How Fast Is Too Fast For Payments?

Good morning. We can now make payments with a blink of an eye, sometimes even without a pin. There is also talk about enabling transactions with unified payment interfaces (UPI) to countries outside of India. While it has brought much ease to the financial system, less friction in the system has also opened us up to more risks. Do we need all of our financial transactions to be really fast? Read on to know. 

In other news, more borrowers in rural areas are throwing up challenges for microfinance companies. Meanwhile, the Reserve Bank of India (RBI) chief general manager Vaibhav Chaturvedi has urged banks to become more responsible lenders.

THE TAKE

We Need To Slow Down Our Financial Transactions

For the last few years, the financial system led by financial technology companies or fintechs has strived to reduce friction in India’s payment systems. The UPIs and other such systems, whether peer-to-peer or with banks, have sped up payments to never-seen-before levels. Similarly, loans, buy now pay later systems and investments in stocks can just be done with a swipe on a smartphone. The financial system is now overheated because of the ease of making any of these transactions, be it personal loans or investments in stocks or worse, derivatives. 

The Core Report has argued in the past that we need to introduce more friction, particularly in some segments of the financial system, to slow down transactions. Now, Christopher J Waller, a governor on the board of the Federal Reserve, America’s equivalent of the Reserve Bank, has made a powerful case for reducing friction at the Global Fintech Festival in Mumbai this week. This would have been, quite likely, to the embarrassment of many present there.

“Not all frictions that slow payments down are bad. Certain frictions are purposely built into the global payment system for compliance and risk-management reasons. Slowing down the speed at which payments are cleared and settled helps banks prevent money laundering and counter the financing of terrorism, detect fraud, and recover fraudulent or misdirected cross-border payments,” he said.

Waller was speaking in the context of interlinking fast payment systems and responding to essentially the proposition that we should be able to make payment to a cousin in the US, with the same speed and efficiency as we do using Google Pay to any vendor or friend present in India.  

Waller said that no silver bullet that can increase the speed and efficiency of payments that currently go through an often complex chain of correspondent banks can happen without tradeoffs. Unless new solutions are found, interlinking fast payment systems might increase the risk-management burden for banks that participate in them. 

Waller also asked if can assume that all parties to a cross-border transaction want faster payments. The fundamental friction in any transaction is that the seller of an object — a can of soup, an hour of labour, or a product manufactured for export — wants to receive their money as fast as possible. However, the buyer of the object, or the buyer's intermediary, typically has an incentive to wait as long as they can to pay for something they have purchased. 

Under this logic, senders need to be properly incentivised to speed up cross-border payments. The one exception may be person-to-person remittances, where workers from other countries want to send money home, and recipients want access, as fast as possible. 

But remittances are only a small percentage of the value of cross-border payments, so we'd need to weigh the benefits against the costs of a potential public-sector intervention to shift incentives. So, I am still left with the larger question of whether we should be incentivizing faster cross-border payments.

Waller also spoke about the costs of faster payments and raised questions on who will eventually bear them. He provided the example of the low-cost international ACH payment network between the US, Europe and Canada,  which he said hasn’t worked. 

The infatuation of finding a technology solution cannot override the social, legal and other constructs that drive financial systems and payments in a country. Technology, as Waller also pointed out, is the easier part. The legal, compliance, settlement and governance challenges are more substantial.

In India scores of people are daily scammed by fraudsters who send SMSs, WhatsApp messages and emails. Sometimes it is about investing your money somewhere, sometimes it’s sextortion and often a simple con, and at other times it’s in the form of a message that sounds like it came from a colleague who desperately needs money.

Be it reported or unreported, it is safe to say that millions of dollars of people’s hard-earned money is lost every month to such scams. Enabling all of this, among other means, is frictionless transfers via UPI to bank accounts. It turns out that despite all the mind-numbing levels of bank KYC that normal people have to go through, there are KYC-less mule accounts that collect the money and transfer them elsewhere. UPI isn’t the only modus operandi, there are many others. But nothing connects all of them well as the basic proposition of speed, efficiency and anonymity.

This brings us to the compliance and legal issues that Waller spoke of. We do need frictionless transactions, but maybe we could benefit from slowing it down by 20% for bigger transactions like buying homes and cars or taking out loans. We don’t need so much ease in financial transactions that the system could collapse on small savers and investors one day.

CO-RELATION

Microfinance Faces Macro Challenges

More and more people in rural India have started to borrow from microfinance companies. Microfinance companies now have borrowers in states that have low wages, as compared to others. The average loan outstanding to average rural income ratio is up to 2.3 as of March 2024 from 2 a year earlier. States like Bihar, West Bengal, Uttar Pradesh, Maharashtra and Odisha have witnessed a decline in average rural income and an increase in microloans. That has resulted in higher delinquencies. This has thrown up a volley of problems for these companies. 

India Ratings, an affiliate of global ratings agency FITCH, flagged the risk in the latest review and said that companies are taking remedial steps. They are shoring up networks or boosting collection efforts by locating borrowers. The credit rating agency also said that monitoring the end use of funds remains challenging. As a result, microfinance companies have to maintain sufficient capital buffers. Shares of Bandhan Bank, Credit Access Grameen and others fell in an otherwise buoyant market.

CORE NUMBER

334

This is the number of billionaires in India, according to the 2024 Hurun India Rich List, a sixfold increase in 13 years. Gautam Adani and family top the list with Rs 11.6 trillion, followed by Mukesh Ambani at Rs 10.1 trillion. Eighteen billionaires have wealth exceeding Rs 1 trillion, with five of the top 10 based in Mumbai. This time, Shah Rukh Khan debuted as a billionaire with an estimated wealth of Rs 7,300 crore. Zepto co-founders Kaivalya Vohra (21) and Aadit Palicha (22) are the youngest billionaires on the list, marking a new wave of wealth in India.

FROM THE PERIPHERY

—🎤 Securities and Exchange Board of India chief Madhuri Puri Buch gave her first public address on Thursday following the allegations by short seller Hindenburg Research against her. Speaking at the Global Fintech Fest (GFF) in Mumbai, Buch called for better compliance between industry players to foster trust and protect small investors. Buch refused to comment on the Hindenburg report which alleged she had a conflict of interest in the Adani probe due to her links with the Adani Group.

—🏦 Chief general manager of the Reserve Bank of India (RBI), Vaibhav Chaturvedi urged banks to be responsible lenders, saying it was as important as responsible borrowing. Chaturvedi said that customer trust and financial literacy cannot be solved overnight but there was an urgency given how digital lending is picking up. His comments come at a time when banks are increasingly using artificial intelligence (AI) models to assess and classify people’s borrowing behaviour. 

—📢 Reliance Industries’ annual general meeting saw various launch announcements including Jio TvOS, a homegrown operating system designed specifically for the Jio Set Top Box; Jio Brain, a work-in-progress suite of tools and platforms used across AI lifecycle; Jio TV+, a consolidated entertainment platform; Jio Phonecall AI, which can record and transcribe phone calls. Reliance Retail is also eyeing the luxury jewellery segment, in addition to Reliance Jewels which is currently targeted at the mass audience. 

—📱 The Telecom Regulatory Authority of India (TRAI) is revisiting its 2018 regulations and considering imposing tariffs on telemarketers who exceed certain limits to combat spam calls and messages. TRAI data shows a small fraction of over 1.1 billion subscribers send 51–100 SMS or make 51–100 calls daily. Proposed fines include Rs 1,000 per valid complaint and higher penalties for registration and misuse violations. TRAI aims to simplify commercial communication categories, distinguishing transactional, promotional and government messages. Starting September 1, messages with non-whitelisted URLs or certain app links will be banned. 

UGH

Imagine being refused boarding at an airport because the airline you’re flying hasn’t paid its dues to the airport. That is reportedly what happened to the passengers flying SpiceJet from Dubai who were not allowed to check in on Thursday over the airline's unpaid dues, industry sources said. As many as 10 flights were eventually cancelled. The budget carrier had received warnings from Mumbai airport earlier this month, but those dues are settled now the airline claims. The airline has been behind on salary payments as well as contributions to the Employee Provident Fund. Yet another crisis brewing in the Indian aviation sector? 

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