"I never travel without my diary. One should always have
something sensational to read in the train."
–
Oscar Wilde
To: your computer screen
Subject: breaking the fourth wall
Hello Dear Reader,
Yes, you. We're waving at you. Not the person behind you. But you.
Writing a newsletter can be lonely. We can't help but wonder if we're talking to the void. Which is why we love hearing from you. Your emails make our day. Do write to us at contact@ikigailaw.com.
And who are we, you ask? FinTales is written by the product team at Ikigai. We are lawyers who love tech – especially fintech. We hope to use this space to share our insights and learn from you. Here are a few of us (at our recent team retreat): Mayank, Anirudh, Aparajita, Astha, Devdutta, and Priyam (left to right).
Now, back to our regularly scheduled programming and new
FinTales menu.
Main course: a glimpse into a fintech
entrepreneur's diary and a deep dive into RBI's concept
note on CBDC.
Dessert: sweet news about UPI-credit card
linkage.
Saunf: a quick refresher on developments in the
fintech-verse.
Takeaway: articles, documentaries, and interviews to grab
and go.
Main-course 🍱
📚 The
diary of a fintech entrepreneur
A Tale of Two Cities begins with the now
immortal lines: it was the best of times, it was the worst of
times. If Charles Dickens wrote about the Indian fintech ecosystem
today, we think it would be eerily similar, something like:
"It was the best of times, it was the worst of
times,
it was the age of
unicorns, it was the age of
funding freeze,
it was the epoch of
BNPL, it was the epoch of
no FLDG,
it was the season of
UPI, it was the season of
zero MDR,
it was the spring of
CBDCs, it was the winter of
cryptocurrencies,
we had everything before us, we had nothing before
us..."
2022 has been a tumultuous year for Indian fintech. This month,
we got our hands on a fintech entrepreneur's diary describing
its highs and lows. Here's a glimpse at how she's been
navigating business opportunities and regulatory curveballs with
her trusted advisor, Cecil, by her side.
Dear Diary,
We're now among the top five most downloaded fintech apps
in India. Our marketing campaign was a hit, and it seems cashbacks
and influencer promotions did the trick. Nonetheless, it wasn't
smooth sailing. The tech team struggled to keep up with the surge
in users and the app crashed. Luckily, we were able to get it up
and running within the hour.
Dear Diary,
The pitch-deck is finally done. I was chasing my tail on the
monetisation model. After several hours of brainstorming with
Cecil, I added a few more slides on using payments data to
cross-sell credit products – our core monetisation strategy.
Fingers crossed.
Dear Diary,
We've been funded! Cecil and I jumped unabashedly on our
couch, I must admit. I posted on LinkedIn about the fund-raise
after running the post by Cecil. He thought it had the right mix of
humility and aplomb for a newly funded fintech start-up –
'humble brag' as the kids call it.
Dear Diary,
The investors asked us to tighten our KYC process. They've
been spooked by the Dhani identity thefts. I'm wary of adding
friction to the customer journey. But as Cecil reminded me,
it's a tradeoff between user convenience and security; and the
latter, in fintech, always wins. I also watched the Netflix series
on the Wirecard
scandal. Scary stuff.
Dear Diary,
We received an offer to partner with a crypto exchange. Cecil
and I are still bullish on crypto. Like Elon, Cecil's favorite
crypto is Doge.
But our partner bank and payment aggregator vetoed the proposal.
Sigh.
Dear Diary,
I'm tired. I woke up with a terrible hangover after
Cecil's birthday party. And if that wasn't enough, our
partner bank called to discuss our co-branded card. They're
reluctant to share transaction data with us anymore because
the
guidelines bar it. Our lawyers, bless
them, found a loophole
.
Dear Diary,
RBI
banned credit-loading PPIs. Cecil and I had
gone for a run. When we returned, I saw half a dozen missed calls
from our legal team. That's never a good sign. We were going to
launch a credit-loaded PPI. Not anymore.
Dear Diary,
The
digital lending guidelines dropped. Much has
changed. It's another reminder that the RBI holds the kill
switch. I want to minimize disruption to our existing customers
that we've paid dearly to acquire. Cecil's been a rock
– a voice of reason and calm. This too shall pass.
Dear Diary,
I'm in Bombay for this glitzy fintech event. The
who's-who of the fintech verse are here. There's a lot of
fist-bumping and chest-thumping on stage. But behind the scenes,
the mood is sombre. I find these events tedious. I'd much
rather spend my day tinkering with our app, discussing new ideas
with Cecil, or talking to users. Alas.
Dear Diary,
It's the last day to
purge card data. We thought RBI would relent. It
didn't. Our payment aggregator said they're
prepared for tokenization. Cecil tells me to trust
them. And that's what I'll do because that's all I can
do.
Dear Diary,
I woke up today without Cecil slobbering all over me –
never a good sign. So I took him to the vet, which he hated,
plus it took all day. My start-up can wait, Cecil is
my priority.
Wishing Cecil a speedy recovery.
💸
CBDC: concept, dream, or reality?
"How is it different from regular mobile bank
transactions?"
asked a Nigerian restaurant owner during a survey about
Nigeria's Central Bank Digital Currency (CBDC) – eNaira.
Turns out, this is a vital question to understand if an e-Rupee
makes sense for India. The RBI's
concept note on CBDC (released earlier this month) offers
some insight. The long and short of it: the general public (the
retail segment) will likely get a bank-distributed, token-based,
non-interest-bearing, and semi-anonymous CBDC. And financial
institutions like banks (the wholesale segment) are likely to get
an RBI-distributed, account-based, traceable CBDC.
The note defines CBDC as "legal tender issued by a
central bank in digital form". It goes on to make a
few tall claims about CBDC:
First, CBDC is safe because it's the liability of the RBI, and
not of a commercial bank. Unlike bank deposits, CBDC is free of
credit or liquidity risk. So, you don't have to worry about
losing money if your bank fails. CBDC could indeed protect people
from bank failures. However, the RBI is mindful that banks are
necessary to create credit in the economy. It wants to avoid a
situation where depositors flee from banks. That's why the RBI
decided against an interest-bearing CBDC which could compete with
bank deposits. The RBI is also considering imposing limits on CBDC
balances to avoid eroding the banks' deposit base. So, any
protection offered by CBDCs against bank failures will be limited,
and perhaps rightfully so.
Second, an offline CBDC may foster financial inclusion in areas
without banking or internet access. Although several existing
financial products already meet this need. Take, for
example,
prepaid payment instruments (PPIs) which offer many of the
functionalities of a bank account. Or
UPI 123Pay which can be used by feature phone users who
don't have reliable internet access. It's not clear why a
CBDC would do a better job at serving the unbanked and underbanked
compared to these established options. But a potential answer could
be a CBDC which doesn't require any KYC (at least for small
amounts) much like cash. Unlike PPIs which require minimum KYC and
UPI which is linked to a KYC-ed bank account,
low-value CBDC wallets could be issued without any
KYC.
Third, CBDC may increase the competitiveness, resilience, and
efficiency of domestic payment systems. While UPI is a huge
success, it has also raised concerns about
concentration risks in payments. With
PPIs and
credit cards being linked to UPI, these risks will only
increase. However, UPI's success is attributable to the work
done by app providers in onboarding merchants and customers. A
similar public-private partnership is needed for the widespread
adoption of CBDC. In fact, the CBDC may also piggyback on existing
payment infrastructure to avoid reinventing the wheel. For example,
CBDC could be designed to leverage existing QR codes and PoS
machines. CBDC wallets can also be integrated with widely used
fintech apps. So, there may be a trade-off between efficiency and
promoting competition while rolling-out CBDC. Besides retail
payments, a wholesale CBDC could facilitate faster inter-bank
settlements. This will reduce settlement risk and the cost of
maintaining settlement guarantee funds.
Fourth, CBDC may enable more efficient cross-border payments.
Cross-border payments currently rely on the
correspondent banking system. This means that a transaction is
routed through multiple banks in different countries, leading to
high costs and delays. Indians receive $87 billion as
inward remittances annually – the highest in the
world. If central banks work together, they can align their CBDC
standards or build bridges to settle
cross-border payments directly with each other. There are
several early examples of such collaborations like the m-CBDC Bridge Project and Project Dunbar. But this isn't something
the RBI can do alone and its success will depend on the attitude of
other central banks.
Fifth, the note claims that CBDC can provide a risk-free
alternative to private cryptocurrencies. But CBDCs and
cryptocurrencies are fundamentally different. Unlike CBDCs,
cryptocurrencies are
global and open-source. They can already facilitate
cross-border payments, which CBDCs may or may not be able to do.
However, stablecoins may see reduced demand if CBDCs become usable
for cross-border payments, which is one of their main use-cases.
Moreover, anyone can build apps on top of a blockchain that is
powered by cryptocurrencies. While CBDCs may also allow apps to be
built on top of them, it's likely to be a closed system in
which only regulated entities can participate.
To further understand the potential of CBDC, we spoke to Dileep
Seinberg, Founder of MuffinPay. He explained that CBDC
opens the door to a "...plethora of payment options that
help businesses run smoothly. It will lead to multiple products,
including instant high-value fund transfers 24×7. It will
create doors for more secure and sustained payment solutions for
the users." He added that CBDC "will
lead to instant cross-border payments and provide higher liquidity
to enterprises and businesses. The dependence on banking services
for financial needs will decrease, and individuals or businesses
will have more power with them."
The promise that CBDC holds is immense. But the devil lies in the
details – which are still being deliberated. Countries
like Nigeria and the Bahamas have already
launched their CBDCs. The results have been mixed. The Bahamas Sand
Dollar has been
adopted by around 5% of the population. The Nigerian
e-Naira has
struggled due to technical glitches and a lack of
awareness. A poll
conducted by Ventures Africa found that only 4% of
respondents had used the e-Naira. More worryingly, 64% of
respondents hadn't even heard of it. The decisions that RBI
takes subsequently will determine whether the e-Rupee can avoid
this fate.
Dessert 🍰
🦸♀️
UPI-credit card linkage: Avengers meets Justice League
Last month, UPI-linked Rupay credit cards were launched at the
Global Fintech Fest. Subsequently, NPCI released
operating guidelines for UPI-linked Rupay credit cards as
well. It was during the Fest that an NPCI official
described the linkage as Avengers meets Justice League. We
couldn't agree more. While UPI is commonly used
for
small-value peer-to-peer (P2P) payments, credit cards are used
for
high-value peer-to-merchant (P2M) payments. With Rupay credit
cards being linked to UPI, these two worlds are set to collide. The
value proposition of linking credit cards with UPI is obvious. The
merchant network for UPI is far wider than credit cards. Compared
to 70 million QR codes, there are only 7 million PoS machines in
India. Imagine being able to pay your auto-rickshaw driver through
your credit card. That'll be possible soon.
The guidelines also address the elephant in the room:
payment fees. The guidelines state that UPI based credit card
payments will be free if the transaction value is up to INR 2000
and the recipient is a small merchant with an annual turnover of up
to INR 20 lakhs. In contrast, high-value transactions over INR 2000
and payments to large merchants will be chargeable at existing
Rupay interchange rates. Most interestingly, the merchant's
payment service provider bank (
Payee PSP) must transfer 0.08% of the transaction value to the
customer's payment service provider bank (
Payer PSP) and third-party application provider (
TPAP) each. As an example, suppose I use my HDFC credit
card through my Google Pay app to buy clothes from Zara. My UPI ID
is abc@okicici which means the Payer PSP is ICICI Bank. Let's
say Zara's UPI ID is zara@axisbank which means the Payee PSP is
Axis Bank. In this transaction, Axis Bank will receive payment fees
from Zara and it must share a portion of that payment fees with
ICICI Bank and Google Pay. This is a big deal because it creates a
revenue source for UPI ecosystem participants.
The guidelines also provide insight into how the role of TPAPs may
expand. The NPCI wants TPAPs to provide complete credit
card
lifecycle management. This will ensure customers don't have
to keep hopping between their UPI app and bank app. For instance,
TPAPs must now enable customers to make repayments, check
transaction history, available balance as well as total outstanding
dues for their credit card accounts. In the future, TPAPs may offer
value-added services such as EMI conversion, limits management,
reward updates and redemption, spend analysis, pre-blocking funds,
etc. With these new features, TPAPs could metamorphose into a
one-stop solution for payments and personal finance management.
Moreover, with the broad userbase that TPAPs have acquired, new
players hoping to break into this segment will have their work cut
out.
Saunf 🍃
👩⚖️ BillDesk-PayU deal falls through
The $4.7 billion acquisition of BillDesk has been terminated by PayU. The stated reason is failure to meet necessary conditions before the contractual deadline. Reports further suggest that the deal's termination may be on account of a delay in RBI approval and the general economic downturn.
⚒️ Interoperable regulatory sandbox goes live
Hybrid fintech products can now be tested in an interoperable regulatory sandbox jointly administered by RBI, SEBI, IRDAI, PFRDA, and IFSCA. These products will be subject to the regulations of the principal regulator which will be decided based on the product's 'dominant feature'.
🤝 NPCI launches partner program
NPCI's new partner program will allow selected participants to get early access to APIs, increase brand awareness, attend exclusive workshops and form strategic partnerships.
📊 NPCI grapples with UPI concentration challenge
Google Pay and Phone Pe want NPCI to push the 1 January 2023 deadline for implementation of the 30% market share cap on UPI transactions by 3-5 years. NPCI is now in talks with the government and industry to understand the implications of a deferred timeline.
🏪 Offline PAs face regulation
The RBI announced that in addition to online payment aggregators (PAs), it intends to regulate offline PAs as well. The RBI will issue detailed instructions on the regulation of offline PAs soon.
👩🏽⚖️ Regulation by taxation for crypto-industry
While the US debates regulation of the crypto-industry by enforcement, India's moving towards regulation by taxation. After introducing direct taxes, the government now reportedly plans to levy GST on virtual asset transactions (including mining and air-dropping). Preliminary reports suggest a new GST slab (18-28%) may be created for these transactions.
Takeaway 🧃
- A documentary on the fall of German fintech darling, Wirecard. [Netflix]
- A Jon Stewart podcast interview with SEC Chair, Gary Gensler. [ Apple Podcasts]
- An exploration of what the history of banking teaches us about digital lending apps. [ MoneyControl]
- A newsletter on the economics of newsletters. [The Diff]
- An insight into what's happening with Elon Musk's Twitter Deal. [ Bloomberg]
- A Ken podcast interview with Nithin Kamath, Founder, Zerodha. [ The Ken]
That's it from us. See you in November.
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.
