Sucheta Dalal :Regulation must keep pace with markets
Sucheta Dalal

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Regulation must keep pace with markets  

Jun 19, 2006

A week ago, a top media company beat banks and finance companies to launch an e-wallet and entered into a new and unregulated market. E-wallets, stored value payment cards and the payment facility offered by mobile phone companies (to pay for music, ringtones, video clips, etc) are all part of a new global market which has immense growth potential in India as well.


Internationally, mobile phones are fast emerging as the preferred instrument for such electronic transactions through the mobile wallet, where technology and ease of use is already established. In fact, Visa, MasterCard International, American Express, Discover and PayPal are reportedly working at developing a pilot full-service mobile wallet.


India today has a large segment of net-savvy people who are wary about exposing their credit and debit cards to e-commerce transactions due to higher risk perceptions. However, there is an obvious market for low value e-commerce transactions to send flowers, gifts, chocolates or buy books, magazines and music, as well as tickets to movies, theatre, sports events and concerts. This is the nice part. The flip side is that unless end use of transactions is clearly defined, there is nothing to prevent e-wallets being used for gambling or other dubious activities.


According to one international media report, Americans bet $4 billion on internet gambling despite a ban on such wagering in the US, and the market is growing at 20%. The Middle East Times reports that, “In the US, authorities have blocked credit cards, banks and the online service, PayPal, from offshore betting. But Ameri-cans still manage to place bets through other online payment services.”


Indian also love gambling and lotteries, despite the government’s constant effort to control and regulate these. Unless end-use rules are in place, several popular underground betting systems (like the unorganised matka system) could potentially spring up and thrive through opaque e-payment systems.


Over the past few years, the banking regulator has been making a serious effort to ensure strict adherence to Know Your Customer (KYC) norms and it is these worries that may have prevented several banks from launching e-wallets. Yet, a new product is already in the market and it turns out that it is operating entirely outside the regulatory ambit. The first e-wallet allows anyone with a valid e-mail ID to send and receive money from anyone, or settle bills through money that is stored online in safe systems or through bank accounts.


Clearly, this is fraught with problems. There is nothing to stop a host of other companies from getting into this space, without worrying about regulatory dos and don’ts. That’s because the Reserve Bank of India (RBI), which is the obvious regulator for such products, currently has no mandate to regulate these, despite the fact that they will involve payment systems and money transfer.


• The e-wallet is operating entirely outside the regulatory ambit

• If not addressed quickly, dozens of non-finance cos would move in

• The RBI needs to be empowered fast before security issues crop up


This is not the first time this has happened in India. One would recall plantation companies of the early 1990s, whose high-blitz advertising allowed them to collect tens of thousand crore rupees from gullible investors before the government woke up to the fact that they were unregulated. But it was too late. We then had the unseemly spectacle of two regulators fighting to shirk responsibility before the issue was decided by the government.


E-wallets are certainly not in the same category— they have a clear and potentially big market. But by their very nature, would need careful supervision about source of funds and their end-use. Bankers say that e-wallet issuers could technically take the stand that KYC norms will remain the responsibility of the bank from which the customer transfers money. If accepted, that argument could lead to curious issues. For instance, banks could also argue that they need not bother with KYC norms when a customer moves money from one bank to another. Indeed, this is already a trick employed by fraudsters to open new bank accounts with minimal checks.


Unless the government quickly settles the regulation issue, there is a good chance that dozens of non-financial companies would launch similar products even while stringent KYC rules inhibit banks from venturing into this space. RBI sources say that regulation will only fall into place when Parliament passes the Payment Systems Bill. The Payment Systems Act is meant to empower the RBI to regulate and supervise all payment systems, including those from private service providers. There is now an increased urgency to pass this Act.


Meanwhile, the RBI may have to approve of banks launching e-wallet products with a clearly defined end-use. For starters, a top banker says that banks could possibly offer physical stored value cards with limited value that can be used at the merchant’s end, or online virtual cards to their existing client base, which has already passed the KYC test. Banks are probably waiting for RBI’s approval. However, there is a good possibility that credit card majors such as Visa and MasterCard could work with mobile phone companies and leave banks out of this market altogether. Or, maybe banks would work with phone companies to expand the market. Anything is possible.


But the government needs to move fast to empower RBI to regulate e-wallets and provide safe and well-regulated options to people before security issues crop up—as they invariably do. Other-wise, the market will expose our inability of regulation to keep pace with technology and global developments.


-- Sucheta Dalal