Last week’s Reserve Bank of India (RBI) guidelines on interoperability of prepaid payment instruments (PPIs) was a much-awaited step under the revised PPI road map announced in December 2017. Individuals can now freely move money from a know-your-customer (KYC)-compliant digital wallet offered by one company to those run by another and, eventually, to bank accounts.
This move will strongly benefit consumers, allowing them to seamlessly transfer money between different instruments, rather than be locked into a particular provider. It will also expand the digitization of small-value person-to-merchant transactions such as taxi rides and grocery purchases. However, we also need to carefully consider the long-term implications of the move.
Firstly, interoperability will accelerate wallet companies’ move towards alternative sources of revenue. Some wallets have started focussing on revenues from multiple sources such as e-commerce, bill payments, insurance, wealth management and lending. Payments has, therefore, become the trojan horse that brings in customers and data, but not necessarily revenue.
Secondly, it can increase customer loyalty to a particular service provider. Interoperability reduces the wallet players’ ability to rely on network effects for user retention.
However, it can make the wallet ‘sticky’ by reducing a consumer’s incentive to switch to another provider. Over time, the wallet can become the one-stop shop for a wide range of digital transactions. This can be used to build a detailed profile of the individual and advertise other services such as merchandise, tickets, loans, etc. Payment interoperability, without data portability, can therefore strengthen the larger players.
Thirdly, it will bring millions of new customers online. Economically speaking, the growth efforts of various digital payments players will now be ‘strategic complements’ – i.e. growth by any one firm will benefit the others as well. The industry will move towards a low-margin environment, directly benefitting millions of customers. However, under-investment in service quality, and potentially data security, are possible unintended consequences of such competition. The National Payments Corp. of India (NPCI) will constantly need to evolve and grow the unified payments interface (UPI) platform in response to India’s burgeoning digital payments demand.
Finally, more digital transactions will create increasing amounts of data. Digital payments firms will seek to capture the data to create accurate profiles of individuals. An individual’s financial data is among her most sensitive information, since it can be used to deduce her income, tastes and activities. Therefore, regulation around the collection and usage of data is urgently required to protect individuals.
None of this takes away from the timeliness and benefits of the new guidelines. Regulators need to monitor the long-term consequences, so that individuals are protected and empowered in the days to come.
RBI will need to work closely with NPCI and the proposed data protection authority to achieve this.
Subhashish Bhadra is an investment principal at Omidyar Network.