What PhonePe-ICICI Bank row shows: India needs a quick-footed fintech regulator

It was a thing waiting to happen, given the unseemly haste with which the NDA government was pushing cashless transactions after its 8 November demonetisation push. But events over the past week suggest that we need a strong regulator for financial technology -- and one that acts quick, is endowed with effective processes and is blessed with clarity.

A tussle between ICICI Bank and PhonePe, the mobile payments app championed by online retailer Flipkart, has reached a regulatory logjam with PhonePe refusing to acknowledge a call from the National Payments Corporation of India (NPCI) that it fell short of regulatory guidelines, which resulted in ICICI Bank blocking its transactions. With PhonePe questioning the legal jurisdiction of NPCI the ball is effectively in the court of the Reserve Bank of India.

The question: is RBI ready enough to police or regulate the issue? On the face of it, it seems not.

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NPCI has developed a technological platform that enables customers to transfer money across banks. Mobile apps essentially are like retail financial shops that are in turn connected to bank accounts or credit card accounts.

Last week, NPCI asked ICICI Bank to reverse its decision to block transactions from Flipkart on the Unified Payments Interface, only to go on reverse gear later, in effect acknowledging ICICI Bank's case that PhonePe did not conform to guidelines. ICICI Bank's case is that Flipkart's bosses effectively created a closed loop that violated interoperability guidelines.

The problem is that NPCI is basically a security guard of sorts --- whose job is like a watchman who allows in people if they are found safe. While guards do have their rights, they are limited. They are not exactly judges.

The scene bears a striking resemblance to disputes between telecom operators -- and that should not surprise us, because electronic money is nothing but pieces of data carrying assurance of underlying value.

In the digital cash, however, unlike in the case of currency notes that automatically bears the stamp of RBI, there are elements that need to be sorted out fast. The PhonePe situation is akin to somebody refusing to recognise a currency note in a shop because it looks like a counterfeit or a "private currency."

The RBI has provided guidelines for e-wallets but it is a small part of its activity, as of now. That has to change. The pace with which rival brands are promoting mobile payment apps, and with banks themselves having proprietary e-wallet apps, there are issues related to business rivalry and conflict of interest that in effect call for quick regulation.

ICICI Bank refusing to acknowledge PhonePe transactions is like Airtel or Vodafone not taking calls from Reliance Jio, on which the Telecom Regulatory Authority of India (TRAI) last year ordered fine on telecom operators.

Now, the difference is that financial transactions cannot be under TRAI but we need the equivalent of a TRAI now. NPCI clearly falls short, while RBI, from all accounts, is a slow body rooted in age-old bureaucratic practices. The real-time financial economy needs a better alternative.

In appointing IIT-educated financial expert Viral Acharya as deputy governor, the RBI recently recognised the emerging significance of financial technologies. Ahead of that last year, it also set up a working group on financial technology and regulation .

We don't quite know what the group has done, and we are staring into a real problem. Last month, speaking at the Vibrant Gujarat summit, RBI governor Urjit Patel said there was a need for a unified regulator for international financial service centres. That may be desirable, but the more urgent need is to ensure a level-playing field and clear rules of engagement in the domestic market as wannabe brands and entrenched banks fight to gain market shares in the emerging digital payments game.

The Flipkart-PhonePe dispute with ICICI Bank has significance because digital payments sit at the intersection of e-commerce and data science, with profound implications on everything from privacy to security and fairplay.

Dr Patel now has on hand a task more urgent than he might like to believe.

(The author is a senior journalist. He tweets as @madversity)


Updated Date: Jan 23, 2017 12:33 PM

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