Opinion Don’t slam the brakes

Last week, the Reserve Bank of India issued a notification that puts taxi service provider Uber out of business. Uber was clearly in violation of the RBI’s regulations, requiring all credit/ debit card payments to be subject to a “two-factor” authentication. The process requires the cardholder to enter some variant of a PIN or password after swiping the card, in addition to signing the payment slip. While it is no one’s case that Uber was on the right side of the RBI’s regulations, questions must be asked about the regulations themselves. This seems to be another case where the RBI is trying to ensure safety at the cost of financial innovation and consumer freedom.

Uber’s business model was an important innovation in the taxi service industry. A customer has to submit her credit card details on its website. Once she takes a ride, she merely climbs out of the taxi without having to make a payment on the spot. The payment is made using the credit card details stored with Uber. A bill is sent to the customer via email. This greatly eases the convenience of using taxis. Consumers need not carry cash and there is no risk of an on-the-spot credit/ debit card transaction failing. The potential to increase productivity through such innovations becomes clear when the time saved is aggregated across the estimated five million taxi rides that are taken every day in India.

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While the RBI’s general concern for consumer protection may be valid, in this case, by requiring two-factor authentication, the RBI could be accused of standing in the way of financial innovation. It appears to be telling taxi companies: you are competing on a mediocre level-playing field in a regulatory system that disregards innovation. It seems to be telling consumers: you do not have the freedom to make a choice between convenience and safety. The RBI does not allow a consumer the freedom to waive this high-security procedure even for a transaction of Rs 500. The root cause of this is the lack of accountability of the RBI’s regulation-making process. There is no formal public consultative process, no requirement to demonstrate the costs and benefits of regulations, or any publicly available information on the effectiveness of regulations. We should move towards a legal framework that requires regulators to follow a rigorous, consultative and evidence-based process for regulation-making.