Indian Digital Payment Platforms vs Fintech Sector

Indian Digital Payment Platforms vs Fintech Sector

 GS-3: Indian Economy

(UPSC/State PSC)

Important for prelims exam:

Fintech, Indian digital payments platform, BHIM Unified Payments Interface (BHIM UPI), Reserve Bank of India (RBI), National Payments Corporation of India (NPCI), Phone Pay, Google Pay, Pippal app.

Important for Mains Exam:

Fintech Sector in India, Recommendations of the Standing Committee, Fraud Cases involving Foreign Fintech Companies, Challenges in Indian Digital Payment Platforms, Formal Efforts for Fintech Sector Regulation in India, Way Forward.

21 February 2024

Why in news:

In a recent report tabled in Parliament, the Standing Committee on Communications and Information Technology has raised concerns about the dominance of fintech apps owned by foreign entities in the Indian ecosystem and recommended that Indian digital payment platforms be promoted.

Key point:

  • The report mentions that Unified Payments Interface (UPI) achieved 73.5% share of total digital payments in terms of volume in FY 2022-23. However, its share by value was only 6.67% in the same period.

Recommendations of the Standing Committee:

  • The committee emphasized in the report that digital payment apps should be effectively regulated as the use of digital platforms to make payments is increasing in India.
  • It said it would be more 'viable' for regulatory bodies like the Reserve Bank of India (RBI) and National Payments Corporation of India (NPCI) to regulate local apps than foreign apps, which operate in multiple jurisdictions.
  • Fintech companies, apps and platforms owned by foreign entities like Walmart-backed Phone Pay and Google Pay that dominate the Indian Fintech sector need to be controlled.

Share of foreign Fintech and Indian Fintech sector in Indian market:

  • Between October to November 2023, the market share of PhonePe (highest market share) in terms of volume, and Google Pay was 46.91% and 36.39% respectively.
  • On the other hand, NCPI's BHIM UPI market share (in terms of volume) was only 0.22%.
  • NPCI data in December, 2023 shows that a total of 5,642.66 million transactions were initiated by customers using PhonePe, while another 4,375 million used Google Pay and only 24.30 million used BHIM.

Fraud cases related to foreign Fintech companies:

  • The committee found that Fintech companies were also being used for money laundering.
  • Example-Abu Dhabi based app named Pippal. This Chinese investment was being operated by scammers. It is difficult for Indian law enforcement agencies to investigate fraud cases related to this app.
  • The fraud to sales ratio, which represents the total number of fraudulent transactions compared to the total number of transactions in a financial year, has remained roughly around 0.0015%.
  • In the current financial year (till September 2023) this figure was 0.0016%. The percentage of users affected by UPI fraud was 0.0189%.

What is Fintech:

  • FinTech, a combination of the words “financial” and “technology,” refers to businesses that use technology to enhance or automate financial services and processes.

Challenges in Indian Digital Payment Platform:

Regulatory Challenges:

  • One of the key challenges in Indian digital payment platforms in India is the lack of a regulatory framework.
  • This sector is regulated by multiple authorities, which can lead to confusion and ambiguity.

Limited access to funding:

  • Many startups in India are struggling to secure funding to compete in the fintech industry.
  • This is due to the lack of understanding of the sector among traditional investors and the limited number of venture capital firms that focus on fintech startups.

Cyber Security Challenges:

  • With the increase in digital transactions, there is increasing concern about cyber security threats.
  • According to India's Computer Emergency Response Team (CERT-IN), more than 674,000 cyber security incidents occurred in the country in 2022.

Lack of awareness:

  • Many people in India are still unaware of the benefits of the services of Indian digital payment platforms.
  • Local companies need to work on increasing awareness of their offerings and the value they provide to customers.

Increase in competition from traditional banks:

  • Traditional banks are also expanding their digital offerings, creating intense competition for Indian digital payments platforms. Indian digital payments startups need to continuously innovate and offer unique solutions to differentiate themselves from traditional banks.

Lack of infrastructure:

  • Despite growth in the digital sector, India still lacks the necessary infrastructure to support Indian payment digital platform services.
  • Issues such as slow internet speeds, lack of interoperability and inadequate digital infrastructure may pose challenges to the growth of Indian payments digital platforms.

Formal efforts for Fintech sector regulation in India:

Payment and Settlement System Act(PSS Act),2007:

  • It issues guidelines prohibiting the establishment and operation of any 'payment system' in India without the prior approval of the RBI.

Peer-to-Peer Lending Platform Guidelines, 2017:

  • It defines lender exposure rules and lending restrictions with respect to the activities of P2P lending platforms in India.

National Payments Corporation of India (NCPI) Regulations:

  • NCPI regulates money transfer services using UPI platforms to banks.
  • NPCI acts as a Quasi regulator for UPI and RuPay.

NBFC Regulations:

  • All NBFCs are governed by the RBI Act 1934. As per RBI requirements, every organization providing Fintech services in India must be registered.

Working Group on Digital Lending 2021:

  • To study all aspects of digital lending activities by regulated and unregulated entities/players in the financial sector to regulate digital lending in India.

Cryptocurrency Regulations:

  • After the intervention of the Supreme Court, in the year 2021, the Reserve Bank of India (RBI) had issued some guidelines by removing the ban on trading of cryptocurrencies in India.

Regulatory Sandbox Framework:

  • The framework provides certain facilities to entities operating in the capital markets – banking, insurance and financial services sector for innovation towards Fintech solutions. These facilities will be strengthened with investor protection and risk mitigation features.
  • Way forward:
  •  A well-organized and efficient regulatory regime should be developed by the government to regulate the FinTech sector so as to promote Indian payment digital platforms.
  •  Indian payment digital platforms must strengthen reliable digital infrastructure to effectively provide their services. The government can invest in building a strong digital infrastructure, including better broadband connectivity and cloud computing services.
  •  There is a need to formulate strong cyber security policies to make the Indian payment digital platform widespread and effective.
  •  Usage of Indian payment digital platforms can be increased by increasing digital literacy.

Source: Indian Express, The Hindu

 

Mains Exam Question:

Discuss the way forward by reviewing formal efforts to address potential challenges posed by the foreign Fintech sector to Indian digital payment platforms.