Parliamentary Committee on local fintech players

What’s in today’s article?

• Why in news?
• What is National Payments Corporation of India (NPCI)?
• What is UPI?
• News Summary: Parliamentary Committee on local fintech players
• What does the report infer about the existing ecosystem?
• What are the concerns about fraud?
• Way forward

Why in news?

• In its recent report, the Standing Committee on Communications and Information Technology expressed worries about foreign-owned fintech apps having too much control in India.
• The committee suggested that Indian-owned apps should be encouraged more.
• It pointed out that while the Unified Payments Interface (UPI) made up a large portion (73.5%) of all digital payments in terms of volume in the fiscal year 2022-23.
• However, its share of the total payment value was much smaller, at only 6.67%.

National Payments Corporation of India (NPCI)

• NPCI is an umbrella organisation for operating retail payments and settlement systems in India.
• It is an initiative of RBI and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007.
• The objective of NPCI is to create a robust Payment & Settlement Infrastructure in India.
  • For this, NPCI was incorporated as a “Not for Profit” Company under the provisions of Section 25 of Companies Act 1956 (now Section 8 of Companies Act 2013).

UPI

• It was launched by NPCI.
• UPI is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood.
• It also caters to the “Peer to Peer” collect request which can be scheduled and paid as per requirement and convenience.

News Summary: Parliamentary Committee on local fintech players

What does the report infer about the existing ecosystem?

• Regulation of Digital Payment Apps
  • The Committee underscored the importance of regulating digital payment apps due to their increasing usage in India.
  • It highlighted that regulating local apps, compared to foreign ones, would be more practical for entities like the Reserve Bank of India (RBI) and the National Payments Corporation of India (NPCI).
• Domination of Foreign-Owned Fintech Apps
  • The Committee noted the dominance of fintech apps owned by foreign entities, such as PhonePe backed by Walmart and Google Pay, in the Indian fintech sector.
  • PhonePe holds the largest market share in terms of transaction volume, followed by Google Pay.
  • As per the statistics were recorded between October and November 2023:
    • PhonePe accounted for 46.91% of the market share.
    • Google Pay held 36.39% of the market share.
    • In comparison, NPCI's BHIM UPI only had a 0.22% market share in volume terms.
• Usage Statistics
  • NPCI's data from December last year revealed:
    • Customers initiated a total of 5,642.66 million transactions using PhonePe.
    • Another 4,375 million transactions were made using Google Pay.
    • Only about 24.30 million transactions were made using BHIM.
• Committee’s recommendation supported NPCI's Transaction Volume Cap
  • In November 2020, the NPCI implemented a 30% volume cap on transactions conducted through the Unified Payments Interface (UPI).
  • This regulation aimed to limit the number of transactions initiated by third-party apps like PhonePe and Amazon Pay, ensuring a balanced usage of the interface.
    • Originally, apps exceeding the prescribed cap were given a two-year period to comply with the directive, scheduled to conclude by December 31, 2022.
    • However, citing the need for further expansion and equilibrium in the UPI ecosystem, the compliance deadline was extended to December 31, 2024, in December 2022.
  • The committee supported this regulation in its report.

What are the concerns about fraud?

• Fintech Companies and Money Laundering Concerns
  • The Committee highlighted that fintech companies were being exploited by scamsters for money laundering purposes.
  • An example cited was the Abu Dhabi-based app called Pyppl, which was reportedly administered by Chinese investment scamsters.
  • This situation posed challenges for Indian law enforcement agencies in tracking the flow of illicit funds gathered through scams on the platform.
• Fraud Trends and Ratio
  • Despite an increase in the volume of transactions over the past five years, the ratio of fraudulent transactions to total transactions has remained relatively low.
  • The fraud to sales ratio, representing the proportion of fraudulent transactions to total transactions in a financial year, hovered around 0.0015%.
  • As of September 2023, in the ongoing financial year, this figure slightly increased to 0.0016%.
• Impact on UPI Users
  • The percentage of UPI users affected by frauds stood at 0.0189%.
  • Despite concerns about fintech platforms being used for illegal activities, the overall impact on users remained relatively low compared to the total volume of transactions.

Way forward

• Advantages of Local and Foreign Fintech Players
  • Local fintech companies possess a natural advantage in comprehending the intricacies of the customer base, various ecosystem participants, and the digital public infrastructure within the Indian market.
  • They are also well-versed in navigating the broader market infrastructure.
  • Conversely, foreign fintech firms excel in leveraging new technologies, employing innovative techniques, and capitalizing on global connectivity.
  • Hence, there is the necessity of fostering a balanced mix of local and foreign fintech players to effectively serve the Indian ecosystem.
  • This balance would be crucial across diverse sectors such as payments, lending, wealth management, and insurance.
• Regulatory Emphasis on Accountability and Compliance
  • Analysts acknowledged the regulator's emphasis on the criticality of accountability and compliance with local laws.
  • They underscored the importance of adherence to regulatory frameworks to ensure the integrity and stability of the fintech sector within the Indian market.

Q1) What is fintech?

The word “fintech” is simply a combination of the words “financial” and “technology”. It describes the use of technology to deliver financial services and products to consumers.

Q2) What is money laundering?

Money laundering is the process of hiding the source of money obtained from illegal sources and converting it to a clean source, thereby avoiding prosecution, conviction, and confiscation of the criminal funds. It is an illegal exercise that converts black money into white money.

Source: What did the Parliamentary Committee recommend with respect to local fintech players? | Explained | NPCI | The Economic Times