RBI Mulls Ways To Limit Big Tech Impact On Indian Banking—BQ Exclusive

The Reserve Bank of India is currently deliberating on the role of so-called Big Tech firms in India's financial system. An internal group at the central bank is looking at the extent of the involvement of these firms within the domestic payments and banking sectors and is mulling over steps to keep them in check, according to three people aware of the matter.

Big Techs are technology giants that offer data-focused services and products to a large section of the global population. These products and services are very well entrenched among their users and are difficult to replicate by smaller companies.

The RBI group is seeking to ensure that Big Tech firms do not get involved in the deposit business of banks and also do not store intrusive customer data. While the group is not in favour of allowing free reign to Big Tech firms, it feels that small fintech firms may act as lead generators for banks, the first of the three people cited above told BQ Prime on the condition of anonymity.

Currently, these deliberations have not reached a stage where they may evolve into regulations; however, they do indicate the direction for the RBI, the first person said.

If these deliberations do materialise into regulation, they will not seek to bar Big Tech firms completely but may impose a higher regulatory burden on them, the second of the above-mentioned three people said. The RBI will avoid introducing outright bans on these firms since entity-based regulations have unintended consequences, the second person said.

This regulatory burden may take the form of tougher data localisation norms, stricter rules for customer onboarding, and narrower business opportunities for these firms, according to the three people quoted above.

Google, Meta, and Amazon have all been actively pursuing the Indian payment ecosystem to work their way into broader financial services.

Google Pay is the second largest mobile application in the unified payments interface system, accounting for over 35% of the 9.9 billion UPI transactions that took place in July, according to the latest data available on the National Payments Corporation of India website.

Amazon Pay accounted for 57.6 million transactions in July. WhatsApp Pay, Meta's payment offering, accounted for only 17.84 million transactions in the same period.

As of now, the RBI has granted in-principle approval to Google India Digital Services Pvt. and Amazon (Pay) India Pvt. for payment aggregator licenses. A payment aggregator allows merchants to accept digital or electronic payments; in those terms, they will end up handling customer funds. It is not clear when the regulator will extend final licences to these entities.

If the regulator intends to curb the extent of Big Tech in India's financial services system, it will need to tighten the role they play as payment aggregators, the second and third persons quoted above said.

The regulator has been consistently raising the issue of Big Tech in public and private discussions. In 2021, when Equitas Small Finance Bank and Google Pay announced a partnership to garner fixed deposits from customers, the regulator objected to it. After the RBI raised questions on the nature of the partnership, Equitas SFB dropped the product, as Managing Director and Chief Executive Officer PN Vasudevan had told BQ Prime previously.

RBI officials, in private discussions, have highlighted the immense risk posed by these companies to the financial services ecosystem, according to the third person quoted above. If allowed to grow without a clear regulatory framework, such firms might become too intermingled with the financial system, introducing unforseen risks, the third person said.

In a paper published in the October 2022 RBI bulletin, authors from the regulator's Department of Supervision highlighted the risks involved in Big Techs. Three key risks include:

• Owing to their complex corporate structures, effective oversight of Big Techs is limited.

• Their financial services offerings may lead to shadow banking activities, undermining financial stability.

• They can acquire cross-functional databases that can be exploited to generate innovative product offerings, making them dominant players in the market.

"The key paradigmatic shift in the regulatory approach towards addressing the risks from big tech lies in calibrating the regulatory frameworks with a mix of entity and activity-based rules," the authors wrote in their paper.