India has been on the cusp of a technological revolution driven by fintech companies. The last decade has seen tremendous growth in the retail payment segment in our country and the definitive push from government of India like demonetization and GST implementation has propelled this segment to the next orbit. The pandemic has accelerated the adoption of digital payments in India, especially retail digital payments. In the past year, retail digital payments have seen huge growth as more people gravitated towards digital modes of transaction owing to fear of contracting the virus and convenience. Transactions through National Electronic Funds Transfer (NEFT), National Electronic Toll Collection (NETC), and the Bharat Bill Payment System (BBPS) registered acceleration over the previous year. Other retail payment platforms such as Unified Payments Interface (UPI), Immediate Payment Service (IMPS), and National Automated Clearing House (NACH) saw a near doubling of both transaction volume from 12.5 billion to 22.3 billion, and value from Rs 21.3 trillion to Rs 41 trillion between FY2020 and 2021.The entire retail payment architecture in India is dominated by state owned NPCI via its UPI system.
The recent approval of new umbrella entities (NUE) licensing by the Reserve Bank of India (RBI) will lead to increased private participation in the Indian digital payments space. To further develop digital payment infrastructure and increase competition RBI introduced framework for entry of private players for retail payments in August 2020. The framework enables private companies to apply for NUE license and create a retail payment system against UPI. Unlike NPCI, which is a non-profit entity, NUE will be for profit, enabling entities to charge fees for online transactions. This has attracted big Indian business houses like Reliance and Tata, as well as global giants like Amazon, Face book and Google. Technology giants Facebook Inc., Amazon.com Inc. and Google and credit-card providers Visa Inc. and Mastercard Inc. are among those vying for unprecedented access to India’s burgeoning digital retail payments market. The companies are part of four consortia preparing to apply for licenses to operate retail payments and settlement systems in the country, people familiar with the matter said. More companies could band together before a March 31 application deadline.
In a market where cash is still king, digital payments are quickly gaining ground as India’s 1.3 billion people are starting to embrace online shopping and services such as online gaming and streaming. With India’s Smartphone user base approaching 1 billion and Credit Suisse Group AG predicting $1 trillion in online payments in the country in 2023, the companies chosen to enable such transactions stand to reap lucrative commissions.
What is the need for NUE now?
Currently, the umbrella entity for providing retail payments system is NPCI, which is a non-profit entity, owned by banks. The monopoly also restricts the vision for future growth as there is no challenge from peers. NPCI operates settlement systems such as UPI, AEPS, RuPay, etc. Players in the payments space have indicated the various pitfalls of NPCI being the only entity managing all of retail payments systems in India. RBI’s plan to allow other organizations to set up umbrella entities for payments systems aims to expand the competitive landscape in this area. For the players planning to establish these NUEs, the aim is to get an even bigger share in the digital payments sector. The new players will come with new innovations and technology which will again facilitate retail payments which will in turn benefit to the customers.
What would be the structure?
The entity shall be a Company incorporated in India under the Companies Act, 2013 and may be a ‘for-profit’ or a Section 8 Company as may be decided by it. The umbrella entity shall be a Company authorised by Reserve Bank of India (RBI) under Section 4 of the PSS Act, 2007. It shall be governed by the provisions of the PSS Act and other relevant statutes and directives, prudential regulations and other guidelines / instructions. All entities eligible to apply as promoter / promoter group of the umbrella entity shall be owned and controlled by resident Indian citizens’ with 3 years’ experience in the payments ecosystem as Payment System Operator (PSO) / Payment Service Provider (PSP) / Technology Service Provider (TSP)2. The shareholding pattern shall be diversified. Any entity holding more than 25% of the paid-up capital of the umbrella entity shall be deemed to be a Promoter. The umbrella entity shall have a minimum paid-up capital of `500 crore. No single Promoter / Promoter Group shall have more than 40% investment in the capital of the umbrella entity. The Promoters / Promoter Groups shall upfront demonstrate capital contribution of not less than 10% i.e., `50 crore at the time of making an application for setting up of the umbrella entity. The balance capital shall be secured at the time of commencement of business / operations. The Promoter / Promoter Group shareholding can be diluted to a minimum of 25% after 5 years of the commencement of business of the umbrella entity. A minimum net-worth of `300 crore shall be maintained at all times.
What would be the scope of their activity?
- Set-up, manage and operate new payment system(s) in the retail space comprising of but not limited to ATMs, White Label PoS; Aadhaar based payments and remittance services; newer 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.
- They will operate clearing and settlement systems for participating banks and non-banks; identify and manage relevant risks such as settlement, credit, liquidity and operational and preserve the integrity of the system.
- Carry on any other business as suitable to further strengthen the retail payments ecosystem in the country. It is expected that the umbrella entity shall offer innovative payment systems to include hitherto excluded cross-sections of the society and which enhance access, customer convenience and safety and the same shall be distinct yet interoperable.
- It is also expected to interact and be interoperable, to the extent possible, with the systems operated by NPCI.
- Fulfill its policy objectives and ensure that principles of fairness, equity and competitive neutrality are applied in determining participation in the system; frame necessary rules and the related processes to ensure that the system is safe and sound, and that payments are exchanged efficiently.
The apparent benefits of introducing another pan-India UE, as envisaged in the Framework, focusing on retail payment systems are multi-fold. The first, and perhaps the most apparent intent is to bring in competition from non-banking players in a market which presently has a sole player backed by only banking entities. With the introduction of such non-banking entities in the proposed UE, the non-banking entities may introduce their indigenous system for payments over NPCI products, with MobiKwik already showing interest , along with PSOs and TSPs like Billdesk and RazorPay. Additionally, it is expected that introducing more UEs can address the risks relating to concentration, which would, in turn, contribute to the country’s financial stability. The RBI’s attempt to invigorate the retail payment system is commendable yet retains some creases which need to be ironed out for smoothly transitioning to a multi-player system. The stated objective of this umbrella entity would be inter alia for the setting-up, management, and operation of new retail payment systems which is clearly seen in Section H of the Framework. Therefore, as the Framework does not provide for any mechanism on governing the existing payment systems, it is clear that the NPCI deservingly gets to retain control over its own products yet shall lose monopoly over the retail payment ecosystem. However, it is unclear as to how the NPCI and the UEs would co-exist.