A change is likely in the shareholding pattern of National Payments Council of India, the bank owned “non profit” which runs key payment platforms like IMPS and UPI. The Watal Commitee on Financial Payments (pdf) has recommended that the Reserve Bank of India enforce an improvement in the shareholding and governance of retail payment organizations within two months, and points specifically to the NPCI as an example of where change is needed: regulations for restructuring are to be released for public consultation within 60 days.
The recommendation from the committee is that the RBI should issue regulations which require NPCI to have a time bound plan to:
- Move towards diffused shareholding where no individual shareholder along with persons acting in concert can hold more than 5% of the equity share capital.
- Ensure that shareholding includes all classes of Payment Service Providers
- Ensure that the board of the NPCI should have majority ‘public interest directors’ – independent directors, representing the interests of consumers in payments markets and who do not have any association, directly or indirectly, which in the opinion of the regulator, is in conflict with their role.
Lack of infrastructure and ownership neutrality at the NPCI
The reason why the NPCI does the banks bidding here is evident from what the Watal Committee has highlighted in its report: there is no “infrastructure neutrality”.
MediaNama readers will recall that the NPCI has kept its much promoted Unified Payments Interface (UPI) limited to banks only, and hasn’t yet even opened it up to Payments Banks. Why? To quote what AP Hota, MD & CEO told MediaNama in May last year, “Bank applications do not have such a great user experience. So the banks asked give us time to catch up and leave the wallets out of it. It is just a competitive position.”
According to the report, “Only bank-led PSPs (Payment Systems Providers) have direct access to payment systems. Non-bank PSPs can access payment systems only through a member bank. As of July 2016, the PSP segment had 44 authorised PrePaid Payment Instruments (PPIs) (including mobile wallets, prepaid cards, etc.) and 8 authorised Payments Banks. Apart from this, the RBI has also authorised 8 Cross-Border Money Transfer operators, and 8 White-label ATM Operators.” Essentially, none of these can connect to the NPCI run infrastructure, and are effectively disenfranchised by the Banks that run NPCI.
The Watal Committee points to the lack of neutrality at the retail payments company, and the fact that it is entirely bank owned: “around 74.7% of the shareholding of NPCI is held by 10 banks (Refer to Table 6.2). The remaining shareholding is held by 46 banks, with Co-operative Banks holding a total of 0.85% of the shareholding in NPCI. The Committee notes that the present ownership structure of NPCI might be conflicted with its pivotal role in the digital payments ecosystem (See Box 6).”
Creating Competition for the NPCI and its IMPS and UPI products
As of now, the NPCI really doesn’t have any competition: being owned by all the banks gives it that monopolistic advantage. The Watal Committee wants the NPCI to be classified as a Critical Payment Infrastructure Company (CPIC) by the Government of India, and be regulated by the Payments Regulator (more on that in a later post). Most importantly, the committee report says that “There should not be any legal restriction on the number of CPICs that can be set up.”
“Accordingly, the Committee believes that the law should define CPIC and specify only CPICs (like NPCI) as the operators and infrastructure providers of critical payment systems in India. CPICs should be set up as companies limited by shares and regulated by the payments regulator. “
What does this mean? It means that multiple entities similar to the NPCI can be set up, and multiple payment mechanisms competing with IMPS and UPI can be created.
Watal Committee considered listing NPCI, but the RBI intervened
One of the ways that the Watal Committee considered diffusing shareholding of the NPCI was by listing it: that, for example at “least 51% of the paid up equity share capital could be held by the public, with no person individually or through persons acting in concert should hold more than 5% of the shares of the company.” The idea of broad-based shareholding was to “prevent any potential conflict of interest.” Read between the lines, and the conflict of interest at the NPCI is being highlighted by the Committee.
However, the RBI intervened, and expressed reservations about listing the NPCI, and the argument is a fair one:
“Committee notes that the RBI has expressed its reservations against NPCI being listed, since it believes that listing would create a perverse incentive in NPCI’s corporate structure – the quest for profits may not be consistent with NPCI’s role as a CPIC”
Payment systems are often organised as member-owned structures. Such arrangments can potentially lead to inefficient outcomes as has been observed with securities exchanges. Securities exchanges evolved as member-owned cooperatives – the members being the traders trading on the exchanges themselves. This led to inefficient outcomes due to collective action problem – conflict of interests between individual traders and that of the exchange. Similar conflict of interest arises between payment service providers and the payment system. To avoid such collective action problems, exchanges were corporatised and demutualised – ownership and trading rights were separated. Collective action problems in payment systems require similar consideration.