"There are some gifts only the RBI can deliver. For everything else, there's Santa."
– (reportedly) Santa
Merry Christmas Dear Reader,
We have a Christmas present for you: a sneak peek into Santa's inbox. Besides millions of gushing letters from Messi fans, we found many from fintech founders, and a lot of them read like this:
Re: Christmas Gift
Dear Santa,
I know I asked for the same gift last year, but things are different now. That gift isn't a want anymore, it's a need. Our partners say we don't offer much, and I think we may need to fly solo. So, I must ask you for this oddly specific gift, again – an NBFC license.
Yours expectantly,
Fintech Founder
The timing of these requests isn't a coincidence. The RBI's digital lending guidelines kicked in on November 30. The guidelines put the regulated entity (bank or NBFC which lends off its own books) at the centre. These entities call the shots and bear the burden of compliance – diminishing the role of the unregulated fintech players they partner with. For example, it's unclear if fintechs can offer their lending partners any loss default guarantee or assess borrower creditworthiness like they used to (lots of limits on data collection). Naturally, the value fintechs offer in the digital lending equation is now being questioned.
Which is why many fintechs want to lend off their own books; for which they need an NBFC license. This won't be easy. The RBI isn't keen on granting NBFC licenses to fintechs. Reportedly, this is because some of them have investors based in tax havens. Maybe that's why they'd like Santa's intervention. Or maybe they'd just love a Christmas miracle.
Okay, enough pining. Let's move on to this month's FinTales menu.
Main Course: deep dives into the e₹, and SEBI's plans to reign in finfluencers.
Dessert: sweet news about UPI, again.
Mints: a quick refresher on developments in the fintech-verse.
Takeaway: articles, TV shows, and documentaries to grab and go.
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Main Course🍱
💸The Rupee's new year resolution is to go digital. Does it need to?
The United States wants to 'get it right than to be first'. That's what Jerome Powell, US Federal Reserve's chairman said about the digital Dollar two years ago. The United States still doesn't have a central bank-backed digital currency (CBDC). Meanwhile in India, RBI just piloted the digital Rupee (e₹) for retail users (like you and me). And the finance minister has promised a full-scale launch by the end of this financial year (22-23).
If you're an e₹ novice, you can read this excellent explainer, or see an e₹ demo here. But if you don't want to take the detour, here's what you need to know: the e₹ is the digital avatar of India's fiat currency – the Rupee. You can access it through mobile phones and pay using QR codes.
Now, India's digital payment technology is already extraordinary. So much so that, checkout pages today offer a buffet of sophisticated digital payment options – UPI, e-wallets, a bevy of co-branded cards (debit and credit) and lots more. So, does India really need one moreway to pay? Do we even need an e₹?
Before we answer that, let's listen to a conversation between Dasher (one of Santa's reindeer) and the ever-cantankerous Ebenezer Scrooge (you know, from the Christmas Carol).
[It's Christmas eve, the whole town is bright with festivities, but there's one dark and dreary home. It's here that Dasher knocks at the door with his hooves. Scrooge appears and grimaces at the sight of a beaming Dasher.]
Dasher – Merry Christmas, Mr. Scrooge, I come bearing presents. Here's an e₹ just for you.
Scrooge – What's that? Some sort of cryptocurrency?
Dasher – Come now, there's no need for profanity. It's a new way to pay online.
Scrooge – Ah, I don't want the hassle, I like good-old UPI.
[Slightly dejected, Dasher keeps his toothy grin and carries on.]
Dasher – That's great. Because it works like UPI. You scan QR codes and pay. Except... UPI is a way to pay, but e₹ is currency itself. With e₹, you can pay without a bank or pesky intermediary in between.
Scrooge – So? Get off my lawn, Dasher, before I turn the sprinklers on.
Dasher – Mr. Scrooge, just a moment – the money in your bank account isn't all that safe. If there's a run on the bank, you'll lose your money. UPI can't help you if the bank itself fails. The e₹ is like cash in your safe. Once you have it, it's yours, you aren't entrusting it with a bank anymore. The RBI will pay it on demand. Now, do you still want to keep your money in a bank, just to pay through UPI?
Scrooge – Okay boy, enough of you. Get on your sleigh and begone.
Dasher – Mr. Scrooge, wait. You can pay with e₹ almost anonymously. Unlike UPI, it won't show up in your bank passbook.
[Scrooge, now interested, feigns disinterest.]
Dasher – And the e₹ is free. Just like UPI.
Scrooge – Well... I do like free things.
[Dasher draws closer, wide-eyed and earnest]
Dasher – Although, Mr. Scrooge, I must disclose the fine print – unlike your bank savings, you won't earn interest on your e₹ holdings. I believe they didn't want to shake up bank deposits too much.
Scrooge –That's it, I'm turning on the sprinklers– off my lawn, Dasher. Bah! Humbug.
Don't let Scrooge mislead you. The e₹ has some advantages over UPI and cash. But the problem is they all benefit the RBI, not us. For example, e₹ payments are instant and final – just like handing over cash. While UPI payments are also instantaneous for the user, there is a complex web of settlements between banks at the back-end. So, in some ways, the e₹ is more efficient than UPI. It also has an edge over cash – it reduces cash printing and distribution costs. But for an average person, it's pretty much the same. Or in some cases, worse. It doesn't offer you interest on your funds (like banks), or complete anonymity (like cash). It promises to deliver more in the future – it could be programmed for specific use-cases (like subsidies). But, in its current avatar, it's unclear how it will benefit e₹ users.
This is why CBDCs like the e₹ have many sceptics. Take for example, e-Naira, Nigeria's CBDC. e-Naira was the country's attempt to capitalise on the crypto boom. But, as it turns out, it failed. Less than 1% Nigerians adopted it after a year of its launch. The Nigerian government is now doing what it can to promote (or force) adoption of e-Naira. It's subsidising rickshaw rides – if paid for using the e-Naira. It's even limiting cash withdrawals. The benefits of CBDC – like being legal tender or offering no or low cost payments – aren't enough for them to succeed. They need something more. Something which helped UPI succeed – cashbacks. China, for instance, resorted to cashbacks with its e-Yuan. But who would fund these cashbacks in India? Many private players have already burnt billions in cashbacks to promote their UPI apps. The government, then? This would be like a subsidy to better deliver subsidies (through the e₹).
Clearly, getting India to adopt the e₹ is tricky. This brings us back to the original question – does India need the e₹? Andy Mukherjee answers this in his Washington Post article. He says that if a high-quality, interoperable payment solution is available at a reasonable price to everyone (this is the definition of UPI), then maybe it's not worth jumping on the CBDC bandwagon. Poland and Denmark have dropped out of the CBDC race for this reason – they don't see what incremental value a digital currency offers over existing sophisticated digital payment solutions. So, should India, like the United States wait to get the digital ₹ right?
📈All we want for Christmas is fewer regulations and better enforcement
Nobody – and I don't care if you're Warren Buffet – nobody knows if a stock is going to go up, down, sideways or in circles, says Mark Hanna in the Wolf of Wall Street. Share market 'gurus' and 'finfluencers' would disagree. After all, unlike Mark Hanna, some finfluencers can apparently predict the perfect time to invest in the perfect stock (over and over). So, it's not surprising that SEBI's decided to regulate these finfluencers.
Granted finfluencers play a role in investor education. They command a massive online presence for this, garnering millions of subscribers and views. But it only takes a few bad apples to elicit the regulator's inner Grinch. On 14 December 2022, a federal jury in Texas opened investigation against 8 individuals for a social media 'pump and dump scheme'. These finfluencers used their social media presence (on Twitter and Discord) to 'pump-up' prices of securities they owned. Later, they 'dumped' (sold) these securities at artificially inflated prices. They hooked their followers with their extravagant lifestyles and self-proclaimed stock-market expertise. In the end, they pocketed about $114 million (at the expense of their followers). Closer home, SEBI, in early 2022, cracked down on a pump and dump scheme, this time on a Telegram channel called 'Bull Run 2017'.
Coming back to the proposed regulation, this isn't the first time that SEBI's paid attention to this issue. SEBI has cautioned investors against unsolicited tips on the internet since 2010. In 2016, it even considered restricting sharing of stock tips through social media. And proposed that only persons it regulates should be allowed to do so. But the needle hasn't moved much since then. As SEBI Chairwoman, Madhavi Puri Buch admits – it's hard to define financial influencers, and even harder to frame and implement regulations for them. Therefore, regulations risk being inefficient and convoluted. They may also impede (much needed) democratization of financial education. So, before SEBI puts this proposal in action, it should pause and reconsider if a new regulation is even needed. We think, no. Because the existing regulations, if enforced effectively, are sufficient. How you ask?
First, finfluencers who share educational content, which can't influence investment decisions, must remain unregulated. For example, finfluencers guiding their users on how to make an investment or explaining basic concepts (like what's an IPO) should remain unregulated.
Second, those doling out stock-specific tips on social media must be regulated like research analysts (RAs). Under current SEBI regulations, anyone who shares buy/sell/hold recommendations (which can be the basis of investment decisions) is an RA. The regulations already address concerns like a conflict of interest and prescribe disclosure requirements. For instance, RAs must, while sharing stock-tips, disclose their interest in companies whose stocks they recommend. Similarly, SEBI's regulations on fraudulent and unfair trade practices can address concerns like market-manipulation (including through pump and dump schemes) and mis-selling by finfluencers.
Third, finfluencers who share personalised advice for a fee must be categorized and regulated as investment advisors. As investment advisors, these finfluencers won't be able to make personal investments contrary to the advice they dispense and must comply with various other obligations. To action this, SEBI could issue a notification detailing how existing regulations apply to social media content.
SEBI must, in parallel, also explore ways to strengthen its supervisory muscle for social media. Because of the sheer volume of social media content, enforcement of existing regulations is difficult. SEBI could consider deploying an automated system to track finfluencer content. And it won't have to start from scratch. It recently developed an AI based tool – Picture based Information News Accumulator and Key Information Analyser (Pinaka) – to track stock-market advice given on TV shows. Pinaka combs through TV show graphics (frame by frame) and converts it into a standard format. Then, it compares it with the trading pattern of advisors on the TV shows to identify unscrupulous activities like pump-and-dump schemes. SEBI could deploy similar measures across other platforms to track and whack delinquent finfluencers.
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🍰Dessert
🎁Merry UPI tidings
This Christmas, besides pudding and gifts (pay attention, Secret Santa), fintech players are looking forward to a new UPI feature: single-block-multiple-debit. It sounds complex. But it will make payments simpler. Before I get to the how, let's go back to the feature's origin.
Launched in 2018 as a part of UPI 2.0, the fund-blocking feature isn't new. It lets you pre-authorize a future payment. Once you approve the transaction using your UPI PIN, the amount payable is blocked in your bank account. Meaning that you can't use that amount for anything else. You can, however, continue earning interest on the blocked amount. The amount gets debited only once your purchase is complete. One of the most prominent use-cases of this feature is subscription to public issue of shares. Let's say PhonePe is going public and you want a piece of the action. Using this feature, you can apply for the Initial Public Offer (IPO). Once you share your IPO application and UPI ID with your broker, its bank will initiate a request to block funds (for IPO subscription). If the shares are allotted to you, the funds are debited. If not, the block is removed. More than 50% of IPO applications are currently processed using this feature.
So, what's new now? Well, so far, for every payment, you must authorize a new block. But with the new feature, a single block can be used for multiple payments. You can use this feature for e-commerce transactions, secondary market investments, and more. Let's say you frequently order from Zomato. Using this feature, you can block Rs. 5,000 (at once) for Zomato. Zomato can auto-debit the order value from the blocked amount upon delivery. This way, Zomato can make multiple debits until the blocked amount is exhausted. The feature is also useful for securities market investments. In fact, SEBI is working on a fund-blocking facility (similar to that for IPOs) for secondary market investments (where securities are traded after being offered to the public). And the new feature can enable that. At present, when you want to buy securities, you transfer funds to your broker – who pools (and holds) it until the securities are allotted. The feature will eliminate the need for brokers to hold the funds. Customers can block funds against purchase, which will be debited only once the purchase is complete.
So, who benefits? Everyone. This will make automated payments more convenient for customers and merchants. For brokers, 'it reduces the operational and compliance burden of being responsible for investor funds', tweets Zerodha CEO, Nithin Kamath. But brokers won't be able to earn interest on the surplus investor funds parked with them (for securities purchase), he adds. So, yes, there's a downside too. As the stock market is volatile, there's also a risk (of loss) to investors if the UPI transactions fail and shares aren't allotted. For this, Mr. Kamath suggests UPI can perhaps be one of the options that investors use, in addition to other modes.
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🍃Mints
📊NPCI extends UPI market share cap deadline
Much to PhonePe's and Google Pay's relief, NPCI extended the deadline for implementation of the 30% market share cap in UPI till 31 December 2024. With credit cards being linked to UPI and new players gaining momentum, the deadline extension may enable an organic change in UPI market dynamics.
🤝GSTN joins Account Aggregator network
The RBI has included the Goods and Services Tax Network (GSTN) in the Account Aggregator network as a Financial Information Provider. Lenders like banks and NBFCs can now use GST data to assess the creditworthiness of small businesses that don't have formal credit histories. And since the GST data will be provided by GSTN, they don't have to worry about its authenticity.
🧾RBI plans BBPS expansion
The RBI wants to expand the Bharat Bill Payment System (BBPS). Currently, BBPS can't be used for non-recurring payments and collections by individuals. So, many use cases like professional service fees, education fees, house rent, tax payments, etc. are left out. NPCI will soon issue guidelines to cover all types of payments within BBPS.
🤝🏿Acquisitions on the horizon?
Two major fintech acquisitions are reportedly underway. First, PhonePe plans to acquire ZestMoney, a BNPL platform with an NBFC license. Second, Cred plans to acquire CreditVidya, a software service provider that helps underwrite first-time borrowers.
📅The month of many firsts
Many novel fintech products were launched in the past month. IDFC First Bank and NPCI launched India's first sticker-based debit card. ICICI Bank and TCS launched iLens – the first platform to digitize home loans end to end. And Razorpay became the first payment gateway to enable credit card payments through UPI.
🕵️ KYC gets easier with e-KYC Setu
The Finance Ministry allowed financial institutions who are reporting entities under anti-money laundering laws to conduct KYC using a new system, e-KYC Setu. The NPCI-built system will enable Aadhar-based authentication without disclosing Aadhaar numbers to reporting entities. The system will also reduce costs and compliance burden as reporting entities won't need their own Aadhaar KYC infrastructure.
🚫After FLDG, loan securitization gets harder
The RBI recently prohibited securitization of loans with a maturity of less than 1 year. Analysts fear this could hurt fintech lenders as they typically extend short-term loans. Securitization was supposed to be an alternative to first-loan-default-guarantees whose permissibility is mired in confusion after the RBI's digital lending guidelines.
📉BlockFi files for bankruptcy
The domino effect of FTX's collapse continues as BlockFi, a crypto lender filed for bankruptcy. It had also neared bankruptcy earlier this year, when FTX bailed it out with a line of credit. BlockFi had significant exposure to FTX and paused withdrawals in wake of FTX's bankruptcy filing earlier.
Stablecoin war intensifies
Crypto exchange Coinbase is asking its users to switch from the stablecoin Tether to USDC (a stablecoin it founded). Coinbase insists this move is aimed at ensuring user safety. But it may actually be a part of a larger stablecoin war. Binance had earlier cut support for USDC in favour of its native BUSD stablecoin. Meanwhile, Tether retains pole position with the largest stablecoin market share.
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🥡Takeaway
- Decentralised exchange Uniswap's founder makes a case for De-Fi in a post FTX world [Economist]
- Four Seasons Total Tech – Winter is Ending in AI, Solar, Nuclear, Space, & Biotech. Summer is Coming [Substack]
- Credit cards as a legacy system [Bits about Money]
- Judicial review of central banks [SSRN]
- Emily the Criminal – a thriller starring Aubrey Plaza about credit card fraud [Zee5]
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
