Regulation plays catch-up in certain areas, enables innovation: Razorpay MD

"It is important how you absorb acquisitions and make them successful. We care about the kind of firms we acquire, and how we integrate them with the mothership"

At the Business Standard BFSI Insight Summit 2024, Shashank Kumar, co-founder and managing director, Razorpay, said regulation was necessary for the growth of the fintech ecosystem, and that norms did not necessarily stifle innovation at new-age companies. In a conversation with Business Standard’s A K Bhattacharya, he underlined the need for the Reserve Bank of India (RBI) to be the single regulator for all financial institutions, including traditional ones and fintech firms.

 

Acknowledging that while innovation at firms outpaces regulation, he said there had to be a system to ensure the safety of the sector. Kumar noted that the collaboration between banks and fintechs had demonstrated immense growth for the payment sector in the form of UPI. Edited excerpts:

 

Razorpay has acquired eight companies in the past 10 years of its existence. How do you balance acquiring companies with innovation and resilience?

 

The secret sauce is our culture and DNA. The firm is very much bottoms up. Most companies are run top-down, which is fine. At Razorpay, firms are actually run by a bunch of leaders. Internally, we have 50 different teams that pursue their goals, decide the strategy and roadmap, and execute it. It allows us to launch new products every quarter and that is the metric which I track. 

 

About acquisitions, it is important how you absorb those acquisitions and make them successful. We care about the kind of firms we acquire, and how we integrate them with the mothership. 

 

How big of a setback was when the RBI took action on the firm which led to an embargo, how did you go about it, and are there any learnings that you would like to share? 

 

The company matured significantly in the last few years even before the RBI embargo came through. As a startup, one is trying to grow fast, build products, and solve customer pain points. The regulator ensures the overall safety of the ecosystem.

 

One major learning for us in the last few years has been that in the businesses that we are doing, we go the extra mile to ensure the firms we deal with also have the right intent on using our platform. If any business is moving through our pipe, then we have to go deeper and verify the authenticity and intention of that business. Systems in the country are slow to respond to any issues when it comes to problems like fraud. For the regulator, and increasingly so for the industry, is to stop the issues from happening in the first place.

 

Do you believe regulation kills innovation or tries to stifle the growth of companies?

 

The blanket statement that regulation kills innovation is definitely wrong. I can agree bad regulation or over-regulation kills innovation. Regulation is needed for innovation to thrive. 

 

Some argue that technology often outpaces regulation. Does regulation just play catch-up, and does that constrain innovation?

 

Regulation does play catch-up in certain areas, but it also enables innovation. For example, the Unified Payments Interface (UPI) in India wouldn’t have been possible without the regulator’s active involvement in shepherding it to scale. The regulator pla­y­ed a crucial role in promoting financial inclusion and fostering innovations like UPI.

 

Technology does outpace regulation in some areas and regulation has to play catch up in those places. There is some intentional regulatory innovation that I can see, which is how do you promote financial inclusion? How do you promote payments and banking?

 

Is there a mismatch between the industry’s aspirations and how you are being regulated, what can you do about it?

 

The fintech industry is about just ten years old, and the regulator is close to completing a century. There is going to be a mismatch in the philosophy of the industry versus the regulator. I do not think either of them is wrong. It needs to come together somewhere.

 

The RBI has a long-term view of the country. We must remember that we are not reaching the real India. While tech can outpace regulation, it also needs to be ensured it does not harm anyone.

 

What might help is to create a lot more comfort and have more transparency. This would be in terms of how some of the (regulatory) decisions are made, what do they think about them, if there can be a dashboard around compliance, and if they can publish more reports leading to some of the actions that they take. These deliberations do happen in private, but as a broader industry, we can have more transparency, making it easier for the industry and the regulator.

 

Is there a need for a localised and focused fintech regulator, which may not necessarily be part of the RBI, or do we need a regulator that is an extension of the RBI? 

 

You can’t have a separate regulation for financial services and financial technology. In 20-30 years from now, fintech is what every company needs to be, whether they like it or not. This is true for institutions that are 100-year incumbent or even a 10-year old startup. That way, I don't think you can have a separate regulatory body. It has to be the RBI.

 

How do you differentiate yourself, since banks face competition from fintechs, do you see that as being a differentiation or a more collaborative endeavour? 

 

One major difference between banks and fintechs is the ability to build software and technology. That is a major fundamental difference just in the way the DNA of the two different types of organisations builds up. 

 

Banks have the banking infrastructure. However, all the software on top of it, at least for payments including merchant transactions, is being done by fintechs. This is a collaboration that has worked very well. As software starts playing a major role, then either banks need to change their DNA or they will cede that space to software companies. 

 

 Will the payments business ever be profitable on its own, especially in a market where UPI transactions are free and companies are unable to charge? 

 

Payment companies will be profitable. I don’t think that has been unproven at this point in time. There are other payment companies in the country, which are either profitable or close to profitability.

 

What about subsidies from the government?

 

Subsidies cover the losses (to promote digital payments). It needs to be directed at the right segments. There is no point in subsiding large companies since they can pay well for the cost of payment infrastructure as well as the innovation. The government also needs to run the sector as a free market.

 

How do you see the payments segment evolve in the next few years, how would digital currency and artificial intelligence be disruptive elements?

 

When we started Razorpay in 2015, a lot of venture capitalists (VCs) would tell us we were late to the market. In 2015, the digital payment market was $60 billion. Today, our company itself processes more than $150 billion. The size of the market would be around $500 billion in the country. 

 

UPI has about 300 to 350 million users at present. In the next ten years, three major things would unfold. The base of customers doing digital payments will grow from 300-350 million to over 1 billion. The economy will grow from $3.5 trillion to about $10 trillion. Third, average incomes would continue to increase. The number of use cases of the conversion of unorganised to the organised economy would continue to happen. Thus, digital payments will grow ten times from here. All of that will be underpinned by the revolution that will happen in AI.  Some of it will happen by central bank digital currency (CBDC). 

 

Would we see the company go public in 2025 or 2026?

 

Absolutely not. We are still in the process of reverse-flipping the company from the US to India. The associated compliances and processes that come with them will probably finish sometime in 2025. 

 

About 2026, we have certain internal milestones, especially for the new businesses that we have. The online payment business is profitable and has flexibility. For the new ones, such as offline payments, financial services, and software business, we are still investing a lot in that area. We want all those businesses to mature. So, going public would be probably beyond 2026.