Beware! As they say, there ain’t no such thing as a free lunch, and this is especially true in the financial domain. Just as we had started to boast about the homegrown Unified Payments Interface (UPI) – an inclusive, user-friendly and largely free digital payments ecosystem developed and run by the umbrella entity National Payment Corporation of India (NPCI) – the Reserve Bank of India gave the green light to yet another New Umbrella Entity (NUE) in the retail payments space.
The most significant differentiator in this case: The NUE will be a ‘for-profit venture that will develop and push technology solutions, build niche expertise and, of course, earn ‘profits’ in the process (more on that later). As the RBI draft framework mentions “pan-India umbrella entity/entities”, it indicates that the central bank is open to more than one entity, subject to the applicants meeting all specified requirements.
When the central bank came out with its NUE guidelines in August 2020, the emphasis was on two focus areas. First, the new umbrella entity, and all its services, would complement the NPCI rather than compete with it. Second, it will try and bring down the country’s overdependence on NPCI/UPI – concentration risk, to be precise – to prevent issues like the Yes Bank-PhonePe glitch, given the massive number of financial transactions carried out on that platform.
This is not an unjust assumption as in October 2020, NPCI’s payment channels witnessed a record-breaking number of transactions. It processed 2.07 billion transactions via UPI alone, currently the most popular retail payments system. This further underlines the massive dependency on NPCI for retail payments and the need to protect it from failure. Therefore, the NPCI and the NUE/NUEs will act as each other’s backup in keeping the massive ecosystem seamlessly operational.
NPCI Vs NUE: Where They Stand
Before we discuss the new domain and its implications, an overview of the NPCI will not be out of context. Established in 2009 as an RBI-administered umbrella organisation, NPCI has the sole responsibility of setting up and managing the country’s retail payment ecosystem until now. Its major objective is to facilitate a robust, scalable, secure and affordable payment mechanism to boost financial inclusion.
After the demonetisation on Nov 8, 2016, people were forced to adopt various modes of digital payments, and the adoption of NPCI/UPI soared incredibly. Consequently, it has been designated as a system wide important payment system (SWIPS) by the central bank in June 2020. Simply put, this is an evaluation system wherein the central bank has created a point of arrival (PoA) and several performance metrics (PMs) to assess and monitor payment systems and participant entities periodically.
In August 2020, NPCI also set up the NPCI International Ltd to facilitate its ambition to venture into new international markets and co-create payment systems with other nations. Of late, it is also eyeing the Asian market where countries like Singapore, Malaysia and the UAE are looking to build the requisite infrastructure to facilitate quick and efficient digital payments.
As of March 2020, NPCI’s share in the entire payment landscape of India stood at 64.5% by volume and 4.07% by value, according to RBI data.
In spite of NPCI’s stellar performance over the years, the RBI has recently set the stage for a formidable competitor. In December 2019, an RBI policy paper first noted the need for NUEs. The reason: Given the criticality, growth and extent of NPCI’s operations in terms of volume of transactions handled, any disruption can impact the payment and settlement of transactions initiated at large.
“Availability of NUE offering products which will lead to the redundancy of existing systems can, besides addressing concentration risk, also encourage competition and innovation, thus contributing to financial stability. By offering alternative digital retail payment systems to the consumers, the NUE would help in enhancing the reach of digital payments to a larger number of people and thereby reduce the dependency on cash,” states the RBI framework.
With the draft NUE guidelines out in August this year, the central bank will be going through a long-drawn process of accepting and reviewing applications for NUE licences. Prospective applicants may vary widely, from banks to financial services firms to technology companies and more. The aspirants will not only provide their business models but will also have to specify how they intend to use their technology solutions to address risks in the payments ecosystem. The NUE application window will be open up to February 2021, after which a panel of the External Advisory Committee members will vet the licensees over the next six months.
According to the RBI, each NUE will require a minimum paid-up capital of INR 500 Cr for risk management, technology infrastructure, business operations and more. An applicant will need three years of experience in the payments ecosystem either as a payment system operator (PSO) or as a payment service provider (PSP) or as a technology service provider (TSP).
Each NUE application must include the technology to be used, security features, market analysis/research, benefit/s (if any) of its payment system, operational structure, setup time, proposed scale of operations and more.
Interestingly, every applicant must have at least two other promoters, and no single promoter can invest more than 40% capital in a specific NUE. Promoters need to demonstrate a capital contribution of minimum 10% of the minimum paid-up capital of INR 500 Cr at the time of application. The promoter shareholding in the NUE will be diluted to a minimum of 25% after five years of operations as a mechanism to control any conflict of interest arising from primary businesses of the shareholders. A minimum net worth of INR 300 Cr is required to be maintained at all times.
But the key difference between the NPCI and the NUE is that the latter will be allowed to operate for profit, unlike the former. NPCI, of course, was self-sufficient due to its income from the merchant discount rate (MDR) or commissions, among other revenue streams, which the government disallowed from earlier this year. The outcome was predictable. In FY2019-20, NPCI reported revenues of INR 1,221.2 Cr and a net surplus of INR 387.6 Cr, both up by 24.5% and 26%, respectively, on a year-on-year basis. Net surplus denotes net profit of not-for-profit corporations. But thanks to zero MDR, the estimated loss in NPCI’s revenues could be up to 20% in FY2020-21, say experts.
Currently, there is an expectation that if NUEs start charging MDR, the government will invariably allow the NPCI to do so to create a level playing field. It is also likely that the governance of NUEs and NPCI will converge at some point in time.
“It makes sense to eventually converge all payment regulations for these entities at a sufficiently mature stage of operations. As for the private entities seeking to set up NUEs, the framework has outlined key principles of fairness, equity and competitive neutrality to ensure that their role remains unbiased,” says Fali Hodiwalla, consulting partner, financial services, EY.
Will There Be A Conflict Of Interest?
What worries industries more is a likely conflict of interest when the new entities are up and about. “There should be a clear demarcation between the regulatory, monitoring and supervisory activities that will have to be undertaken by the NUE. An exhaustive list of activities under each should also be provided in the final framework,” wrote the tech industry lobby Nasscom in a submission for the draft framework. These concerns are now particularly relevant after the NPCI suddenly capped the volume of UPI transactions in an ecosystem it has created and nurtured.
Since the RBI has not explicitly mentioned it, all industry lobbies and research groups have requested clarity on the boundaries between the entity’s regulatory and supervisory roles.
The BHIM UPI app row is a case in point. When the NPCI launched the payments app in 2016, the industry cried foul, citing a conflict of interest. That a facilitator-regulator like the NPCI also offers a consumer-facing product that directly competes with third-party platform players and monitors its rivals was not considered good business ethics by the concerned parties. The issue was also raised in 2016 by the Ratan Watal Committee on Digital Payments.
Likewise, an NUE can launch its own products while it sets up and manages new payments systems and thus gain a competitive advantage against other players on that system. In fact, these private entities may easily take on NPCI as the framework does not forbid them from creating their own version of BHIM UPI or RuPay, yet.
As of now, the RBI regulates retail payments under the Payments and Settlements Systems Act (PSSA) 2007 (which applies to NUEs) as well as the NPCI, which offers retail payments solutions.
It is not good when your clients see you as their competitor, says Vijay Mani who is a partner at Deloitte India and leads digital payments, digital banking and other digital services.
“So, it is unlikely that an NUE will offer any consumer-facing solution. The larger benefit will be ensuring that the digital payment backbone between NUEs and the NPCI can be switched seamlessly to ensure a fail-safe transaction ecosystem,” he tells Inc42.
According to him, NUE(s) may bring new developments/ improvements and more innovative products in areas such as cross-border payments, bill payments and micropayments and also simplify pricing mechanisms for merchants.
How Lucrative The NUE Is For Elite Applicants
Business behemoths like the State Bank of India (SBI), theTata Group and Reliance Jio are said to be in talks for NUE licences. And some of them already have significant stakes in the NPCI. SBI and HDFC Bank own a 7.47% stake each in NPCI while Bank of Baroda (BoB) holds a 9.6% stake. But it is not clear yet if they will have to give up their NPCI stakes to form NUEs, according to industry observers. SBI, India’s largest public-sector bank, and Reliance Jio also have a payments bank partnership in the country.
On the other hand, the Tata Group’s Tata Communication runs Indicash, a white-label ATM network. Then there is Tata Capital Financial Services, the financial arm of the group. It is registered with the RBI as a systemically important non-deposit accepting non-banking financial company, offering loans and fee-based financial services to its customers under the Tata Capital brand. So, the Tata group comes with its own expertise in this field.
Understandably, many of these financial bigwigs will be keen to enter the NUE space. SBI, Bank of Baroda (BoB) and HDFC Bank are likely to make a joint application to the RBI. Bombay Stock Exchange and National Stock Exchange are also said to be eyeing an NUE consortium opportunity. An Economic Times report further suggests that Google, Facebook and Amazon may seek out Indian partnerships to participate in the NUE opportunity.
Although Paytm is not known to be a contender yet, mainly due to its Chinese investor base, banking insiders are not ready to discount Vijay Shekhar Sharma’s interest in his personal capacity.
Not to be outdone, new companies have also decided to take the plunge. Fintech veteran Naveen Surya, the chairman emeritus of Payments Council of India, has recently set up So Hum Bharat Digital to apply for an NUE licence. His company will be backed by Infibeam Avenues, a digital payments and ecommerce technology platform.
Infibeam said in a statement that through this venture, it is looking to expand the scope of digital payments in India by taking it to a much larger user base than currently in existence. The company is reportedly in talks to tie up with banks and non-bank players with a significant presence in the payments system and will likely focus on rural markets and far-flung locations.
According to Vishwas Patel, director of Infibeam Avenues, there are four-five payment systems in the US. Therefore, India, too, can opt for more than one NPCI-like payment settlement system.
“We have a huge opportunity to make digital payments natural and effortless in our economy just like our breath is natural, effortless and invisible. This is also the philosophy behind So Hum,” he explains.
Even though digital payments have grown, there is plenty of white space for NUEs to tap into, says Patel. “NBFCs, micropayments and (payment) acceptance networks in Tier 2 and Tier 3 cities still have poor acceptance, and the new entities will have a big market to explore. UPI is just one wonder of real-time payments. There are still many and we can come up with them. Cash is back in our economy today, but we have to work continually towards digitisation to ensure a less-cash economy. Mastercard, Visa and the NPCI can work towards that.”
But there is a downside. The last time the RBI floated a grand business plan for the payments bank opportunity, it doled out 11 licences. But Cholamandalam, Tech Mahindra and a consortium led by Dilip Shanghvi, Telenor and IDFC Bank surrendered their licences even before the initiative took off. Aditya Birla Payments bank shut shop 17 months after commencing operations.
“The RBI had a bad experience giving out licences to payments banks. So, it will be wiser this time around. We are not likely to see as many NUE applicants as we did in the case of payments banks,” an industry veteran says on the condition of anonymity.
What Innovations NUEs Can Bring Forth
The RBI has thrown open the retail payments ecosystem to NUEs. However, the scope defined at present seems so broad that it has left many scratching their heads. A quick look at the huge laundry list is bound to baffle most people.
NUEs will be allowed to set up, manage and operate new payment systems, especially in the retail space, comprising but not limited to regular and white-label ATMs, point-of-sale (PoS) devices and Aadhaar-based payments and remittance services. They can also develop new payment methods, standards and technologies and monitor-related issues within the country and internationally. NUEs can also support and promote developmental objectives like awareness building about payment systems.
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.
What is absolutely not clear is what NUEs cannot do in terms of business activities and how far the conflict of interest between its ‘for-profit’ activities and regulatory/ supervisory roles will be allowed. For example, white-label ATMs (those operated by non-banks) and PoS devices come under the purview of the NPCI. If an NUE is already in these businesses and implements its own price points for a better margin, how is the conflict supposed to be handled?
Besides, the NUE draft framework does not mention any guideline on user data protection, a primary concern for all digital forms of engagement. Given that these payment systems are expected to reach the masses, will their innovation be tested under the RBI’s regulatory sandbox mechanism? This process allows the testing of new solutions in a controlled environment.
Murali Nair, president (banking) at Zeta, a fintech firm that provides cloud-based banking solutions, expects the NUEs to bring many more digital payment solutions for the bottom-tier population over and above what the NPCI has done so far. Consequently, the need for regulating financial systems will persist. Just like most of the industry stakeholders, he thinks NUEs will be essential as the growth of digital payments has warranted additional entities to offset risks in the ecosystem.
Although the NUE framework does not mention data protection and solution testing requirements, Nair expects those areas to be handled by the larger Data Protection Bill and the sandbox mechanism in place for these requirements.
“NPCI and the larger Indian fintech ecosystem have already managed a splendid job in taking digital payments to the masses. But India is yet to come up with an open banking framework. NUEs can lay the groundwork for open-banking solutions using blockchain, artificial intelligence, machine learning and other new-age technologies, says Nair.
He, however, thinks it will take more than a single NUE entity, preferably a combination of at least a large bank and a technology provider, to realise these requirements.
The open banking system mandates banks to share customer data with relevant third party providers (TPPs) for better fintech products if customers consent to data-sharing. A few banks are working on such solutions, but there is no regulatory framework yet.
Besides open banking, there could be further innovations on payment messaging technology to provide financial institutions with better clarity on the nature of transactions and strengthen fraud and risk control mechanisms. NUEs can also develop better B2B financial solutions for areas such as merchant onboarding and retail payments.
“Let us say I want to use my debit card to generate a QR code. Today, both are different payment methods. But I believe such innovation is possible where I can generate a QR code from my debit card and send it to my wife who is at a grocery store. Now that my wife has the QR code on her phone, the store can scan it to pull the money from my account. NUEs will possibly look at further interoperability between different methods of retail payments,” says Shishir Mankad, financial services head at Praxis Global Alliance, a management consulting firm.
Of course, interoperability will be an essential requirement for these initiatives as mandated by the RBI. Under the current payment infrastructure, there are different channels for different payment methods, and interlinking these would greatly help NUEs in gaining users.
Not A Cakewalk For NUEs
The most critical criterion that NUEs will have to address at this point is their position as an efficient regulatory body that comes more easily to a non-profit entity like the NPCI, even if its methodology is not always appreciated.
For example, if the SBI and Reliance Jio bring their payments bank partnership to the NUE ecosystem, will they have an unfair advantage due to their pan-India retail presence? How long will it be before the RBI and other government bodies step on their toes and needlessly regulate them? Think of the NPCI imposing transaction caps on third-party UPI apps. Or how the finance minister asked banks to promote Rupay cards (an NPCI product) among new account holders. Faced with similar constraints, the NUEs’ ‘for-profit’ ambition may get a beating, and their innovations or product strategies could be thrown off gear.
According to industry stakeholders, if interoperability between similar solutions is enabled by the umbrella organisations, the zero- MDR mandate on the NPCI cannot last long. They feel MDR is essential for cost-recovery because digital ecosystems entail expenditure on risks controls, cybersecurity, servers and more.
However, zero MDR for NPCI does not necessarily mean NUEs will create an alternative UPI-like system with MDR as it will be counter-intuitive for customer acquisition, says Mankad of Praxis.
“It is premature to think whether NUEs will adopt the zero-MDR model or not. No one is in favour of zero-MDR, including the NPCI, except the finance ministry,” according to Patel of Infibeam Avenues.
The RBI framework does say that NUEs can be ‘for-profit’ entities, but ultimately, whatever the NUEs do will be subject to government regulations – at least that is the consensus. Moreover, the NPCI and the RBI can collectively mandate the NUEs to make all sorts of disclosures, right from volumes, pricing and customer feedback to data security measures, say industry observers. NPCI, too, is subject to such disclosures to the RBI.
“As a potential consumer of NUEs, my main areas of concerns will be product experience and end-customer benefits. The cost factor will be secondary as free markets will take care of it. It has also happened in the mobile internet space,” says Rajan Bajaj, founder and CEO of Slice, a credit startup backed by VCs such as Gunosy Capital, Das Capital, Finup and Blume Ventures, among others.
Another critical requirement should be around grievance redressal and customer support mechanisms. Both NUEs and the RBI will have to put robust governance mechanisms in place for a smooth run. After all, the NPCI has been plagued with allegations of biases and regulatory overreach multiple times.
The RBI is yet to justify the payments bank experiment and outcome, which, very clearly, have not taken the right direction. It has gone so wrong that the central bank has to introduce a new clause, allowing payments banks to convert to small finance banks to escape their travesty.
Zero-MDR, too, has not gone well with the digital payments ecosystem. Many experts and industry insiders feel that the government has killed profitability in the NPCI-UPI ecosystem through overregulation. So, the obvious question at this point is: Can NUEs address the issues that might have left the NPCI in a quandary?
Harshit Rakheja contributed to this story.