The Reserve Bank of India’s (RBI) move to allow private players to set up, manage and operate retail payment systems [officially described as a New Umbrella Entity (NUE)] can be described as a significant step in the evolution of the country’s digital payment ecosystem. Currently, all digital transactions in India are processed by the National Payments Corporation of India (NPCI), a non-profit umbrella body backed by a group of over 50 banks.

The introduction of private players will quicken the scalability of India’s digital payment network and the growth of the base technology. Among the many advancements, the NUE will make intra-wallet transactions possible. Also, unlike NPCI, the NUE licence allows the players to earn profit.

Why NUE?

In India, over the last decade and especially after the demonetization of 2016, innovations in payment modes have picked up the pace, from the online payment mode to Unified Payments Interface (UPI) apps. NPCI’s RuPay cards now allow offline transactions in areas with low internet connectivity. The lockdowns and social distancing triggered by the COVID-19 pandemic have accelerated the shift to digital methods. With the MSMEs (micro, small and medium enterprises) and mom-and-pop stores also joining the digital retail payment mainstream, there has been a big jump in such transactions.

Against this backdrop of rising volumes and to protect the country’s only digital retail payment system from monopolies and other threats, NPCI introduced a set of guidelines this year under which third-party app providers “are required to ensure that the total volume of transactions initiated through their respective UPI applications does not exceed 30% of the total volume of transactions in the country during the preceding three months.”

Being a non-profit organization, NPCI’s ability to improve and expand its technological base or build a more robust and dynamic digital payment network is limited. It has been five years since the development of UPI in India, but it has not seen much technological progress. Therefore, on August 18, 2020, the RBI announced a framework for authorization of a pan-India NUE for retail payment systems. Further, it invited applications for an NUE licence by February 26, 2021. However, this deadline was extended to March 31, 2021, because of the pandemic. Six consortiums of businesses have applied for the licence (see chart). However, there is no clarity yet on how many licences the RBI will allocate.

Consortiums in Race for NUE Licence

Source: Counterpoint Research

What is NUE?

The introduction of the “for-profit” NUE will open business opportunities for domestic and foreign players. Unlike before, the players will earn interest on the balance that the consumers maintain for their daily shopping. Further, the players will be allowed to charge fees for online transactions. A single domestic player will not be allowed to hold more than 40% investment in the capital of an NUE. A foreign entity can hold only 25%.

NUEs can improve the digital payment ecosystem in the following potential areas:

• The shared responsibility between NPCI and NUEs will open opportunities for an improved digital payment ecosystem.
• Moving towards a privately-held setup with government guidelines will promote healthy competitive efficiency.
• The competitive atmosphere will also encourage research, development, and innovation. The players will work towards customer convenience and safety. The payment system will be more interactive and interoperable.
• The introduction of an alternative to NPCI will dilute the latter’s monopoly characteristics and concentration of risk due to cybercrime and other threats.

Challenges

• The state-owned banks are trying to double-dip into the payments space by enlisting as applicants for the NUE licence while already being NPCI stakeholders. This puts a question mark on the competitive spirit which the NUE seeks to promote.
• How the RBI will tackle any conflict between NPCI and NUEs is still unclear.
• The ruthless competition among multiple NUEs will eventually lead to zero-pricing scenarios. Therefore, the banking parameters need to offset the cost.
• Banking entities will always dominate in these consortiums due to their payment infrastructure.

While we will have to wait for the RBI to allot the licence(s) before commenting further on the issue, one thing we are sure about is that this framework will be an international milestone for the digital payment ecosystem, defining standards for subsequent such endeavours.