In a move that could be a massive boost for the Indian fintech ecosystem, the Reserve Bank of India (RBI) has invited startups, tech companies and other businesses to compete directly with the National Payments Corporation of India (NPCI), which has created the national digital payments infrastructure. This means that “payments system operator, payments services provider, or technology services providers” will be able to create a payments ecosystem extending to modes such as ATMs, point-of-sale devices (PoS), Aadhaar-based payments and remittances.
The RBI is calling it a “Draft Framework for authorisation of a pan-India New Umbrella Entity (NUE) for Retail Payment Systems“. It has set a minimum capital requirement of INR 500 Cr and has stipulated certain conditions in shareholding patterns for any company seeking approval to become the NUE.
RBI’s Conditions For Retail Payments Entity
The RBI has said that the new entity must have owners or promoters with at least three years of experience in the payments ecosystem. “The entity eligible to apply as promoter / promoter group for the NUE shall be ‘owned and controlled by residents’ [as defined in FEMA Regulations, as amended from time to time] with 3 years’ experience in the payments ecosystem as Payment System Operator (PSO) / Payment Service Provider (PSP) / Technology Service Provider (TSP). The shareholding pattern shall be diversified. Any entity holding more than 25% of the paid-up capital of the NUE shall be deemed to be a Promoter.”
Foreign investment will be allowed subject to existing guidelines and approval, the RBI added, while the central bank’s fit and proper guidelines for promoters would apply for the NUE as well.
The application for setting up the NUE needs to contain a detailed business plan covering the payment systems proposed, technology and security features, market analysis or research, operational structure, the time-period for setting up the payment systems and proposed scale of operations. Applicants have three months from February 10, 2020 to submit the applications. The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) will be the final authority on issuing authorisation for setting up the NUE. Reserve Bank estimates a six-month completion time for announcing the NUE.
Will Competition For NPCI Open Up Fintech?
According to the notice released by RBI, the NUE shall be responsible for setting up, managing and operating new payment systems, especially in the retail space. This comprises of but not limited to “ATMs, White Label PoS; Aadhaar based payments and remittance services; develop new payment methods, standards and technologies; monitor related issues in the country and internationally; take care of developmental objectives like enhancement of awareness about the payment systems.”
The NUE would also be allowed to operate clearing and settlement systems, identify and manage relevant risks such as settlement, credit, liquidity and operational and preserve the integrity of the systems, monitor retail payment system developments and related issues in the country and internationally. Further, it can carry on any other business “as suitable to further strengthen the retail payments ecosystem in the country.”
The capital stipulation has been put in place to address managing risk, and determine whether the NUE can sufficiently provide for technological infrastructure and uninterrupted operations 24×7, similar to the current UPI system managed by NPCI. The RBI stipulates that no single promoter or promoter group in the NUE can hold over 40% stake in the company, and a minimum net worth of INR 300 Cr must be maintained at all times.
The NPCI has something of a monopoly when it comes to implementing pan-India standards across all recognised banks. It manages UPI, FASTags, NEFT, Aadhaar-enabled payments as well as the RuPay card. The NPCI is created as a private non-profit company from within the RBI. But the apex bank did express fears that being a single point of failure, the NPCI could become a target for attackers and could create inefficiencies in the future.