strike a balance between innovation and regulation. It is heartening to see the RBI press release for WG (13 January 2020) recognise this.
The best way for RBI to move forward is to engage with the industry while developing a policy framework. A stronger cohort of digital lending apps (Simpl, Lazypay, Lendingkart, etc.) should create self-regulatory norms. After all, we have good examples of successful self-regulatory organisations (in India) like Advertising Standards Council of India which claims a compliance rate of around 80-90%.
Else, what started with callousness of some players, may open a pandora box of heavy-handed regulations for the entire industry. The RBI may also follow the lead of other regulators (like Australian Securities & Investments Commission) to make a lender responsible for verifying the suitability of a credit product for a borrower.
It is time for the industry to join hands and stand with the regulator against the unethical lending platforms.
RBI rolls out Digital Payments Index
Digital payments grew by 80% from July 2020 to December 2020. This sharp pick-up requires uniform tracking. On 1 January 2021, RBI announced the launch of Digital Payments Index (RBI-DPI) – a metric to estimate the digitisation of payments effectively. Calculation of RBI-DPI is based on these parameters: payment enablers (like merchants); payment infrastructure (demand side like debit/credit cards and supply side like POS terminals and QR codes); payment performance (volume, value and unique users); and consumer centricity (like declines, complaints, frauds). On one hand, payment performance carries the highest weight (45%). On the other, customer centricity carries the lowest weight (5%). Such a low weightage to customer centricity is odd.
The RBI-DPI for March 2019 and March 2020 stands at 153.47 and 207.84, respectively – keeping March 2018 (100) as the base. We are excited to know what it will look like for 2021. It will also be interesting to see how the RBI-DPI changes if customer centricity is allocated more value.
Government may reimburse Merchant Discount Rate (MDR) on Rupay and UPI transactions
The Government’s move (in November 2019) to scrap MDR on Rupay and UPI transactions shocked the digital payments industry. And now it seems that the government may retrace its steps. Indian Banks’ Association and payment industry forums recently met the Ministry of Finance and the Ministry of Electronics and Information Technology (MEITY) (during pre-budget consultations) to demand that MDR (on Rupay and UPI transactions) must be brought back. The payments industry and the NPCI have consistently lobbied against the zero-MDR policy. And reeling under the pressure, the government may compensate the payment firms for the revenue loss on account of the zero-MDR policy. A policy for compensation could be announced in the upcoming budget for 2021-22.
The payment players want zero-MDR policy to be scrapped for several reasons. The policy stripped payment firms of their core revenue model. And has made players explore alternative business models, like using payments data to cross-sell other products. But once the Personal Data Protection Bill 2019 (PDP Bill) becomes the law, it may be difficult to use payment/transaction data to cross-sell other products. Also, lack of revenue has disincentivised payment players from investing in the acceptance infrastructure (like card networks, PoS terminals, etc.) – leading to payment failures. Zero-MDR policy (for Rupay and UPI – both NPCI’s products) has also put the NPCI at a competitive disadvantage against MasterCard and Visa (who can still charge MDR).
Payments infrastructure development fund gets operationalised
‘Digital India’ cannot leave behind ‘Bharat’. Lack of smart phone penetration, poor connectivity, and power outages make digital inclusion difficult. But tough roads make better drivers. And RBI is focussed on financial inclusion. On 5 January 2021, RBI operationalised the payments infrastructure development fund (PIDF) – which was first announced in June 2020. PIDF is aimed to develop payment infrastructure in low-tier cities. With a war-chest of INR 345 crores, subsidies will be given to banks and non-banks offering PoS devices, GPRS, QR code-based payments, etc. With the zero-MDR policy, this may ease the unit economics for the stakeholders to develop the infrastructure for payments in rural India. However, some payment industry representatives have anonymously stated that this cannot be an alternative to MDR. Especially since the loss due to zero-MDR exceeds the proposed corpus, by a long shot.
CKYCR now includes legal entities
Client on-boarding for financial service has been made easy with Central Know Your Customer Registry (CKYCR). Regulated entities can directly access the KYC data of a customer from the CKYCR (through user-specific KYC identifiers) without troubling the user repetitively. The scope of the CKYCR was however limited to individual accounts. But last month, the RBI expanded the scope of the CKYCR to include the KYC data of legal entities (LEs). This is expected to curb several cases of misuse and unauthorised use of bank accounts. It may also help start-ups cut down on the cost of customer on-boarding. Inclusion of LEs may however pose new challenges. Such as keeping track of frequent changes in the name of authorised signatory and registered office addresses, and the tedious process of verification.
RBI’s second cohort for regulatory sandbox is live
2019 was a breakthrough year for fintech innovation. RBI came out with an enabling framework for regulatory sandbox (RS). By November 2019, applications for the first cohort were live. And 6 products have now begun the ‘test phase’. With that wrapped, RBI has invited applications for the second cohort with the theme ‘cross border payment’. Since NPCI is already looking to take UPI international, 2021 may be the year for innovative products for cross-border payments. What makes this cohort more interesting is the relaxed eligibility criteria. The net-worth requirement is down from INR 25 lakhs to 10 lakhs. And now partnership firms and LLPs can apply too. Interested? Application window is open till 21 Feb 2021. If you are a fintech innovator meeting the criteria, now is the time!
NPCI to create a separate entity for Bharat BillPay
UPI is NPCI’s champion. But Bharat BillPay is another beast which NPCI has nurtured over the years. The Bharat BillPay System (BBPS) enables users and billers to make a range of bill payments for telecom, electricity, gas, water, DTH, education, etc. In November 2020, BBPS processed 22 million transactions. Seeing this growth and to channelize its focus, NPCI will soon hive-off Bharat BillPay into a separate entity. And the RBI has reportedly approved this.
WhatsApp enters the insurance and pension sector
Instant messaging, check. UPI, check. What next? WhatsApp (WA) is now entering the insurance and pension sector. And plans to step into ecommerce, education, and social welfare in 2021. Ambitious? Maybe. With 400 million users in India, WA’s reach, stickiness and accessibility is unparalleled. It’s partnership with SBI General and HDFC Bank for small-ticket products might disrupt India’s insurance and pension sector that is accustomed to long-term, high-value products.
Securities Exchange Board of India (SEBI) relaxes rules for mutual fund business
The SEBI has made it possible for technology startups to enter the mutual fund business. In December 2020, SEBI relaxed the eligibility criteria to sponsor a mutual funds (MFs) business – by waiving-off the ‘profitability requirement’, and the criteria of having 5 years of experience in financial services among others. This may help fintech firms, who are yet to turn profitable, to offer MFs without showing prior experience. But would more flexibility attract greater supervision from the SEBI? We will have to wait and watch.
That’s it from us. We’d love to hear from you.
Tell us what you think about the developments we covered. Or if you’d like us to cover another development.
Write to us at contact@ikigailaw.com.
See you in February!
Yours,
Ikigai Fintech Team
