It would not be wrong to say that the year 2018 belonged to Fintech in India. The number of Fintech companies in India has risen exponentially, with India now being second only to the United States in number. Fintechs have also attracted the highest amount of foreign investment last year. Within Fintech, Payments and allied services occupy a dominant position. Payment services providers like Paytm have had no small role in ushering in the Fintech revolution in India.
With the rise of Fintech and payments, these last few months have seen an interesting conversation develop on the need for independence in regulation. The focus here has been on regulation of the payments space. Currently, the Reserve Bank of India regulates the payments ecosystem in India per the payments and settlement systems Act, 2007. A question garnering substantial interest in recent times is whether the payments space should continue to be regulated by the RBI, or by a separate, independent payments regulator. Two developments have paved the way for this healthy debate. Firstly, the recommendations of the inter-ministerial committee for Finalisation of Amendments to the Payments and Settlements System Act, recommending a separate regulator. Secondly, the dissent note from the RBI strongly opposing such a move.
The PSS report suggested various amendments to the existing law including, significantly, setting up of a Payments Regulatory Board (PRB) as a separate independent regulator of payment systems in India with the RBI playing a consultative role on the board of the PRB.
The RBI as the payments regulator has, of late, given mixed signals. On one hand, it has tried to foster innovation by inviting more players into the payments ecosystem through a recent policy paper on authorisation of new retail payment systems; on the other hand, it has refused to reduce the restrictive barriers to entry under the act, such as of the paid-up capital of payments systems operators. The RBI had, in February 2018 through its report of the working group on Fintech and digital banking, mulled the idea of a regulatory sandbox in association with the Institute for Development and Research in Banking Technology. We are yet to see anything substantial implemented, though the RBI governor recently confirmed that guidelines for setting up regulatory sandboxes for Fintech companies would be rolled out in May this year.
Objectively, one can see a scope for conflict in RBI’s multiple roles here. The RBI as a regulator is trying to regulate an industry which is disrupting trends in the traditional banking industry, while at the same time, safeguarding the interests of the very same traditional banking system sought to be disrupted.
There is no doubt that the RBI is well equipped to regulate the payments ecosystem. There is also no doubt that the RBI, as the central bank, plays a pivotal role in safeguarding the banking system in the country. The question is whether the RBI will be able to balance the needs of innovation on one side and stability on the other. The RBI here, for all its merits as a regulator of the nascent payments ecosystem in India has not yet perfected its approach. Case in point, the data localization circular of April 6, 2018, requiring all payments related data to be stored in India. The issue here is not so much that that the RBI has brought out data localisation requirements in the first place. The issue has more to do with the manner in which the RBI has stonewalled any suggestions or legitimate requests for exemptions here. This is uncharacteristic of an institution that is known to invite views of interested parties. Stances such as this may provide fodder to justify the need for a PRB.
The recommendation for an independent PRB is definitely a bold one, considering banking and payment regulatory functions are typically housed within a single regulator in most countries. Notable exceptions are Australia, the United Kingdom, and South Africa.
The Australian model in particular seems to have inspired the composition of the independent PRB. In Australia, the Reserve Bank of Australia (RBA), as the central bank, is responsible for monetary and economic policy, much like the RBI in India. However, there also exists an independent regulator for payment systems - The Payments Systems Board (PSB) - the Australian equivalent to the PRB in the PSS Report. The PSB is composed of representatives from the RBA, and other members (including those appointed by the government). However, while the PSB is a separate independent body regulating payment systems, it is important to note that the governor of the RBA is also the governor of the PSB, and has the final authority to decide on questions of inconsistency of policy of the RBA and the PSB.
The key difference between the Australian and Indian models is this - the governor of the Indian Payments Regulatory Board here, would be appointed by the government, in consultation with the RBI. While RBI would have a consultative role here, this does not necessarily mean that the government would be required to take the RBIs views into account. Also, the governor of the RBI may not head the PRB, as in Australia. This was, of course, a point of dissent from the RBI.
The other two examples the PSS report relies on, are the UK and the South African models. The UK created a separate regulator under the ambit of the Financial Conduct Authority, the payment systems regulator which regulates payment systems independently, while cooperating with other regulators such as the Bank of England and the Prudential Regulation Authority, and the Financial Conduct Authority from time to time. In South Africa, the South African Reserve Bank too has recognized a separate body – the Payments Association of South Africa, which governs payments systems in the country. However, this too is under the oversight of the South African Reserve Bank as the central bank of the country.
Can a middle ground be explored here? A tweak in the composition of the PRB, in line with the RBI’s suggestions, to ensure the chairman of the PRB is appointed by the RBI and has a casting vote may ease the conflict here. The PRB with its whole-time members along with the government and RBI nominees could be a good bet for innovation since it would have expert members who would be better placed to deal with and facilitate the extent of innovation we expect to see in this space. It would have the ability (and, depending on the composition, the expertise) to evaluate and regulate the Payments space without formally needing to balance any other interest, while the RBI would have the final say in matters in case there is a conflict between the policies of the RBI and the PRB, to protect the stability of payment systems and consumer interest.
One can never fully comprehend or compare regulatory models unless one has experienced both versions. The experience in one country (with a different economic and regulatory structure) may not necessary translate with equal success to a country like India. What we ultimately need is a regulator who is proactive, encourages and tries best to accommodate interests of participants, especially when the industry is in its teething stage. The rolling out of regulatory sandboxes as promised would, for example, be one way of demonstrating the regulator’s willingness to foster innovation and help the industry grow.
Most importantly though, this debate must be kept alive and these issues discussed thoroughly. Let this not be swept under the rug in anticipation of the impending general elections.
Vishnu Nair is partner and Akshit Goyal is associate, J Sagar Associates. Views are personal.
