Why India's move to diversify its digital payment system is good news for Amazon and Google

The country's move to establish alternatives to the retail digital payment network run by RBI will help private companies tap into India's booming payments market

In this photo taken on April 16 2020 37-year-old school teacher Dashmi Mohan, a registered volunteer with the Karnataka government 'Carona Warrior' programme, uses her mobile phone to pay for medicines at a pharmacy she bought to deliver to elderly and physically challenged residents during the government-imposed lockdown as a preventive measure against the spread of the COVID-19 coronavirus in Bangalore. (Photo by Manjunath Kiran / AFP)
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India’s move to diversify its digital payment system presents a massive opportunity for technology giants such as Amazon, Facebook and Google, who are keen to tap the country's rapidly expanding market.

The Reserve Bank of India (RBI), the country’s central bank, invited companies last year to apply to establish alternatives to the retail digital payment network run by the government-operated National Payments Corporation of India (NPCI).

The move is expected to reduce the country's dependence on one network and mitigate risks. It can also help companies looking to gain a foothold in India’s burgeoning digital payments industry, analysts say.

“It's a welcome move, as it opens up the possibility of additional standards that could potentially deepen digital payments penetration,” says Utkarsh Sinha, the managing director of Bexley Advisors, an investment advisory firm based in Mumbai.

Digital has become an all-pervasive mega-trend, dramatically changing the lives of individuals, business models of enterprises, and the economy of India

India's digital payments market has been expanding rapidly in recent years and is projected to more than triple to 7,092 trillion rupees ($97.5tn) by 2025 from the 2020 financial year, according to RedSeer Consulting. It attributes this trend to the country's young population and rapidly rising smartphone ownership. Government policies have a role to play too, as Prime Minister Narendra Modi pushes for a digital economy.

The Covid-19 pandemic has helped accelerate digital payments in India, particularly after Asia’s third-largest economy was placed into lockdown last year to stem the spread of the pandemic, according to a PwC report.

"Digital has become an all-pervasive mega-trend, dramatically changing the lives of individuals, business models of enterprises, and the economy of India," says Nitin Seth, the author of Winning in the Digital Age.

Currently, digital payments are processed by the NPCI that was established in 2008 by the RBI as a not for profit company to operate the retail payments and settlement systems in the country. It is backed by dozens of retail banks.

The NPCI runs the Unified Payments Interface (UPI), launched five years ago. Users link their mobile phone numbers to their bank accounts through this system and they can easily transact online on retail platforms such as Amazon and through apps such as Paytm to pay online.

In total, 31.7tn rupees of transactions were processed on NPCI's payments interface between April 2020 and January 2021, and it handled about half of India's 41 billion online retail transactions, according to data from Bloomberg. Currently, there is no alternative to the UPI system, but that is set to change with the government’s move.

As digital payment volumes boom, authorities and businesses are concerned that dependence on one system could make it more challenging to manage risks such as cyber fraud. That prompted the RBI to open up the market to other firms to set up for-profit retail payment systems, under what it refers to as “new umbrella entities”.

“There should be more than one faster payments platform in a large country like India,” says Ajay Adiseshann, the founder and chief executive of PayMate, an Indian payments solutions firm. “NPCI has had a monopoly with UPI and that is not healthy.”

“A sole institution like NPCI can be a systematic risk to the payment system of the country,” says Suresh Rajagopalan, the chief executive of Wibmo, a digital payments company based in the US and Bangalore, India.

Mr Adiseshann says new payment systems could also help “foster innovation beyond certain types of payments”, which can be achieved by allowing companies to operate commercially in this space, as the RBI is planning to do.

Under the central bank's rules, foreign companies can only own up to 25 per cent of a new umbrella entity.

At least six groups have been formed to try for the licences, according to Bloomberg. These include a consortium of companies including Amazon, Visa, and Indian banks ICICI and Axis. Mastercard is also planning to apply for a licence along with Indian conglomerate Tata, according to Bloomberg.

India's richest man Mukesh Ambani's Reliance Industries has teamed up with Facebook and Google – which last year both invested billions of dollars into Reliance's digital services company Jio Platforms. Meanwhile, home grown electronic payments giant Paytm and ride-hailing app Ola are understood to have joined forces to apply for a licence.

Google Pay, Amazon Pay, and Facebook-owned WhatsApp Payments are all available in India, but they all currently depend on the UPI system for their transactions to be processed.

Google and Amazon did not respond to requests for comment. A Facebook spokesperson said the company would not comment on the matter.

Competition will be stiff as the RBI is only expected to award one or two licences. The deadline to apply is the end of this month and industry insiders say the initiative has the potential to transform the sector.

Mr Rajagopalan says the new umbrella entities could bring many deep-pocketed players who can “accelerate the Digital India mission in tier two and three centres [smaller towns and cities] where digital payments are burgeoning post-Covid”.

A sole institution like NPCI can be a systematic risk to the payment system of the country

The RBI, when it first invited companies last year, said that the scope of activities of an umbrella entity – alongside operating new payment systems in the retail space in India - would include “identifying and managing relevant risks such as settlement, credit, liquidity and operational and preserve the integrity of the system” and “monitoring retail payment system developments and related issues in the country and internationally to avoid shocks, frauds and contagions that may adversely affect the system or the economy in general”.

The new licensees would also be expected to work on areas such as enhancing awareness about the payment systems, the RBI said.

With the creation of new entities, “payment industry players can leverage their existing payment platforms and infrastructure to set up new payment methods, partner with payment aggregators, and expand their footprint among competitors”, according to the PwC report.

But analysts point out that implementation will be a challenge and it remains to be seen how things pan out for those that win a licence.

“One must celebrate with caution,” Mr Sinha says. “The existing standards are working well and UPI is perhaps one of the best systems available globally. We have seen in the past how companies rush to adopt newer RBI licences, but little adoption happens on ground causing the licences to languish.”

An Indian shopkeeper receives payment by Paytm mobile phone technology a at stationery shop in Bhopal. EPA
An Indian shopkeeper receives payment by Paytm mobile phone technology a at stationery shop in Bhopal. EPA

However, there could be significant rewards for those companies that do action this effectively once they win a licence.

“What gives this particular licence more teeth” is the fact that it also allows the new licensees to set up and operate ATMs, point-of-sale systems and remittance services, alongside a digital payments interface, Mr Sinha says.

While companies will be able to make money from transaction fees, it is the data from electronic transactions that “represents the real value”, he adds.

Customers could also stand to benefit from having more choice and the platforms may offer incentives to vendors as they compete to grab their share of the market. But they will have to wait a while for the new systems to get up and running.

The RBI said that it is aiming to complete the processing of the applications it receives within six months.

The central bank is likely to assess “the pedigree of the entities, track record of management, usual financial metrics, and in this case payments experience and track record” before awarding the licences, Mr Adiseshann says. That would mean stalwarts such as Amazon, Google or Facebook indeed stand a chance to tap into India’s digital payment sector.