The restrictions placed on Mastercard by the Reserve Bank of India (RBI) have passed muster with light editorial comments on the need to comply with the regulations and the imperatives for localisation of data. The RBI did give Mastercard a long rope, but it chose to hang itself.
Questions arise about regulatory overkill, conflict of interests, growing protectionism and a tinge of anti-Americanism. These questions are non-trivial and merit understanding. The financial services industry is following the path of the telecom industry, which was once vibrant, but is now threatened.
The RBI Did Not Consult Stakeholders In 2018
Let’s look at regulatory overkill. On 5 April, 2018, the RBI released a statement on ‘Developmental and Regulatory Policies’ and ‘Storage of Payment Systems Data’ out of the blue without any prior consultation with stakeholders.
The objectives outlined were: ensuring safety and security of payment systems data by adoption of best global standards, continuous monitoring and surveillance to reduce risk from data breaches, and unfettered access to all payment data for supervisory purposes.
Further down in the statement was the announcement creating an RBI Data Sciences Lab comprising experts and budding analysts, internal as well lateral. It is not every day that conservative regulators are open to engaging lateral experts and budding analysts. There was no explanation of the motivations for this decision or the problem the RBI was trying to solve. Exceptional data breaches or impediments for the regulator in accessing payments data weren’t reported or cited.
A sledgehammer visible in the statement was confirmed the next day, 6 April, 2018, by the notification on Storage of Payments System Data. Issued with the alacrity reminiscent of an emergency, the notification said, “All system providers shall ensure that the entire data relating to payment systems operated by them be stored in a system only in India. This data should include the full end to end transaction details / information collected / carried / processed as part of the message / payment instruction. For the foreign leg of the transaction, if any, data can also be stored in the foreign country, if required.”
It Bypassed A Key Requirement
Given that the target comprised only a handful of payment processors, was it that card-based payment operators were guilty of breaching the Financial Action Task Force (FATF), internal security or core mandatory stipulations? Had this been the case, the repercussions would have been global, given the entities involved. But the RBI gives no explanation, though it owes one.
It is noteworthy that as far back as 2013, following a decision made in a meeting of the Financial Stability and Development Council, the Ministry of Finance instructed that all subordinate legislation should be published before they come into effect, along with a statement of objectives, explanation of the problem to be addressed and an assessment of potential costs and benefits. How does the RBI consider itself above the transparency and accountability standards set for it?
NPCI And A Case Of Conflict of Interest
Coming to conflict of interest, the RBI has, in disregard to basic propriety, floated the National Payments Corporation of India (NPCI), which performs the same functions as Mastercard, American Express and Diners — all stymied by it — as also Visa, which possibly awaits its turn at the gallows. It is no secret that the RBI has been pushing the business case of the NPCI with banks and promoting it in the guise of thinly hidden innovative payments space. What it could not do was increase customer acceptance of the NPCI card business.
The NPCI directly benefits from the Payment Systems Data notification, which knocks the bottom out of the competition. Since it is the sector regulator, the silence of the lambs is understandable. The action of the RBI, however, bears scrutiny.
The financial services sector, despite being open to competition — both global as well as domestic — has been facing a slant favouring Indian participants. The hurdles in the way of international banks for expanding and conducting their business recently led to the exit of Citibank from the retail industry. Some high-profile exits had preceded it.
The RBI facilitated the adoption of the indigenous Unified Payments Interface (UPI)-based payment systems by the NPCI to the detriment of other similarly positioned market players. It overlooked the fact that the Board of NPCI comprised key proponents of UPI. In fact, even for the widely popular Jan Dhan scheme, an uncontested mandate went to the NPCI.
The lack of a level playing field for domestic and international players complicates the ease of doing business in India. On the other hand, even MasterCard is no kid on the block and has been accused in India and abroad of abusing its dominant position.
Avoiding The Same Mistakes
The emergence of the NPCI has widened and deepened the payments processing industry. The UPI system has democratised digital payments and made India a force in the fintech world. But the problem is that means are as important as the end. The telecom sector is a typical example. A lot was short-circuited in the name of subscriber interest, especially absurdly low-cost telephony. The long-term consequence is the collapse of the once-vibrant industry. We are treading a similar path in the payments and financial services sector. Telecom and financial services are fundamental to digital economies; strategic mistakes ought not to be repeated.
The spate of regulatory action against American firms, including Facebook, WhatsApp and Twitter, combined with the exit of Citibank from retail banking and restrictions on American Express, Diners and Mastercard, sounds an ominous warning. Occupants of the Sanchar Bhawan, both recent and of the past, know that a price is paid for twiddling with American businesses.
(The writer is a former Member of the Postal Services Board. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
(At The Quint, we question everything. Play an active role in shaping our journalism by becoming a member today.)