Some of India’s leading startups, fintechs, large banks and corporates, alongside a few global financial giants and tech companies, have come together, all to grab a piece of India’s burgeoning payments market. Soon, the Reserve Bank of India (RBI) may grant some of them their wish to build and scale new ways for Indian consumers to transact.
While cash remains the dominant form of making transactions in the country, over the last few years the number of consumers and merchants transacting digitally has grown exponentially. This has to do with two factors — one the falling cost of data and access to smartphones which enable digital transactions and the second, the increased access to financial services like bank accounts and credit. According to Credit Suisse, digital payments in India now clock an annual payment run-rate of $450 billion and constitute 30% of all retail transactions from 10% in 2018.
What is the NPCI?
In 2008, the RBI together with the Indian Banks’ Association decided to create a separate entity which would be responsible of maintaining and operating specific digital payments systems. The entity, called the National Payments Corporation of India (NPCI), would be independent of the regulator and banks, developing new payments methods based on a common standard for the entire financial system. Over the years, the NPCI has developed several new ways of processing payments digitally. It operates 10 payment platforms or rails at present:
- RuPay cards: debit and credit card network and switch
- Unified Payments Interface: a bank to a bank mobile-based payments system
- Bharat Bill Payments: an interopable payments system which connects all bill payers to all types of billers including utility providers, education, broadband and others
- Aadhaar enabled Payments: a payments system which uses Aaadhar-based bio-metric authentication to send/receive or withdraw/deposit funds
- FASTag or National Electronic Toll Collection: An automatic payments system for toll booths on highway, wherein funds are deduced from linked e-wallet
- National Automated Clearing House: Facilitates automated payments, debit or credit, be it for loans, insurance premiums, investment contributions or others
- Immediate Payment System: The 24×7 payments system, which UPI is built on top of, usually reserved for large value payments
- *99#: A USSD-based payments system, similar to UPI, that works across all GSM handsets (smartphone or otherwise)
- National Financial Switch: A common network to manage transactions across more than 250,000 ATMs in the country
- Cheque Truncation System: A common system for clearing cheque payments across the country.
Since the NPCI is the main digital payments ‘umbrella’ organisation in the country, it also a quasi-regulatory status since it issues guidelines to third-party companies and banks that integrate any of the NPCI’s 10 payments systems’, within their products and services.
Why does RBI want more than one umbrella payments entity?
In a January 2019 paper, the RBI said that since NPCI was a single operator for multiple critical retail payments systems there was concentration risks. Therefore, there was a need to encourage competition and permit multiple entities. New license holders of a New Umbrella Entity would be able to supplement and compete with the NPCI’s systems.
“Payment Systems in India have grown in a manner which is characterized by a few operators while there is a wide array of payment systems. This has given rise to certain questions which range largely around concerns of concentration, need for competition and the resultant impact on economic efficiency and financial stability” — Policy Paper on Authorisation of New Retail Payment Systems
Together, the NPCI’s 10 platforms have processed over Rs 128 lakh crore worth of financial transactions in the current financial year. While transactions across platforms have grown significantly in the last year, so have transaction failure rates. In the case of UPI for instance, according to MediaNama’s calculations, the transaction failure rate stood at 3.4% as of December 2020, compared to 0.99% in January 2020. This is because of a server capacity issue across the banking system, which was unprepared at the start of the pandemic last year for the large surge it would see in digital transactions.
How will the NUE(s) operate?
Unlike the NPCI, which is a Section 8 company and therefore designated as a not-for-profit entity, the NUE can be profit making under the RBI’s framework. This is why everyone is keen on getting in on the action and apply for a NUE license under the Payments and Settlement System Act, 2007. The RBI is accepting applications a license till March 31, 2021.
The applicant will need to have a minimum paid-up capital of Rs 500 crore, with the promoter/promoter group shareholding diluted to a minimum of 25% after 5 years of the commencement of business of the NUE, the framework says. It further adds:
- The entity must maintain a minimum net worth of Rs 300 crore at all times
- No single promoter / promoter group shall have more than 40% investment in the capital of the NUE
- If the applicant entity has any Foreign Direct Investment (FDI) / Foreign Portfolio Investment (FPI) / Foreign Institutional Investment (FII), it must fulfil the capital requirements according to the FDI policy
The applicants would need to provide the RBI with a detailed business plan covering the payment system they propose to set up and operate, along with documents that proves their experience in the payments ecosystem. The plan would need to also touch upon the technology and operational structure of the proposed payment systems, the time-period for setting up the payment systems and proposed scale of operations.
Who is participating?
So far, the list of participants is exhaustive, however, at present it does not include state-owned banks since the government has raised concerns over their participation. This is because state-run banks, along with their private counterparts, are shareholders in the NPCI. If the state-owned banks participate in the bid for a NUE license they would be competing with NPCI, therefore leading to competition and monopoly risks. However, the State Bank of India has approached the Finance Ministry to reverse its stance.
There are a total of four groups of companies applying for a NUE license:
- Kotak Mahindra Bank and HDFC Bank, which have have roped in the Tata Group, Mastercard, Airtel Digital, Flipkart and PayU
- IndusInd Bank, which has joined hands with Paytm, Ola Financial Services, Centrum Finance, Zeta Pay and Electronic Payment and Services
- ICICI Bank and Axis Bank, which are working with Visa India, the National Stock Exchange, BillDesk and Pine Labs
- Yes Bank, which is is backing the combine of So Hum Bharat Digital, Reliance Industries, Google and Facebook
Why is there widespread interest?
While the NPCI is a not-for-profit entity, ever since its inception it has been profit making. Since it earns a switching fee from banks for every transaction that it has to process, across the 10 platforms, its revenues have grown linearly with its server’s output over time. Since the NPCI is the brainchild of the RBI and operates largely under its authority it cannot exploit the ability to grow its profits through fees, since it is tasked with far more significant public responsibilities. The NUE, on the other hand, does not have any such condition or restriction.
With the total value of digital payments expected to grow to Rs 238 lakh crore by 2024-25 from ₹92 lakh crore in 2019-20, according to PwC, there is a large opportunity for fintechs in India. The industry hopes to replicate the success of the UPI story. In the last few years, UPI helped create several unicorn startups both in the financial and non-financial space, and has given thousands of entrepreneurs an opportunity start and even expand their business. The hope is that the NUE(s) will have similar success.
What can one expect from the NUE(s)?
The NUE will need to create new retail payments systems across various use-cases. The applicants can pick specific industries or target consumers to design a new retail payments system. However, whatever system the NUE(s) creates it will need to interact and be interoperable with the systems operated by NPCI, the RBI said in its framework. The operating parameters of the NUE include:
- Create a new retail payments rail in the Automated Teller Machines space, for White-Label Point of Sale machines, Aadhaar based payments and remittance services and other digital modes of payments.
- Develop methods, standards and technologies for their payments systems
- Take care of developmental objectives like enhancement of awareness about the payment systems.
- Operate clearing and settlement systems for the system
- Manage settlement, credit, liquidity and operational risks of the system
For instance, the NUE applicants would launch a new payments rail for offline or non-smartphone users, which would serve as a standard for hundreds of companies to use and promote across rural India where connectivity is poor. Or, the applicant could create a specific payments protocol only for PoS devices across the country which can be used to communicate offline or process credit transactions.
One could even see new forms of biometric-based, like sound- or iris-based payments solutions being launched by an NUE in the next few years. With the participation of major non-financial corporations like Google, Facebook, Reliance and the Tatas, some of the payments solutions that would come out over time from the NUE could be intrinsic to products marketed by these giant companies.
- Deciphering NPCI’s dominance in digital payments
- So Hum Bharat Digital aims to deepen, expand the digital payments ecosystem
- Payment companies suffer frequent UPI system outages