Competition concerns in digital finance services in India Amol Kulkarni CUTS International 10 October

Contents Prevailing scenario in digital finance services Some perceptible policy distortions to competition Some perceptible practice distortions to competition Possible implications of competition distortions Way forward to address competition concerns 2

Prevailing scenario in digital finance services Use of technology (mobile phones, internet etc) has become imperative for enabling access and use of financial services. Digital finance services were introduced in India in 2007 but failed to take-off (Evans and Pirchio, 2015). Renewed efforts are being made now. Policy level push: Jan Dhan-Aadhar-Mobile trinity; Rupay cards. However, Supreme Court order on use of Aadhar. Regulatory push (TRAI and RBI): Payments and small banks, guidelines on mobile banking, prepaid payment instruments (PPIs), and business correspondents (BC), pricing and quality of service regulations 3

Prevailing scenario in digital finance services (contd.) Public sector: Public sector banks in PMJDY, National Payments Corporation of India (central switch and payments infrastructure), Bharat Bill Payment System, Indiapost, SBI Private sector: Airtel money, Reliance, digital wallets (Paytm), corporate business correspondents (Eko, Fino) etc 4

Optimal competition needed to foster adoption of innovative and affordable services (Brookings, 2015) 5

Some perceptible policy distortions to competition (entry) PPIs (smart cards, wallets, vouchers): Non-banks cannot issue open system PPIs (lack of competitive neutrality), thus cannot facilitate cash out. Only Indian companies can be granted license to issue PPIs (entry barrier). Only banks are permitted to issue PPIs to i) government organisations for onward issuance to beneficiaries; ii) financial institutions for credit of one- time/ periodic payments etc. Payments banks: Public sector entities were independently eligible to apply for license. 6

Some perceptible policy distortions to competition (operations) PPIs: KYC/AML/CFT norms for banks applicable to all PPI issuers. PPI issuers cannot pay interest to customers. Payments banks: Requirement to park funds in safe short term government securities. Requirement of having a controlling office for a cluster of access points. BCs (agents): Customer facing BCs need to be exclusive (exclusive agreement), unless conditions with respect to technology, operating procedures are met. Policy level push. e.g. Jan Dhan-Aadhar-Mobile trinity; Rupay cards. However, Supreme Court order on use of Aadhar. Regulatory push (TRAI and RBI). e.g. Payments and small banks, guidelines on mobile banking, prepaid instruments, and business correspondents, pricing and quality of service regulations 7

Some perceptible practice distortions to competition Exclusive arrangements with BC network managers and customer facing BCs (Microsave, 2012). Lack of interoperability between payment instruments like cards, wallets, mobile numbers, bank accounts (NPCI, 2015). Only Rupay cards attached to PMJDY accounts, and pushed by PSBs. Exclusive arrangements with merchants and customers. Regional Rural Banks and District Central Co-operative Banks not equipped to enable interoperability (Mor Committee, 2013). 8

Possible impact of competition distortions Customers: Inadequate disclosures by agents (Helix India, 2015) and limited guidance on data protection/ sharing, interest payments etc, for payment banks. Complex process to access and use services (Helix Bangladesh, 2015) Sub-optimal quality, hidden costs, inadequate grievance redress. BCs: Limited avenues to generate revenue (Helix Pakistan, 2015). Increase in competition needs to be coupled with higher liquidity, better network and technology (Schiff, 2015). Visibility, risk management and accountability concerns when BC sharing allowed (Helix Bangladesh, 2015) 9

Possible impact of competition distortions (contd.) Regulators: Burden increases, need to create conditions to facilitate competition. Need to ensure regulatory coordination. Technical, human, financial and information constraints. Merchants: Hidden charges and high investment requirements. Market players: Exclusive arrangements increase cost of doing business. 10

Way forward to address competition concerns (policy) Regulations should allow technology enabled business models to emerge, while balancing interest of consumers (CGAP/ BFA, 2012) Regulations must estimate impact on different stakeholders. Stakeholder consultation, comparison of alternatives is key. Adoption of regulatory impact assessment and competition impact assessment necessary. National Competition Policy needed to ensure regulatory coordination, address implementation and capacity concerns. Periodic evaluation of regulations and sunset clauses needed to track progress. 11

Way forward to address competition concerns (stakeholders) Consumers: Empowering with information, suitability tests and grievance redress mechanisms. Regulators: Addressing financial, technical, information and human capacity constraints. Facilitating greater co-ordination. Market players: Disseminating the benefits of competition and achieving balance between competing interests. Learning for experiences and evidence from similar markets 12

THANK YOU & 13