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Why RBI Push for Interoperability Good for Payments, Bad for Payments Banks?

Professor of Financial Economics and Part-time Value Investor, Transfin.
Oct 22, 2018 6:29 AM 2 min read

Ever since India's retail payments industry really skyrocketed courtesy arrival of mobile wallets such as Paytm* and Mobikwik (i.e. "Prepaid Payment Instruments" or PPI in RBI lingo), the regulator has been obsessed over the concept of "Interoperability". 


In plain speak, it means if I have some money topped up in my Paytm* wallet, the regulator says I should be free to transfer it to a friend who uses Mobikwik.


Well the RBI has finally spoken, releasing its final guidelines on Interoperability last week. 


We thought it'll be a good idea to do a deep dive into its implications. 


Interoperability is not being explicitly imposed by the RBI, but the underlying business opportunity should push them to participate. The requirement for "full KYC" of participating PPIs though would be a headwind, considering Supreme Court's recent restrictions on sharing of Aadhaar data with private companies.

The RBI's final guidelines mentions that "Participating PPI issuers [can] choose to adopt interoperability...", thereby making it clear that the guidelines are non-mandatory.


However, considering most of the 49 PPIs have been struggling to compete since the advent of Payments Banks, interoperability brings a new lease of life by opening up the payments ecosystem. Thereby RBI's rules are de facto mandatory. 


A "full KYC" requirement without the benefit of Aadhaar (post the recent Supreme Court ruling) would however mean additional compliance and marketing spend for wallets.


Interoperability for mobile wallets shall be enabled via UPI. Where PPIs are issued as cards, interoperability can be enabled via card networks, bypassing banks.

Translation: Users with mobile wallets such as Mobikwik and Oxigen can transact with each other via the government's Unified Payments Interface (UPI), bringing them at par with various banking Apps.


Secondly, they can issue cards (cash, gifts, meals etc.) in collaboration with card networks like Visa, MasterCard etc. Hence, mobile wallets can issue plastic money by bypassing banks! The cards would have to be EMV chip and pin compliant (like debit and credit cards).


This is good for mobile wallets, and definitely good for the end-user. Perhaps not so good for Payments Banks and payments applications of Commercial Banks.

A "full KYC" mobile wallet will going forward not be very different from a Payments Bank, aside from the latter's ability to raise large deposits.


PPIs historically grew by twice the growth rate of credit and debit cards in India. However, their trajectory lately slowed with the advent of Payment Banks and Commercial Banks' in-house payment applications (via UPI) which merchants preferred tying up with, rather than partnering with multiple mobile wallets. Interoperability breaks that distinction and brings everyone on a level playing field. 


*we're using the example of Paytm here due to its wide spread recognition. They're no longer a pure play PPI, but rather a payments bank. More on that subject some other time.


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