RBI's Payments Vision amid Regulatory Chaos (#53)
While the central bank may seem certain, the industry deserves more dialogue on the payments regulations
Welcome to the 53rd issue of Unit Economics. For today’s write up, I pen down some thoughts on the latest development in payments regulations and take cues from the payments vision document to understand how RBI may be thinking about payments. Dive in!
The Reserve Bank of India (RBI) released its vision document for Indian payments (2025) last week and defined at its core the goal to enable e-payments for everyone, everywhere, everytime (4Es) by providing every user with safe, secure, fast, convenient, accessible, and affordable e-payment options.
The last few years of digital payments add tremendous credibility to the central bank’s goals, and the diligence is corroborated well with the pace and gravity of regulations being revised and issued by the RBI. At no other period has this been more apparent than over the last few weeks.
To give us a glimpse of how the RBI is thinking, the vision document interestingly expands its scope and identifies the need to,
Revisit the guidelines for PPIs, including taking a view on the timeline for full-KYC PPIs, definition of closed system PPIs, and other related aspects within the master directions (para 4.2.2),
Attempt implementation of proportionate regulation of BigTechs and FinTechs in the payments space, given their growing prominence (para 4.2.9),
Undertake an evaluation of charges for all payment systems, including a comprehensive review of all aspects related to charges involved in various channels of digital payments (para 4.2.12),
Explore feasibility of linkage of credit cards and credit components of banking products to UPI, to offer more avenues and greater convenience to users in making payments through the UPI platform (para 4.3.3),
Issue appropriate guidelines on BNPL payments (para 4.3.7)
A clear theme of more active regulatory overwatch for fintech companies and their new payment plays emerges above. This adds perspective to some of the regulations issued on payments and adds more weight to why the RBI is doing so. Three regulations, particularly, attract notice.
Credit cards allowed to be linked with UPI
The move to allow credit cards to be linked with UPI will significantly increase the scope of UPI payments by making UPI more enticing to the millions of credit-willing and affluent populations, who would – with this – be able to use their available credit over UPI without (likely) sacrificing the transaction perks that they earn on credit cards today. Further, this aligns closely with RBI’s goal to “offer more avenues and greater convenience to users in making payments through UPI platform”.
A second-order effect of the regulation might be an increase in the issuance of digital-only credit cards which could then simply be tied to a UPI handle for transactions, removing the need for many to carry their plastics or metals to the point-of-sale.
However, the notification is expected to be followed by a detailed circular highlighting the instructions for system developments, and it might be premature to comment a priori on how authorization or settlement would work for the feature. Further, the implementation of the guideline will take months for even Rupay to allow UPI interoperability for its credit cards, and likely more than a year or two for other networks (Visa, Mastercard, Amex, Diners) with little to no integration with UPI/NPCI today.
Lastly, the regulation expects credit card issuers and networks to also formalize certain aspects of how credit cards would operate on UPI. Importantly, they would need to answer whether the same rewards would apply to UPI-based transactions and whether P2P or unverified-P2M transactions would be entertained over UPI for the cards, moving against the predominant merchant-only payments acceptance that card networks have long followed.
The underlying view that emerges from thinking more on the topic is that this is a win-win for UPI but only puts across more dilemmas for the already-struggling credit cards.
Credit-backed PPIs in a spot
In a notification issued on 20th June, the RBI clarified that the PPI Master Direction “does not permit loading of PPIs from credit lines. Such practice, if followed, should be stopped immediately. Any non-compliance in this regard may attract penal action..”.
The notification appeared to only address PPIs issued by non-banks, but the rumors in the industry suggest similar application to the bank PPIs. The guideline, along with limitations on information access and contribution to marketing and distribution of credit or pre-paid cards by co-brand partners, shows the concerns with which the RBI views the co-brand PPI issuance model today. Further, the lack of standard on where credit line is sourced from and the differing roles of NBFC add to the grim view.
The notification, however, appears knee-jerk with no exact rationale being given by the RBI and leaves to imagination the digital lending circular that is expected to remove some of the greys within the guidelines.
Additionally, the guideline – without prior notice – has put over 10 Mn credit-linked PPIs in the dark, forcing the payments council to urge more sanity for full-KYC PPIs at the least.
The ambiguity of the guideline stops in tracks multiple product launches that were expected over the year and likely pushes some of the investor commitments out of comfort for the fintech companies. For anyone in payments, these regulations – along with the funding freeze – make this a year as challenging as any over the last decade.
There are a few ways to compensate for the lack of notice: allow time for fintech players to transition away or evolve with a year or two long grandfather or sunset clause, offer more flexibility for issuers offering full-KYC PPIs, issue clarification on timelines for when clarity on digital lending models can be provided, and allocate a dedicated body for any grievance redressal for those impacted. With the industry bodies creating noise for more clarification, the RBI should rue the unnecessary chaos the notification has caused and should see the time of utmost essence by giving more clarifications on the subject.
Tokenisation deadline extended, again
Tokenisation has been the elephant in the payments room for the last year. Not enough has made it to the news on how ready the industry and merchants have been at any point in time.
However, the extension of the deadline to 30-Sept suggests – yet again - what internally had been known for the last few months. That is, it will take time for the issuers, card networks, PA/PGs, and merchants to be ready for such an industry-defining shift.
To capture the issues briefly, if the deadline were to remain, only two (Visa, Mastercard) out of five networks would have supported payout to saved tokenised cards without requiring the user to enter the card details again. This would have had a direct impact on processing any transactional refunds. And even within the two networks, the bin coverage for instant settlements was <40%. To make it worse, a survey from Razorpay put the readiness of merchants to integrate the tokenisation solution to less than 50% last month, indicating extremely low market readiness.
The extension of three months, generous given the wordings of the last RBI extension, will provide time for more elaborate CUG testing for the networks & PA/PGs on tokenised card payment flows – and hopefully increase the adoption of such solutions with the merchants, who would otherwise see a large drop in customer retention. This would, especially, aide merchants who wish to become token requestors (TRs), and will now have more time to do so with the now-ready card networks.
Further, the tokenisation solution mandates that the card networks assume a greater role in fund settlement, and the alternative of direct issuer integration (via issuer tokenisation) continues to be shorthanded until more issuers have developed the direct flows with PA/PGs – which will likely take by the end of the year for even the top five banks.
You will notice that the three months help, but the challenges of tokenisation make it seem eerily short, which is why the industry voices had been for a 6-to-12-month extension instead. If the RBI does stick to the new timeline, the drop in checkout experience on merchant websites will continue to be significantly poorer for ~half of all card bins – which would be another step back for an otherwise blooming payments ecosystem.
Regardless, cards – again - are on the short end of the stick with the regulation and this appears to have become a recurring theme.
Final few thoughts
The payments regulations from RBI have gained pace and become more absolute with respect to the greyer sections. This is good news for the long term, and I assume that the RBI views it similarly. However, the definite nature of the directions with little prior dialogue has unintended consequences for many that have innovated and moved the ecosystem ahead in the last few years.
The latest developments, again, highlight the need to make such decisions with more discourse and consideration of the present market structure, and to keep the communication on the rationale for the regulations more explicit.
This is a time of chaos for the industry, but we can choose to be optimistic and realise the value of a clear payments vision by the RBI, and the new conversations that have now spurred with the regulations on PPIs, digital lending, credit cards, and more.
With the dialogues, this will be a period to keenly observe and follow for all in the industry, and we can hope that the payments ecosystem will be better for it by the end.
If you have any views or feedback to share on the topic, feel free to add a response below or to share your thoughts with me over Linkedin. In case you feel your friends or family would be interested in reading about payments, feel free to share the blog with them as well. See you in a couple of weeks!