E-commerce is shifting more merchandise in India, at an ever faster rate and, with foreign firms commandeering almost every transaction, 'Digital India' initiatives take on a life of their own, throwing in disarray the delicate social balance, planned by the government
It all turns out to be about the e-commerce payment system, meant to be an ingenious shared banking platform, the Universal Payment Interface (UPI), to avoid the conflicts of interest skewing China's financial system, locked in by the two third-party transactions behemoths, Alipay of Alibaba's Ant Group
Even though different payment 'rails', or links, were incorporated by the Indian UPI, and there were many, some payment flows ended up amassing such overpowering payment volume, as to figuratively suck the energy out of the shared link - for the benefit of the two American e-commerce giants, Amazon
The ingenious launch of new inter-operable payment platforms, named New Umbrella Entities (NUEs), initiated by India's Reserve Bank in August '20, will seek to align the priorities of Digital India - setting out the payment processes as a common good - without constraining the potential of e-commerce growth for the Indian economy at large
However, significant delays in the allocation of NUE licenses in February '21 and again in August '21 signal a tug-of-war on many fronts
The invention of India's digital economy is only starting...
In India's impeccable logic, digital markets could drive economic expansion by boosting Indian and international demand, creating new opportunities for business across India and putting on a more equal footing consumers and manufacturers, in urban and rural areas
To insure interoperability across the banking system for all the existing payment systems, further including the postal system and telecom providers for global reach, the National Payment Corporation of India (NPCI), a non-profit organization, co-owned by the banking system at large, was put in charge of the inter-bank Universal Payment Application (UPI)
With more than 2 billion monthly transactions over UPI, real time transactions for 2020 reached 25.5 billion - and given the still large share of paper-based payments in India (more than 60%), digital payments are expected to grow at a CAGR of at least 25% year-on-year until 2025
As a result, the payment platform, devised for moderate expansion to level the playing field for any type of transaction, such as utility bills, domestic card networks or inter-bank transfers of any kind, appeared to be getting increasingly out of step
- the exponential growth of payment transactions, the NPCI's exclusive role and its unwieldy co-ownership could slow further innovation in the new digital context
- the massive dependency of retail payments on the organization - 64.5% by volume and 4.07% by value of all payments transiting through the banking system - created concentration risk
What could not be anticipated was that, however many different payment 'rails' were incorporated by UPI, some payment flows were going to amass overpowering payment volume
This turned out to be the case for e-commerce, benefitting its two major contenders, Amazon and Flipkart, riding the inter-operable platform devised as a 'common' good, for free....
In the light of the ascendancy of the two American e-commerce firms, carving out 40% of the transaction flow each, the UPI was potentially turning into a cybersecurity nightmare, a sprawling monopoly and a potential foreign lock on e-commerce competition all in one...
'Systemic' risk on many fronts...
With an 80% share of payments in a system essentially supported and financed by the Indian banks, and expected to consolidate their position even further at a projected 30% annual growth rate, Amazon and Flipkart were confronting financial regulators with an unenviable dilemma
- a take-over, in all but name, of the UPI payment system by the foreign e-commerce giants could not be contemplated
- emergence of local e-commerce contenders had to be assisted
The New Umbrellas (NUEs) will be offering alternative digital retail payment systems to the consumers, on terms expected to be competitive and innovative - and, at the same time, entertain redundancy in the ecosystem, addressing UPI's concentration risk
And the list of candidates for a license reads like a roll call of titans
- the global e-commerce firms, Amazon and Walmart
- India's largest banks (HFDC Bank and ICICI Bank) and industrial conglomerates (Tata and Reliance),
- Chinese minority interests (Paytm by Ant Group and PayU controlled by large Tencent shareholder Naspers and indirectly by Prosus)
- and of course American giants of social networks (Facebook) and search (Google) giants
Flagging the outsized importance of Indian digital retail, the NUE payment rails could well be all about finance in India...and globally
Sensing once-in-a-life time opportunities so vast they are impossible to project, the gamblers are ready for this great game, to be discussed in "India - Umbrella Wars"