Context

The landscape of financial technology (fintech) in India has witnessed a significant transformation in recent years, particularly with the proliferation of digital payment platforms. However, amidst this rapid growth, concerns have been raised regarding the dominance of foreign-owned fintech apps and the need to promote local players in the ecosystem. The Parliamentary Standing Committee on Communications and Information Technology highlighted these concerns in its recent report, emphasizing the importance of effective regulation and support for indigenous fintech companies.

Dominance of Foreign-Owned Fintech Apps

One of the primary concerns outlined by the Parliamentary Standing Committee is the dominance of fintech apps owned by foreign entities in the Indian market. According to data presented in the report, companies such as Walmart-backed PhonePe and Google Pay command a significant market share in terms of transaction volume. PhonePe leads the market with 46.91% share, followed by Google Pay at 36.39%. In contrast, the National Payments Corporation of India's (NPCI) BHIM UPI holds a mere 0.22% share in terms of transaction volume. This dominance raises questions about the market competitiveness and the level playing field for local fintech players.

Regulatory Oversight and Control

The report underscores the importance of effective regulatory oversight to address the challenges posed by the dominance of foreign-owned fintech apps. Regulatory bodies such as the Reserve Bank of India (RBI) and the NPCI are seen as better positioned to regulate local apps compared to their foreign counterparts, which operate across multiple jurisdictions. The Committee recommends promoting local fintech players and implementing regulations that ensure fair competition in the market. Additionally, the report suggests that stringent regulatory measures are necessary to prevent misuse of fintech platforms for activities such as money laundering, as evidenced by instances like the Abu Dhabi-based app Pyppl being used by scamsters.

NPCI's Volume Cap on UPI Transactions

In response to the concerns raised, the NPCI issued a 30% volume cap on transactions facilitated using the Unified Payments Interface (UPI). This directive aimed to address the risks associated with the dominance of certain third-party apps and protect the overall UPI ecosystem. According to NPCI's data, the total number of transactions initiated by customers using PhonePe stood at 5,642.66 million, while another 4,375 million used Google Pay, and only about 24.30 million used BHIM. The decision reflects NPCI's commitment to maintaining market equilibrium and fostering a more competitive environment in the digital payments space. However, the timeline for compliance was extended to December 31, 2024, to allow for a phased implementation approach.

Concerns about Fraud and Money Laundering

The report also highlights concerns about fraud and money laundering in the fintech sector, with instances of scamsters using digital platforms for illegal activities. While the fraud-to-sales ratio has remained relatively low, around 0.0015% to 0.0016%, there are still significant challenges in combating fraudulent transactions and protecting consumers. The rise of fintech platforms has introduced new avenues for financial crime, requiring enhanced regulatory measures and collaboration between law enforcement agencies and industry stakeholders to mitigate risks effectively.

Impact on the Ecosystem

The dominance of foreign-owned fintech apps and the challenges related to fraud and money laundering have significant implications for the Indian fintech ecosystem. McKinsey's Global Payments Report (September 2023) observed that instant payments in India were only expected to contribute less than 10% of future revenue growth because no fees are charged for the interface (UPI). However, despite minimal transaction fees, the report noted an uplift from no-fee cash events, and the paperless process eliminates the hidden costs of managing cash transactions, thus enhancing security and increasing access to digital commerce channels. Achieving a balanced mix of local and foreign players is essential to foster innovation and competition while ensuring compliance with local laws and regulations. Moreover, initiatives such as the NPCI's volume cap on UPI transactions seek to level the playing field and promote a more inclusive and competitive environment for all stakeholders.

Conclusion

In conclusion, the recent report by the Parliamentary Standing Committee on Communications and Information Technology sheds light on the challenges and opportunities facing the Indian fintech sector. The dominance of foreign-owned fintech apps, concerns about fraud and money laundering, and the need for effective regulatory oversight are among the key issues highlighted in the report. By promoting local players, implementing stringent regulations, and fostering collaboration between industry stakeholders, India can navigate these challenges and build a robust and inclusive fintech ecosystem for the future.

Source - The Hindu