India’s digital payment ecosystem, which is currently dominated by the National Payments Corporation of India (NPCI), is ready for a major change. With RBI’s new guidelines that allow the setting up of NPCI like pan-India umbrella entities for retail digital payments (called New Umbrella Entities), business behemoths are rushing to get a license for the same. This seems to be a promising step for the consumers.
This article closely looks at the new directives that have been issued by the RBI which revolve around the establishment of New Umbrella Entities and further analyses what changes will it bring to the fintech industry.
Origin and Meaning
In March 2020, the Reserve Bank of India reported that NPCI’s share in the entire payment landscape of India stood at 64.5% by volume and 4.07% by value. Despite its stellar performance, the central bank has underlined the need for more competition in the payment sector. The concentration of payment system operation within the same entity has several disadvantages. These include systematic and operational risks, inefficiencies, no space for innovation, and monopolistic trends. Bureaucrats think that how NPCI’s operations and volume of transactions are increasing, any disruption can have a large impact on the payments and the settlement of transactions. Just imagine a situation when payment apps with most volumes like Google Pay, PhonePe, Paytm fail (with no other alternatives); the inconvenience and the sheer loss associated with it are beyond our calculations.
Therefore, RBI floated a draft framework to set up a New Umbrella Entity (NUE) to bring down the overdependence of the NPCI. The New Umbrella Entities will be entrusted with the task of managing and operating new retail payment systems majorly including ATMs, white-labeled point-of-sale (PoS), Aadhar based payments, and remittances among others. The RBI has decided to give out only two NUE licenses as of now.
To understand in simpler terms, setting up NUEs is the government’s other attempt to create a ‘cashless economy’ by bringing more people into the channels of digital payments. Digital transactions ensure more transparency and accountability as compared to cash transactions.
New Umbrella Entities would threaten the monopoly of the NPCI which operates UPI and RuPay networks. UPI has been the backbone of all payment apps including Google Pay, PhonePe, Paytm, Amazon Pay, WhatsApp Pay. Given that Google Pay, PhonePe, and Paytm alone take over 80% of the digital transactions in the ecosystem, welcoming NUEs would unquestionably threaten their volumes.
Having said that, the government has no intention of scrapping NPCI. Since the time the government had issued guidelines about NUEs in August 2020, it made it clear that such entities would complement the NPCI rather than competing with it. The New Umbrella Entities will work parallel to NPCI and create solutions on peer-to-peer and merchant payments. Just like NPCI runs UPI, IMPS, and other payment modes, these entities will create similar mechanisms which shall be later used by banks and fintech companies.
The Government’s rationale is to provide more choices to the consumers instead of creating any confusion. The main difference between the working of NPCI and NUEs is that the latter shall be permitted to operate on profit unlike the former.
As per the guidelines set by the RBI, any interested companies should have a net worth of at least Rs 300 crore at any given point of time, paid-up capital of Rs 500 crore, and a prior experience of a minimum of three years in the minimum space. All promoters in the entity have to demonstrate a capital contribution of a minimum of 10% (equivalent to 50 crores) at the time of setting up the entity and no single promoter or group can hold more than 40% in the capital of the NUE. Only after five years of the commencement of NUE’s business, the promoter or the promoter group’s shareholding shall be diluted to a minimum of 25%.
A series of business behemoths and e-commerce giants are queuing to set up NUEs. Reliance Industries along with Google and Facebook, which are already prime investors in Jio Platforms, are planning to apply as a consortium. Joining them in the race is Tata Group which has joined hands with HDFC Bank, Kotak Mahindra Bank, MasterCard, and Bharti Airtel. E-commerce giant Amazon has partnered with Visa, ICICI Bank, Axis Bank, and fin-tech start-ups BillDesk and PineLabs. Lastly, Softbank portfolio companies: Paytm and Ola: have also reportedly joined hands for the NUE license.
Various factors explain the madness which is driving business consortiums to apply for an NUE license. Non-Banking Financial Companies, micropayments, and payment acceptance networks in Tier-2 and Tier-3 cities are still a far cry and these cities provide plenty of white space for NUEs to tap into. Such cities are still heavily dependent on the usage of cash. Therefore, these cities provide a big market for NUEs to explore and make consumers less cash savvy.
What’s ‘New’ in NUE
New Umbrella Entities will bring an array of innovations to the Indian market. They will be allowed to set up, manage and operate new payment systems in the retail space not limited to regular and white-label ATMs, point-of-sale (PoS) devices, and Aadhaar-based payments and remittance services. These entities will be given the autonomy to develop new payment methods, standards, and technologies and monitor related issues within India and internationally. These new entities will operate clearing and settlement systems, identify and manage relevant risks (settlement, credit, liquidity, and operational), preserve system integrity and monitor the development of retail payment systems in India and abroad to avoid shocks, frauds, and contagions, which may adversely affect the system and the economy in general.
NUEs can even bring innovations on payment messaging technology that shall provide financial institutions more clarity on the nature of transactions and strengthen fraud and risk control mechanisms. NUEs can also develop better solutions for areas such as merchant on-boarding and retail payments. The work of these entities will also revolve around supporting and promoting developmental objectives like awareness building payment systems.
There is no doubt in the fact that the creation of NUEs will further fuel India’s growth in digital payments volume. Global software firm ACI Worldwide has predicted that by 2025, digital payments could make up 71.7% of overall payments volume in India with cash and cheques making up the remaining. The report highlighted India as the world’s top market with 25.5 billion real-time payments, followed by China that recorded 15.7 billion transactions.
One of the biggest obstacles that can come in the way of NUEs is to establish themselves as an efficient and credible regulatory system that can often be promised more with a more profitable entity like NPCI even if its methodology is not always appreciated. For example, if tomorrow Reliance Jio and SBI come together to form an NUE, will they enjoy an upper hand due to their existing pan-India presence? Therefore, NUEs’ ‘for profit’ ambition will always be a subject of scrutiny and their innovations or product strategies shall always be criticized.
Another important requirement that NUEs should take into account is a robust grievance redressal and customer support mechanism. The NPCI has been recently plagued with a lot of allegations and regulatory overreach therefore to counter that both NUEs and RBI must put an effective governance mechanism in place. The NUE draft framework is also silent on user data protection which is a crucial concern for all digital forms of engagement. Such entities need to ensure there is no conflict of interest between their ‘for-profit’ activities and regulatory/supervisory roles so that the interests of the consumers aren’t compromised.
Om Agarwal is a second-year student at Ashoka University majoring in Economics and Finance.