Last week, the Reserve Bank of India (RBI) extended the timeline for the implementation of its new rules for recurring online transactions to September 30. When RBI first notified the rules back in 2019, BillDesk, one of India’s largest payment gateway providers, acted swiftly and developed SI Hub in partnership with American payments giant Visa to facilitate the necessary e-mandates (standing instructions) on recurring payments.
BillDesk, owned and operated by Mumbai based IndiaIdeas.com, became a unicorn (startups privately valued at $1 billion or more) in 2019. A year before that Visa picked up an minority stake in the company, which was founded in the year 2000 by accounting firm Arthur Andersen employees MN Srinivasu, Ajay Kaushal and Karthik Ganapathy.
In an interview with TechCircle, BillDesk co-founder and director MN Srinivasu spoke about scaling SI Hub, the regulatory environment and growth prospects for the current financial year.
Why did you set up SI Hub as early as 2019?
Towards the end of 2019 is when RBI came up with the guideline with respect to how certain card-based recurring payments needed to be processed. At BillDesk, we understood the implications of RBI's guidelines... we understood fully the complexity of what was to unfold.
The key part to the RBI guideline was to essentially change the way an existing authorization or authentication worked in terms of who took the responsibility for a recurring payment mandate. Historically it has always been the merchant side. As a customer, you go on to a merchant platform, set up a recurring payment and the bank authenticates and authorizes.
What RBI's guideline, in essence, was trying to do was to place a significant part of the responsibility on the issuer bank, to say that banks need to track of all mandates issued by a customer on a card and provide flexibility to customers to stop payments, make changes, etc.
Now, this is a seminal shift from the way that all card payments traditionally work. When you think of this as a solution that has to work across banks and merchants, it's fairly easy to see why you will effectively need one unified platform. And that's how the SI hub was born -- to create one hub where all participants could connect.
What does it do for banks?
Specifically, SI Hub is positioned for the issuer banks, on whom this compliance burden has been placed in terms of the RBI mandate. And, this platform, helps issuer banks attend to the e-mandate, registration and transaction processing businesses in a manner that is compliant with the RBI requirements. It's largely focused on the insured bank side, helping them meet RBI guidelines and compliances. At the same time, it offers incremental functionalities to the acquiring banks and payment aggregators, who form part of the larger ecosystem of payment processing.
How SI Hub has scaled so far?
The original deadline for the banks to achieve compliance was March 31. And, I think over the course of the last year, because the pandemic, from a bank side perspective, the timing of getting onto the platform had complexities in terms of the internal priorities. But beyond the banks, there is a larger play here in terms of the rest of the chain. The payment aggregators and the merchants are also doing minor tinkering at their side to be compliant with what the issuer bank should meet.
From a platform perspective, today, SI Hub is one of the most robust solutions in the market. It's being built based on the years of experience that we have in the domain. And we've been partnering all the large banks in India for over 20 years. So, it's been an easy choice for banks to make to integrate onto this platform.
Given the happy position we are in, what we would expect is that all large issuers will integrate to this platform. The incremental timeline (till September 30) offers breathing space to align the internal processes to conform. But what we would expect is largely that all the card issuers in India would get integrated into the platform and this will become the platform of choice in the marketplace.
At the same time, we're also cognizant of that fact that this is India. There will be me-too and copy-solutions that will emerge over the next few months and other players will want to build similar solutions with reasonable functionalities. But as an open platform, it's freely available to all, including to competitors for them to assess and learn from.
There has been talk in that the company wants to sell its business. Any comment?
There is no merit to that. That said, BillDesk is the largest digital payments business. It's a profitable business. It's been of the size and scale that is technically an IPO (initial public offering) size company.
Do we hear IPO talk?
We have the size and scale for, let’s say, a very successful IPO for being a very successful and interactive company. So, we constantly evaluate that possibility. But it'll be a function of investor needs, market timing and other things. And given that the environment, the regulatory space is also evolving and cleaning up for payments, it's a good time for us to kind of focus attention on that (an IPO) to see if the timing is opportune.
How did financial year 2020-2021 (FY21) close at BillDesk? What are your growth projections for FY22?
Tracking FY21, in the initial stage when there was a lockdown and physical deliveries are impacted, obviously ecommerce would have been affected. To that extent, those services would have taken a bit of a knock, but later came back, so to speak, with double the vigour. So overall, good year for I think for digital payments growth.
From BillDesk perspective, just to give a sense, we would top at about $100 billion of throughput for FY21. We would have added a level of TPV (total payment volume) which the rest of the market combined wouldn't have added. For FY22, from $100 billion we will perhaps go to about $130 billion.
At an industry level, what we will see in FY22 is an increase in small value transactions, because a lot of things like FASTag that are mandated digital use cases. Second, there will be more and more government businesses coming online. We will see flows to government in digital payments increase. Ecommerce transactions, to my mind, we'll have to see how they grow as we balance the pandemic behaviour as in digital versus offline. Given it's also a year of big regulatory changes in calendar year 2021, the most significant thing for businesses will be the degree of regulatory changes and regulatory compliance processes. I would expect this to be a regular good growth year and not necessarily an outlier in any form.
What are the top challenges for payment aggregators in the current landscape in terms of the regulator or even just consumers and the never-ending gamut of transacting options?
I think for payment aggregators, as a business, a couple of things are happening, some good and some which will be challenges. The one good part is there is now a regulatory framework. Business operations are going to be clear from an external environment perspective. The range to which they can work, or the framework in which they can work will be very clear, which structurally will mean, it'll make it easier for payment aggregators, to either raise capital or form strategic alliances.
However, this also comes at a point in time when there have been both government and regulatory interventions in the transaction space. As you know, there is MDR on a couple of payment products, and obviously because it's zero priced. There is a way that adoption increases there. These pose problems of business viability for payment aggregators.
If I were pick the single biggest challenge, I would say, building viable businesses in the face of a zero MDR regime.
Second, India has always been a hyper competitive market. It's a difficult market to build profitable businesses. Anyone who's hoping to build a robust profitable business like the rest of the world, that's going to be a a challenge in India even in the near short term.
What has zero MDR done for the fintech ecosystem at large?
The zero MDR regime has effectively created an environment where startups or businesses building business on the payment aggregation side, have been forced to figure out how else to build a revenue base if they can't make it from transactions.
You can talk about value added services, but essentially, most of them would look at how you leverage the underlying data that's flowing through to monetize it. To me, that's more dangerous than allowing for an MDR because that sets into operation a whole set of business practices that can be questioned.
And so, at large, industry participants, especially the younger ones whose need for revenue is higher because they have other needs of capital raising, attracting venture capital, have been forced to kind of diversify into lending solutions and other data monetization solutions. Lending is by and large currently unregulated in this space by RBI to great extent. But effectively so many of startups are being forced to do that as a way to figure survival. We've kind of just taken out problems from one block and placed in another. And inevitable problems will creep up there.
What are your thoughts on RBI's move to mandate tokenisation for payment aggregators?
Just to be technically correct, RBI has not mandated tokenisation. RBI has come up with a framework for card storage and said, measures like tokenization. It's important to make this distinction because even earlier when RBI mandated for example, additional factor of authentication, most in the market assumed that the RBI mandated OTP, which it didn’t.
Similarly, here RBI has put out a framework for card security and whatever helps the industry get there, and has identified tokenisation as one possibility. But any other thing that meets the same requirements could well get us there. That said, India has had this 2FA regime for many years now, and it is acknowledged across the world as being the most secure online payment mechanisms. This has also meant that India has had an extremely low fraud in online transactions, among the lowest anywhere in the world.
So, when we look at aspects like tokenisation, one has to examine what it will contribute. Tokenisation needs to be understood... That is when a merchant is storing a card, they could now store a token and therefore, that storage aspect is more secure. It doesn't necessarily lead to any higher degree of comfort in the transaction process where phishing attacks with OTPs happen. Standalone tokenisation doesn't address that.
It’s 2021. When do you see zero-click authentication come into fruition in the future, given the current flexibility at the regulatory end?
I think it's not going to happen in at least the next 18-24 months. We will have to wait and watch as to how the industry implements some of the regulator's intent with respect to card security. And all that will need RBI approvals. If well thought out, the framework allows for a possibility of zero click authentication, because now it is going to come under regulatory mandate. And if the ecosystem were to work solutions, within the RBI framework, there is a possibility that for a certain category of transactions done in a certain manner, 2-3 years from now we could see zero authentication process.
How has BillDesk's product thinking developed over time and with the emergence of facilities such as NUUP or UPI and/or others?
Let's think of it as a 20-year journey. Payments have grown significantly from a time when people undertook a part of the transaction digitally and part of it manually. Now it is end-to-end digital and in real time.
Second, from an India perspective, the ability to move money in real time at zero cost, having existed for many years is cutting edge in terms of world payment technologies, so to speak. Let's say, the top end of delivery of service to customers, which is how do you take all the front-end technologies and connect to the banks to... I think India's clearly really cracked it making sure all these are available. UPI is a great sterling advertisement for that in terms of how consumers can transact easily. I think that problem has by and large been solved and are in fact, in some ways even over-engineered.
The problem that is pending to be solved is an honest assessment of how big is this market? Is it a $150-200 million customer market or is it a billion-customer market from a real digital payments journey and a business case proposition? I think that's the one honest assessment that is pending, which will then give rise to the next set of solutions for growth. We listen to the top 20% of the Indian population, which is already very pampered with solutions. We need to figure out what works for the rest 80%.