The reason we are talking about the RBI today is because of something that happened last week. Back in 2019, the RBI issued a notification for processing recurring payments on payment instruments. You know, the kind that you use to make purchases, pay your bills, and manage subscriptions. After this, it asked the banks to implement them, and told them to do it before 1 April 2021. 

By all accounts, the banks tried their best, but there’s a problem. Recurring payments is not a new payment instrument; it’s been around for a while, and entire international banking systems and merchants have built themselves around existing standards and practices. It’s not that easy to just throw it all out and overhaul it. And that was before Covid hit us. 

So the banks went back to the RBI and said, look we aren’t ready, please give us some more time. And the RBI thought about it, and said...no. 

Recurring payments are not just used to purchase subscriptions for Netflix and The Ken. An entire financial system consisting of small, micro and medium businesses are built on this, who use it to pay bills, utilities and collect payments. By one estimate, the payment volume for this in April, for consumers and businesses was around Rs 2000 crore. 

And the RBI was saying: not ready? Don’t care. Let it burn. 

So banks started sending out notifications to their customers informing them that their recurring transactions and subscriptions would fail from 1 April. So if businesses needed to continue paying their bills and accessing subscriptions, they’d need to go and do it manually every month. 

Then finally, 8 hours before the recurring bomb was set to detonate, the RBI came in and hit the pause button. It allowed banks to continue to process recurring payments, and gave them six months to implement these changes. After this, the RBI released a letter. Here’s what it said. 

There are two things worth noting here. The first is that it’s completely unclear to me what the RBI is trying to solve in the first place. Presumably it’s to reduce fraud, but it’s unclear how big of a problem is this in the first place. Surely it cannot be more than a few crores—a relatively minuscule number in the larger scheme of things. 

The second thing to note is the tone of the letter from the RBI. Just look at this line, for instance. 

It is, however, noted that the framework has not been fully implemented even after the extended timeline. This non-compliance is noted with serious concern and will be dealt with separately.

Forget the fact that India’s national financial regulator is treating banks the same way parents tell their misbehaving children in public to ‘wait till we get home’. Forget the fact that it’s India’s bull-headed insistence to make recurring payments as difficult as possible that’s historically made tech companies stay away from India. Fine. Forget all that. 

Instead, let’s ask, what exactly is the RBI’s strategy to regulate the financial tech industry? 

Well, let’s see what they did in the past. 

The UPI catalyst

You know the story. It’s 2016. Cash is demonetised. And the big bet now is the United Payments Interface (UPI). 

The UPI was developed by this entity called the National Payments Corporation of India (NPCI)—an organisation that’s owned by a consortium of banks and initiated by the RBI.

When cash became briefly illegal, the NPCI decided to go all in on the UPI as a way to promote digital payments. It wanted banks to build out apps for their customers to support transactions on UPI. But there were a few problems: 

1. Banks weren’t too thrilled to get into UPI because they had other mechanisms which they offered to customers to help transfer money.
2. UPI would cannibalise the banks’ existing business of collecting transaction fees through debit cards and credit cards at PoS (Point of Sale) terminals.
3. Banks had no idea how to build apps. 

Some banks reluctantly built UPI apps, but they were buggy and barely used. The only company that has invested time and effort to building a beautiful and functional UPI app was this small company called PhonePe. PhonePe wasn’t a company with a banking DNA. It emerged out of Flipkart. It had a tech DNA. 

But after demonetisation, the NPCI was desperate to get widespread adoption for the UPI. 

So it created its own with a company called Juspay. It was called Bharat Interface for Money—BHIM, for short. It then ensured it got the best marketing any app could get—a public, personal endorsement from the Prime Minister of India, Narendra Modi, who, at the height of demonetisation, went on air and told millions of Indians to download and use BHIM for payments.

They did. And because banks never really built a UPI app very well, and because UPI was interoperable—meaning one could use any app to transfer money regardless of the bank—slowly, banks started becoming less powerful and relevant. 

So, let’s recap. 

A new financial interface emerges. Existing participants are unwilling to adopt it. So the banking regulator which had created an entity that’s owned by the banks themselves, creates a competing app, which eventually makes the bank offering into a commodity. 

Just think about it for a moment. 

The Wallet Destruction 

In 2019, UPI usage was soaring. Many fintech companies were in UPI—like Google, PhonePe, and others. So the RBI decided to do something else.

This time, it decided to take on wallets.

Vaibhav Kakkar and Puneeth Nagaraj are lawyers from the firm L&L Partners. Here’s what they wrote in an opinion column for BloombergQuint back in 2019 about wallets. 

They were right. The sector never recovered. 

That was wallets. Then there were debit cards.

RuPay was pulled...until it was pushed

Imagine building another card network to take on Visa and Mastercard. That’s what RuPay was supposed to be. It was promoted extensively by the NCPI, but still, adoption was low. So what did the RBI do?

It slashed the Merchant Discount Rate (MDR) for RuPay debit cards to zero. 

RuPay was created because the RBI believes that Visa and Mastercard, thanks to their stringent guidelines, were not making enough small cooperative banks digital. But by making the MDR zero, it effectively made RuPay into a cost instead of a revenue stream for banks.

This helped Visa and Mastercard. 

Until they found themselves threatened by UPI. 

So the RBI decided, hey, maybe it’s time to rein in UPI. 

UPI and NPCI get competition 

To make things more interesting in the fintech space, the RBI decides to create entities called NUEs (New Umbrella Entities) as competitors to NPCI. 

And who gets to create these NUEs? Well, here are the applicants. 

Just so you’ve understood this correctly, the RBI has created these NUEs—which are formed by banks and financial consortiums to compete with the NPCI—another entity owned by the RBI and banks, actively crafting interventions that don’t benefit said banks. 

Phew. 

I need to lie down. 

What does this tell us about the RBI’s approach to regulation? 

One thing that’s clear is that the RBI is not just a regulator, crafting and tweaking laws and guidelines to enable the market to figure it out. It has created entities like the NPCI, which does not hesitate to create apps, or set up entities like the NUEs or slash rates to benefit and push things it wants to push. It adds cards to the Community Chest that didn’t exist earlier. It changes how the game is played. And once in a while, it adds a new piece on the board. 

Sometimes, this works out well — like in the creation and proliferation of UPI. 

Sometimes, the changes to these rules are random and even disruptive — like a regulation to modify recurring payments as it exists.

In one sense, the RBI is playing Monopoly.

Another thing that’s clear is that the RBI does not like clear dominant winners. If you start getting bigger, chances are the RBI is going to create something to contain your size.  That’s what happened with Visa and Mastercard, and with banks. It’s also happening with UPI, where the NPCI is placing limits on market shares of players. 

In another sense, the RBI is playing Prosperity. 

But mostly, it’s playing a variant that’s a mix of both. 

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