India is charting its own course in the digital economy by redefining the market structure of some of its parts. A key aspect of the path that India has chosen is to build novel interfaces between systems that already exist and applications that can be developed on their basis, thereby opening up access to these systems. So far, the most ambitious efforts have been made in the field of payments, financial information, and e-commerce.
For opening up payments, the Unified Payments Interface (UPI) was developed and launched in 2016. UPI allows separation of the customer interface for payment from holding of the underlying account, so that an account with a bank can be transacted through third-party applications. This unbundling of the safekeeping of the money in an account from the making of payment from it is a major innovation that has allowed UPI to grow rapidly. This has made specialist application providers that focus on providing the payment service emerge.
For opening up financial information, the Account Aggregator (AA) framework has been initiated. Account aggregators can bring together a user’s financial information in one place, based on the consent of the user. Based on the user’s consent, it can also be shared with any other financial firm from which the user may be looking to get some service. This information can be useful for underwriting loans and other financial products that involve taking a risk on the consumer. It can also be useful for wealth management and advisory services.
More recently, to maximise the e-commerce reach, the Open Network for Digital Commerce (ONDC) is being developed. It is supposed to be an open-source network in which different buyers, sellers, logistics companies, payment providers, and others can participate. Even other e-commerce platforms can integrate with this network that requires data portability, so that participants on different platforms can transact with each other.
Each of these initiatives seeks to redefine the market structure for their respective sectors. Initiatives like UPI, AA, and ONDC can show that we need not settle for the existing traditional modes of payment for performing certain functions that can be performed by different forms, some of which may be better than the forms that already exist. For instance, UPI has shown that unbundled payments may work better than making payments dependent on the holder of the underlying account.
While these are promising initiatives, things can also go wrong. Perhaps the most important factor to consider is how state powers are being used to promote these innovations and whether this promotion might be creating distortions that can create problems later.
Consider UPI. In itself, it is a creditable innovation that has improved the experience of making payments. However, the government has also used coercion and banned any fees to be charged from customers or merchants for UPI transactions. It has also made it mandatory for businesses with more than Rs 500 million (about $6 million) annual sales to accept UPI payment, with a penalty to be enforced by the joint commissioner of income tax for each day of non-compliance. This was done in 2019 through an amendment to the Payment and Settlement Systems Act. The specific reasons for the need for this coercion were never given. UPI had been growing well even before these measures were announced. Further, as the experience of a similar system in Brazil, Pix, shows, such coercion is not required. Pix has done better than UPI without the use of comparable coercive measures.
In July this year, Finance Minister Nirmala Sitharaman instructed all public sector banks to onboard the Account Aggregator platform. Once implemented, this would mean that the banking transaction information for the consumers of all public sector banks would become available, subject to consent, to any other financial firm in the system. This suggests that the government is choosing an expansive mandate for the opening up of financial information. While this may appear beneficial, use of coercion and mandate must be justified. Only when a public policy concern like preservation of competition is being pursued, coercion may be justified. In the UK, for instance, open banking was introduced due to competition concerns, and therefore applied only to the largest banks and for their individual and small enterprise consumers. When the mandate is applied even to smaller banks, one has to wonder which principles the government is following, and whether it is going overboard. Otherwise, this can be seen as an unnecessary intervention into the working of markets.
Innovation and monopoly
Another issue worth considering is the consequence of only one organisation leading systemic innovation in a sector.
UPI is owned and operated by the National Payments Corporation of India (NPCI), which sets the rules for participation in the interface. Registered with the Reserve Bank of India (RBI) as a retail payments organisation, NPCI is owned by banks and payment service providers. Interestingly, RBI has not authorised any other entity as a retail payments organisation, even though a proposal for new umbrella entities was floated some time ago. In this case, the ban on charging fees has anyway weakened the commercial incentive to offer something similar to UPI.
ONDC is being developed by a non-profit company promoted by the Quality Council of India and Protean eGov Technologies Limited as initial promoters. From statements by senior leaders of the Narendra Modi government, it seems that the government is actively supporting this initiative. Here again, it would be worth considering how multiple competing organisations could be brought in to develop standards and pursue innovations.
The government should pursue public interest, which lies in better performance of functions. It should be neutral toward the organisations performing these functions and the forms deployed by them, and let the market pick the winner. If a monopoly is entrusted with innovation, sooner or later, it might hurt the pace of innovation. If state coercion is used to promote a particular innovation, other innovative solutions might not happen.
Since India is redefining these markets through these initiatives, it is all the more important to get them right not just as successful solutions but also as institutional and policy designs that can be emulated by others.
Suyash Rai is a deputy director and fellow at Carnegie India. Views are personal.
The article is part of a series examining the geopolitics of technology, which is the theme of Carnegie India’s seventh Global Technology Summit (29 November to 1 December), co-hosted with the Ministry of External Affairs. Click here to register. ThePrint is the digital partner. Read all articles here.
(Edited by Anurag Chaubey)