Regulation does not kill innovation, it makes industry thrive: Razorpay MD

Speaking at the BS BFSI Summit, Shashank Kumar said that the firm has certain internal milestones, especially for the new biz they have launched and therefore, going public would likely be beyond 2026

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

 

Meanwhile, he acknowledged that while innovation at firms outpaces regulation, there must be a system to ensure the safety of the sector. He also added that the collaboration between banks and fintechs has demonstrated immense growth for the payments sector in the form of the Unified Payments Interface (UPI). Excerpts:

 

 

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

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

 

Regarding acquisitions, it’s important how you absorb those acquisitions and make them successful. We care about the kinds of companies we acquire and how we integrate them with the mothership.

 

How big of a setback was it when the RBI took action against the firm, leading 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 past 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 past few years has been that in the businesses we’re involved in, we go the extra mile to ensure that the firms we deal with also have the right intent when using our platform. If any business is moving through our pipe, we have to go deeper and verify the authenticity and intention of that business.

 

Systems in the country are slow to respond to issues like fraud. I think for the regulator, and increasingly so for the industry, it is important to prevent issues from happening in the first place.

 

Do you believe regulation kills innovation or stifles the growth of companies? 

The blanket statement that regulation kills innovation is wrong. I agree that bad regulation or overregulation 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, 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 also some intentional regulatory innovation, which I can see, such as how to promote financial inclusion, payments, and banking.

 

Is there a mismatch between the industry’s aspirations and how you are being regulated? What can be done about it? 

The fintech industry is only about 10 years old, and the regulator is close to completing a century. There will be a mismatch in the philosophy of the industry versus the regulator. I don’t think either 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 yet reaching the real India. While technology can outpace regulation, it also needs to be ensured that it doesn’t harm anyone.

 

What might help is creating more comfort and transparency. This would include how some of the (regulatory) decisions are made, what the regulators think about them if there can be a dashboard around compliance, and if they can publish more reports leading to some of the actions they take. These deliberations happen in private, but as a broader industry, we can have more transparency, making it easier for both 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 cannot have separate regulations for financial services and financial technology. In 20-30 years from now, fintech is what every company will need to be, whether they like it or not. This is true for institutions that are 100-year incumbents or even 10-year-old startups. For this reason, 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 a differentiation or a more collaborative endeavour? 

The major difference between banks and fintechs is the ability to build software and technology. That’s a fundamental difference in the DNA of the two different types of organisations.

 

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 collaboration has worked out very well. As software plays a larger role, banks either 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? 

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

 

But what about subsidies from the government? 

Subsidies cover the losses (to promote digital payments). They need to be directed at the right segments. There’s no point in subsidising large companies, as they can pay well for the cost of payment infrastructure and innovation. The government also needs to run the sector as a free market.

 

How do you see the payments segment evolving in the next few years? How would digital currency and artificial intelligence (AI) be disruptive elements? 

When we started Razorpay in 2015, many venture capitalists told us we were late to the market. In 2015, the digital payment market was worth $60 billion. Today, our company itself processes more than $150 billion. The size of the market will likely reach around $500 billion in the country.

 

UPI has about 300-350 million users at present. In the next 10 years, three major things will 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; and average incomes will continue to increase.

 

The number of use cases for the conversion of the unorganised to the organised economy will continue. Thus, digital payments will grow 10 times from here. All of that will be underpinned by the revolution that will happen in AI. Some of it will occur through central bank digital currency.

 

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 that will likely finish sometime in 2025.

 

By 2026, we have certain internal milestones, especially for the new businesses we’ve launched. The online payment business is profitable and has flexibility. For the new ones, such as offline payments, financial services, and software businesses, we are still investing heavily in those areas. We want all those businesses to mature. So, going public would likely be beyond 2026. 

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