Mr. Navin Surya
Chairman, Payments Council of India
Badal Malick, Principal Innovation Officer, Catalyst caught up with Navin on evolution of payments industry, key strategies to push merchant adoption of digital payments and the state of innovation finance targeted towards fintech.
Digital payments industry has formally evolved over the last ten years, starting with the Payments and Settlement Systems Act, 2007. Industry organized around that statutory framework and a separate department at the RBI was formed. It started with the credit cards where entertainment and travel related expenses first got digitized and further expanded into day-to-day expenses. The credit card users are top of the consumer pyramid, probably half a percent of the population, but almost 90% of their transactions will be digital, albeit they are a small base of course.
Then we have the wallets. In terms of numbers, total non-bank issuance is worth about 14000 crores. Wallets centre around three use-cases fundamentally. Firstly, the gift and meal coupon use-case; this segment is about INR 2000 crores. The second bucket, that recently came to the fore, is taxi services and general e-commerce. This segment is worth another INR 2000 crores. The third and the final bucket, important from a financial inclusion standpoint, is the remittance bucket relevant for the migrant labourers. This bucket is INR 10,000 crores. It is rarely talked about but from a wallet perspective but this is a financial inclusion story. Though the volumes were low during and after demonetization, they have started growing again.
(In terms of the misses), I would say that the payments industry is not growing fast enough. In the last two years, the industry grew at about 30% on annual basis. But given that we are an aspiration economy, we need to reach 50% of growth in the next five years. We are far away from that benchmark.
Merchant digital payment acceptance is still low at 5%. Why is small merchants / business digitisation particularly thorny? What do you think are key strategies that should be applied?
SMEs collect cash because cash gives them the option to determine whether to pay tax on it or otherwise. It is also driven by value chain. A lot of industries have their entire value chains in cash. Let’s take an example of a grocery store that buys certain cooked material from a family. The family operation is simple and anyway below the threshold that attracts tax. So, they accept payment in cash. And what originates in cash has a strong tendency to stay in cash. Cash allows the small businesses to save on the (applicable) tax. So, the biggest game changer could be if policymakers incrementally reduce the tax incidence on every additional INR brought back into the formal economy. Let’s say a business has income of INR 100 of which INR 50 is taxable and INR 50 is in cash. What if I (taxman) keep incrementally reducing the tax rate for every extra Rupee (from cash component of the income) brought into the system. That would incentivize businesses to bring their transactions in the formal economy and migration (to digital payments) because the small business is going to trade-off the costs of cash against the peace of mind (with formalization). But tax reform is a bold decision; someone will have to do that.
Following up on that how does GST regime interplay with what you just said?
An interesting point. There are only two modes now; either you are GST compliant or you are end-to-end cash. GST still leaves the end-to-end cash business models out of its scope. So, we have still not grabbed the bull by the horns. Each segment has a value chain. And wherever in the value chain, the origin is cash, the value-chain has to follow. It is a bit like culture. Just like culture, digitization works from upstream.
Do you see the potential of VAS like credit to act as a hook for digitizing payments?
We need to look at these as core services rather than VAS. Payments is a horizontal layer on which we need to build on. I am a strong believer in convergence philosophy. We have already seen it in the context of television and mobile phones. The next convergence ought to be in the financial services space. Payments is a layer that needs to be topped up with other verticals based on the need of the consumer. Convergence is especially important from a regulatory perspective because the cost of delivery in the last mile is so high. Unless you integrate, expanding would be difficult. Today, we have three regulators, each operating with their worldview; for example, we need a KYC to open a bank account, another for a credit card and then again, another for opening a depositary account. Why can’t I use one KYC interaction for doing several things and interface with the KYC compliance only if there is change in my relevant co-ordinates for example. Look at Aadhaar as another example. The regulations permit e-KYC but mandate a physical KYC within one year of e-KYC. So, how are we digitizing? How are we reducing the cost of delivering services? This may actually increase the cost of services. And why do you even need it? If you need physical KYC why permit e-KYC.
The new regulations for pre-paid instruments requires KYC that is thwarting the business model. On the other hand the regulations have enabled interoperability. Do you think there is a business case for interoperability? How do you see this playing out?
Banking and payments (engender) different risks and should be treated as such. In India however, owing to the industry and regulatory structure (where banking regulator is the same as Payments regulator), all the regulatory and policy requirements for payments instruments mirror that of banks including say KYC. For instance on the one hand, gold is “PMLA-exempt” (one can buy gold worth INR 200,000 without any KYC), we need to get full-KYC to do an INR 10,000 transaction through a wallet. That reflects a flawed understanding of risks in banking and payments. We need to regulate payment instruments in terms of the (analogue instrument they mimic) i.e. cash and not like banking.
As far as interoperability is concerned, there is a use-case for bank and non-bank interoperability for instance. It not just helps the non-banks but also the banks because interoperability creates a touch-point for banks to interact (with the next unique set of customers including who have been hitherto dealing in cash). Our submission to the regulator was to give the consumer the option to upgrade to KYC and opt into interoperability. Making KYC mandatory and linking it with the ability to operate the wallet itself may have a negative unintended outcomes; for instance, in the migrant labourer segment. The use-case to remit the money exists, the service providers also exist. What happens when the migrant labourer can’t use his wallet to make the remittance? Nothing to stop a given service provider from finding out the end destination of the remittance, picking up the phone and telling its associate to deliver cash in that location (after having receiving the amount at point of origin from the migrant labourer). So, formal economy that has emerged around remittances may all of a sudden give way to informal “hawala” markets. So, we need to understand the (unintended) implications.
Let’s compare India to China from a behavioural perspective. Where does Indian story differ from China (where there is a QR Code revolution)?
With wallet interoperability coming in, the QR Code and wallet interoperability design has the potential to expand the market. But the core issue still remains. Unless the merchant is incentivized in the value proposition, he may find ways to not use the QR Code solution often enough.
Coming to innovation in the fintech space, is good mass scale innovation getting financed in India?
An interesting question! There seems to be a perception among stakeholders that anything that is a “cool, shiny object” is innovation. So, innovation in India is skewed in favour of the top 10% of the market that is already fully included. They are not going to expand the market. However all innovation seems to be happening for that “upper crust”. And funding also by default has followed that segment. That chokes the business model (by reducing margins). On the other hand, the excluded segment still remains undersupplied because even though it may solve a significant problem, the product that may potentially solve the problem is a rudimentary solution, not glamorous. But that is a real gold mine! Businesses that seek to value for these (new) markets are still not getting funding enough easily and not at the right value. The reality is that if you want sustainable business models, especially in fintech, you need to target the middle. If you solve those problems, you would have a sustainable business model, a profitable business model, but it is not glamorous. So, I think somewhere the investors need to think about exploiting the opportunity in the middle.
