India's payments 'umbrella' could provide uneven cover

The payment and e-commerce brands that have poured billions of dollars into India may not get the payoff they were expecting.

Four groups of tech and payment firms are competing for the first licenses the Reserve Bank of India will grant to offer a variety of revenue-generating financial services without having to access the government's United Payments Interface (UPI) rails. The application deadline is March 31 and a decision will come later this year with any launches expected in 2022.

The companies that win licenses would gain control over enrollment and leverage in negotiations for payment partnerships, such as integrations with companies without the proper licenses.

India is working to set up new umbrella entities (NUEs), which will process and settle retail payments domestically, operate ATM networks, sell white-label point of sale systems, offer payment services tied to India's national ID system, and process remittances. License holders, which will likely be a coalition of companies, will be responsible for risk management but will be able to directly enroll users and collect fees.

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There are at least four groups vying for licenses, according to Indian Express, Business Insider and other local media sources, which report India has become concerned about the concentration of risk in UPI and wants other options.

Amazon, Visa and Indian banks ICICI and Axis are one group; Facebook, Google and Reliance Industries are another. A third group includes local Indian firm Paytm, which is backed by Softbank; and ride-sharing company Ola plus a group of fintechs.

A fourth group comprises Tata Group, Mastercard, Bharti Airtel and Indian banks Kotak Mahindra and HDFC Bank. The presence of a telco could enable mobile money apps, which have been successful for years in bringing new people into the financial system.

"Mobile money is an economic game changer in developing markets, as shown in the radical restructuring of commerce and payments in Kenya, Zimbabwe and Ghana, among others," said Thad Peterson, a senior analyst at Aite Group. "Moving from cash to mobile digital payments makes commerce safer and enables remote transactions that can’t easily be done with cash."

The stakes are high for many of these companies, which have pledged billions of dollars in investments to set up markets in India, which is a greenfield in a variety of ways.

UPI transaction volume grew more than 100% in 2020 following years of even larger growth by percentage.

Yet India has upside, since there's still a high amount of cash usage and more than 760 million smartphones, according to Statista. India also has a low per-capita usage rate for real-time payments, according to SPGlobal, suggesting more adoption of real-time payments is ahead as the pandemic and subsequent economic recovery push more merchants and consumers to e-commerce.

Mastercard for years has invested in India, operating innovation labs and investing in shopping technology. Visa has made similar investments and recently partnered with Open to expand small-business banking in India. Amazon has been very aggressive in India, patenting mobile authentication, pushing its payment app and developing an online pharmacy as part of a broader $6.5 billion investment.

Despite regulatory pushback against crypto, Facebook has invested nearly $6 billion in Reliance Industry's digital arm, giving the social network a lane to build e-commerce share in India. And while Google Pay has a dominant share of UPI transactions, Google has also had disputes with the government over registration rules and could benefit from having its own rail.

By granting licenses, India maintains control over how outside firms access its domestic market.

While not as restrictive as China, which for years has changed requirements and issued partial approvals for outside firms seeking to process payments domestically, India still poses barriers. Visa and Mastercard have made investments in local data storage to comply with India's tough regulations, despite Mastercard's contention that these rules stifle innovation and create security risk. India has also pushed a near-ban on cryptocurrency, posing a barrier to projects such as the Facebook-affiliated Diem.

But India's isolationism poses challenges to that innovation and is a potential threat to private-sector investment. Writing for PaymentsSource, Eric Grover, a principal at Intrepid Ventures, argues India's regulatory stance, which often leans toward favoring government-operated payment networks, costs the country the expertise and competition from external sources. "Indian consumers and businesses would be best served if [the government] confined itself to discrete interventions to reduce structural barriers to payments competition," Grover wrote.

Competition would force UPI to innovate and would introduce more payment options for Indian consumers and merchants.

"The bank-run UPI has accelerated digital commerce activity and adding a strong competitor or two will help to keep the space competitive, encourage innovation and continue to drive adoption," Peterson said, adding it will be vital to ensure the umbrella firms and the government systems can work together. "It’s great to have strong competition but after the new players achieve scale, the ability to send funds from one platform to another will be critical for the next stage of growth in India."