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RBI drops plan to issue licenses under NUE, cites data security concerns: Report

As a part of its plan, the RBI had provided details on who could bid for licenses and set up operating parameters; it had already received bids from six payment consortiums. 

The Reserve Bank of India (RBI) has put on hold its plan to invite proposals for new digital payment platforms citing data security concerns, according to a LiveMint report. The RBI’s plan permitted private entities to obtain New Umbrella Entity (NUE) licenses to create platforms that supplemented and competed with the systems of the National Payments Corporation of India (NPCI).  

Digital payments in India have grown exponentially in the last few years as smartphones and mobile data plans became cheap. Credit Suisse revealed that digital payments constituted 30% of all retail transactions in India till March 2021 up from 10% in 2018. 

The growing size of payments caused the RBI to express concern that financial stability and efficiency are at risk due to the concentration of various critical payment systems with a single operator. NPCI processed over Rs 128 lakh crore worth of financial transactions in 2020-2021 alone. The central bank, in its January 2019 paper, opined that there was a need to promote competition following which it came up with the NUE scheme.  

Why did the RBI pull the plug on the NUE scheme? 

The Mint report put forth several factors that may have led to RBI’s decision such as:

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  • The issue of data security vis-á-vis foreign entities compelled RBI to not provide new licenses. 
  • Mastercard’s non-compliance with local data storage norms and the subsequent ban on the company may have caused RBI to reconsider proposals under NUE. 
  • Data breaches at MobiKwik and BigBasket forced RBI to account for the threats posed by the involvement of the private sector in handling payment transactions.

“It’s likely that the RBI will wait and watch before proceeding with this,” a source informed Livemint.  

Interestingly, Reuters reported in June that the All India State Bank of India (SBI) Staff Federation and the UNI Global Union requested the RBI to scrap the “whole process of NUE licensing” and focus on strengthening the domestic payments group, NPCI, which operates as a non-profit. 

The groups, in a letter, said that the participation of multinational companies can lead to the abuse of user data. They had also predicted then that privatisation would compromise data safety. 

Who could bid for the NUE license? 

The RBI in its notification had said:

  • The applicant must 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. 
  • No single promoter/promoter group shall have more than 40% investment in the capital of the NUE.
  • The entity must maintain a minimum net worth of Rs 300 crore at all times.
  • Applicants must furnish a detailed business plan covering the payment system they propose to set up and operate, along with documents that prove their experience in the payments ecosystem. 
  • They would also have to explain the technology and operational structure of the proposed payment systems, the time period for setting up the payment systems, and the proposed scale of operations.

List of applicants who submitted proposals

The RBI commenced inviting bids for licenses from companies in 2020. The companies could submit their bids till March 31, 2021. As many as six consortiums submitted applications for NUE licenses as per an Economic Times report. 

Reliance Industries (RIL) teamed up with Facebook, Google, YES Bank, and Infibeam’s So Hum Bharat Digital to form a consortium.

Financial Software and Systems (FSS) joined hands with Razorpay, Airpay Payment Services, Zoho, India Post, and Zerodha.

Axis Bank and ICICI Bank floated MoPay and included players like BillDesk, Pine Labs, Amazon, and Visa in their consortium. 

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Tata Group’s Ferbine got together with Flipkart, Mastercard, PayU, National Bank for Agriculture and Rural Development (NABARD), Airtel Digital, HDFC Bank, and Kotak Mahindra Bank to form a consortium.

PayTM partnered with Ola Financial, PolicyBazaar, Electronic Payment and Services, IndusIND Bank, Centrum finance, Suryoday small finance bank, Zeta Pay, and Think360.ai. They set up an entity called Foster Payment Network. 

iserveU is an Odisha-based financial services startup. There are few details about this consortium but fintech and neobanking startup Niyogin Fintech acquired a majority stake in iserveU last year, Inc42 reported.

The finance ministry expressed concerns about the participation of state-run banks given their stake in NPCI due to which they were conspicuously absent from the process. SBI requested the ministry to rethink its reservations and allow the bank to participate in the process. 

Operating parameters of NUE

MediaNama previously reported that the NUE license provides an opportunity to take a slice out of India’s burgeoning payments market. Major startups, fintech companies, large banks, and global financial giants bid for licenses as the RBI scheme would have allowed them to earn profits by charging fees for transactions.  

Some of the other features of the scheme laid down by RBI: 

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  • Interact and be interoperable with the NPCI’s systems.
  • Produce a retail payments rail in the Automated Teller Machines (ATM) 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
  • Manage settlement, credit, liquidity, and operational risks of the system

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