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From 1 October, the Reserve Bank of India’s new rules that govern auto-debit of pre-decided amounts from consumers’ bank accounts kicked in. It plunged millions of people into a web of chaos as their seamless payments for digital products and services came to a grinding halt. They now must manually renew all their subscription-based services such phone bills, OTT services, systematic investment plans, and digital news content. The RBI’s decision to go ahead with the rules, despite the apparent non-readiness of the retail payments ecosystem, came after a series of measures that were liberal in nature.

In an August 2019 circular, the central bank allowed recurring payments of up to Rs 2,000 on debit cards, credit cards, prepaid payment instruments and wallets. In January 2020, it extended this facility to Unified Payments Interface (UPI)-based transactions and, in December that year, it increased the cap from Rs 2,000 to 5,000 for all recurring payments. All these regulations were subject to certain conditions, which essentially gave consumers greater control over their transactions, ensuring their security without compromising on convenience. For instance, banks would have to send consumers a notification about a transaction before and after it has occurred, via SMS or email. Consumers were also empowered to stop any recurring payment at any point in time.

A key aspect of these conditions is that they must be enabled by consumers’ banks — or “issuers” as the RBI calls them. However, it is merchants who possess critical information such as billing cycles that banks are unaware of. Therefore, there’s a need for the lenders to build in new technology infrastructure which supports information sharing by merchants.

In March this year, the RBI had agreed to delay the implementation of its current regulations till the end of September. At the time, none of the banks were technologically ready to implement these changes. Even today, only about four of the 34 scheduled commercial banks are ready to make the transition. These include HDFC, Bank, Axis Bank, Kotak Mahindra and Bank of Baroda. However, in this regulatory confusion, it is consumer welfare that has suffered the most and it is worth examining how such situations can be addressed in future. Especially since there are other retail payments regulations that are on the anvil.


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Merchants, banks and the RBI: In it together

Today, merchants that sell their products and services online are firmly embedded in people’s everyday lives. Be it phone bills, internet bills, OTT services, and even utility bills, consumers subscribe to or pay for all of them online.  It is these businesses that are directly in touch with consumers, unlike banks who remain behind-the-scenes of online transactions. If merchants are unable to provide top notch and seamless quality of services to consumers, there will be tangible repercussions on value creation in digital markets and consumer welfare will be dented. Even the Watal Committee and the Nandan Nilekani Committee, formed in 2016 and 2019 respectively, to study the digital payments ecosystem in India, highlighted the importance of recurring transactions in their reports. The fact is, that countries like China and the US, have achieved their digital might on the back of efficient retail payment architectures.

However, unlike banks, merchants are not regulated by the RBI. Therefore, the central bank is as inclined to hear them out as Rahul Gandhi is to listen to Amarinder Singh complain about Navjot Singh Sidhu. As a result, there is a friction-filled status quo which suits the banks just fine. Ultimately, banks are in the business of storing customers’ deposits, but merchants benefit only from the movement of money. This was the main tug-of-war between banks and financial technology companies in the previous two decades, which, to some extent, continues to linger on.

What banks and the RBI need to realise is this: financial technology is worthless if consumers don’t use it frequently – be it OTT subscriptions, phone bills or insurance premiums. In fact, the non-readiness of banks to carry out RBI’s mandate has also impacted businesses such as ours, that rely on cloud infrastructure paid for in recurring, monthly installments. Therefore, recurring payments are important – to keep the engines of a digital economy running smoothly. Above all, they are in the best interests of consumers.


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How could this have been handled better

To be fair to the RBI, it is one of the most progressive regulators in India and its constitution of the Regulations Review Authority (RRA 2.0) is proof of it. The RRA’s mandate is “to make regulatory and supervisory instructions more effective by removing redundancies and duplications,” according to its own press releaseIt shows an agility on RBI’s part and a willingness to learn from its mistakes. After all, nobody forced the RBI to adopt this best practice.

Going forward, the RBI needs to do three things.

First, it should conduct an impact assessment of its regulations just like the European Union did before implementing its Payment Service Directive (PSD 2), an oft cited best-in-class regulatory framework for retail payments. The PSD 2 was preceded by a comprehensive impact assessment study by the European Commission to identify regulatory gaps and challenges and recommend regulatory/policy responses. These were evaluated based on their efficiency and effectiveness, as well as their impact, on key stakeholders, including consumers and merchants. Even in the extant case, after the rules have come into effect, the central bank can commission an impact assessment study to see if at all they were effective.

Second, the RBI could be more inclusive in its consultations to include every business that has a digital footprint. Digital markets represent an interconnected paradigm by design and it is unfair to exclude new businesses from any form of consultation on regulations  that directly impact them. Part of the central bank’s raison d’être to regulate banks and fintechs, is to ensure that markets grow in an orderly manner. That won’t happen if all digital market participants don’t get an equal voice.

Finally, the abrupt halt of recurring payments came as a surprise to consumers. There was scant media attention paid to the issue prior to 1 October and organised consumer groups too were caught unaware. The RBI should work with merchants to raise awareness about regulations that directly affect consumers. The recent constitution of groups like the Merchant Payments Alliance of India (MPAI), suggests that these market participants are more than willing to take the lead to engage with the regulator to ensure the twin objectives of market growth and consumer welfare are achieved. Now the ball is in the RBI’s court.

The authors work at Koan Advisory Group, a technology policy consulting firm. Disclosure: Koan Advisory serves as the secretariat for the MPAI. Views are personal.

This article is part of ThePrint-Koan Advisory series that analyses emerging policies, laws and regulations in India’s technology sector. Read all the articles here.

(Edited by Anurag Chaubey)

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