Impact of SEBI, RBI circulars | Fintech Inside - Edition #84 - 08th July, 2024

Hi Insiders, I’m Osborne Saldanha , investor in early stage startups.

Welcome to the 84th edition of Fintech Inside. Fintech Inside is the front page of Fintech in emerging markets.

Been a minute, but I’m back to publishing. This week, I resurrected the Fintech Top Three section - three stories that made big news with some thoughts, insights and takeaways.

1. SEBI released a new circular for stock market participants to introduce “True to Label” pricing for the trades on their platforms. I had a lot of thoughts on this, including if zero brokerage days are behind us.
2. On 1st of July, RBI’s new mandate requiring all credit card bill repayments be made via India’s special bill payments protocol (BBPS) went live. Unfortunately, there’s a slight hiccup.
3. Since increasingly a lot of Indian startups are looking at expanding to Southeast Asia, I’ll try to cover at least one big news item from the region. This week, there’s a solid round up of the digital finance services landscape in Vietnam.

Let me know what you think.

As usual, there’s also a beautiful song recommendation at the end, if you’d like to listen to a song in the background while you read this. Do share your recommendations with me too :)

Thank you for supporting me and sticking around. Enjoy another great week in fintech!

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3?? Fintech Top Three

1?? End of zero brokerage in India?

SEBI released a notification for the licensed stock market participants to maintain "True to Label" charges and introduce uniform and fixed fee across all market participants instead of slab-based charges.

Takeaways:

1.What does the regulation say? Regulation is trying to address the "fee income" of stock brokers i.e. difference in fees charged by stock brokers to end users vs. the fees paid to stock exchanges. Stock brokers charge users per trade but pay the stock exchanges at the end of the month based on total monthly traded value. Zero fee brokers like Zerodha, don't charge users these fees on equity delivery, but only for Futures and Options (F&O) transactions. The fees charged/earned on F&O transactions by these zero fee brokers is so much that this revenue has been subsidising fees of investors investing for equity delivery. Zerodha itself earns 10% of its total income from this mismatch of fees, and 90% of this income is earned from F&O trades. The latest circular is basically saying (quotes mine), "no more earning from this fee mismatch, what you display as fees to the user, must be paid in full to the stock exchanges. You have to be 'true to label'. Oh and also, no slab-based pricing anymore, only fixed uniform pricing for all market participants".

2. Stock exchange revenue potential increase: If stock trade values continue growing at the current pace and the new circular brings equal uniform charges, then the exchanges will see a phenomenal rise in revenue from transaction charges. NSE, one of the major stock exchanges, earned INR 12,049crs ($1.44bn) in FY24 from transaction charges - this was 89% of NSE's total income. BSE, another major stock exchange, earned INR 5,827crs ($700mn) in FY24 from transaction charges - this was about 36% of its total income but the largest revenue source.

3. Level playing field for all market participants: If you see the current NSE pricing chart, you'll see the transaction charges (per INR 1lac/$1,200) reduce as total monthly traded value increases. With the new circular, this slab-based pricing will be replaced with uniform equal fees being paid by all, irrespective of traded value. This could mean that smaller stock brokers who don't have the scale of brokers like Groww or Zerodha, don't have to pay theoretically higher fees to compete. Further, there will not be any subsidising of user charges. The founder of Fisdom, Subramanya S V, certainly seems to think this circular is levelling the playing field.

4. Will this end zero brokerage? As mentioned above, zero fee stock brokers would earn enough from F&O trades that they could make the equity delivery trades free. The circular has made it fairly clear that this status quo will not work in the future. This could have one of two impacts: 1) brokers cannot make it free to buy stocks on their platform, or 2) charges for F&O trades will have to increase. If stock brokers want to continue to keep equity delivery trades free, then they'll have to increase the transaction fees charged for F&O trades, but that might not be allowed, as the charges need to be "true to label". This means, stock brokers will possibly have to introduce "true to label" fees for all trades. Does seem like it'll be the end of zero brokerage in India. Implementation will matter. Let's see how that goes.

5. Will this bring down F&O traded volumes? The big worry of the Indian securities regulator and most stock market watchers has been the meteoric rise of F&O trade volumes in India's stock markets. Ready for the numbers? India's monthly F&O turnover reached a record INR 8,740 lac crore ($1.1tn) in March 2024 - this is a 41x increase in five years, from just INR 217 lac crore ($27bn) in March 2019. Globally, in April, the top 3 largest exchange in terms of number of contracts traded were 1) NSE at 8,484mn contracts, then 2) BSE at 2,224mn contracts, and lastly 3) Brazil's B3 exchange at 692mn contracts. In Q1 2024, 84% of all equity options traded globally were on Indian exchanges, a significant jump from just 15% a decade earlier. The value of F&O traded is much higher than India's GDP. This new circular could be seen as a step to impose higher charges to end users, resulting in reduced F&O trades (might deter some folks from trading because of the unit economics of the trade). Will it have the intended effect?

2?? No credit card bill payments using third party apps

RBI's regulations for credit card bill payments via Bharat Bill Payments System came into effect on 1st July 2024, while HDFC, Axis, IDFC First and others were still not integrated into BBPS.

Takeaways:

1.What this means: India has a special system for all bill payments, that system is called Bharat Bill Payment System (BBPS). With BBPS any business can become a biller and collect bill payments via the protocol. It's best used for recurring payments. A user platform can also integrate and provide the user with bill payment access to the full suite of billers (across 20+ categories). Credit and credit card issuers are also billers on this platform to auto collect monthly credit repayments. So far, to my knowledge, no biller was required to be integrated on BBPS, all were voluntarily on the platform because of the convenience for both user and biller. Until now. Starting 1st July all credit card issuers are required to collect repayments only via BBPS.

2. Credit card issuers are not ready to be billers: The move to make credit card repayments via BBPS was supposed to be to make repayments convenient and timely. BBPS just seems to work better with NACH (auto-debit system) than direct NACH integrations. However, most credit card issuers are still not integrated with BBPS, creating confusion and issues on the user front. Of the 34 total credit card issuers in the country, only 11 are live on BBPS and 6 (including HDFC Bank, Axis Bank, YES Bank, IDFC First Bank and others) are in process of integration. The rest have not even begun to integrate with BBPS. That's 32% of issuers that are live billers on BBPS. These 32% of issuers represent only 50% of total outstanding credit cards, 47% of total CC volume and 49% of CC value. Wonder how this move of mandatory BBPS bill payment is in the consumer's best interest. This seems to be attempt by RBI to plug any potential delinquencies in the unsecured credit portfolio of the country from causing a systemic risk. But then again, credit card default rates have held at a little above 1.5% for the past year (RBI, Page 50).

3. Bharat Bill Payments volume is still small: The total transaction value of 103mn outstanding credit cards was $20bn in May, 2024. The total transaction value of bill payments facilitated in FY2024 (ended Mar, 2024) was $36bn. In Q4 FY2024, the total value of bill payments was $11bn, growing on average 17% QoQ. BBPS has a long way to go. As of May, 2024, the top 3 categories by value of bill payments are electricity bill payments (29.24%), loan repayments (28.23%) and credit card repayment (24.73%). Credit repayments already account for 53% of all bill payments.

1. (as an aside, I can't seem to reconcile why Saraswat Co-operative Bank is a live biller on BBPS, and seems to have its Rupay credit card program live, but is not accounted for by RBI).

3?? Vietnam’s digital finance landscape

According to a report on Vietnam's digital financial services, MoMo and Zalopay had the highest penetration rates of 62% and 45%.

Takeaways:

1. Some important numbers from various reports on Vietnam's digital financial services landscape.

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?? Song on loop

Fintech updates can get boring, so here's an earworm: I’ve been obsessed with Sofi Tukker lately and their widely popular song Original Sin (Youtube / Spotify). It’s an easy, smooth listen that’s sure to give you good vibes. Enjoy!

???? That's all Folks

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See you in the next edition.