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How Will the New Umbrella Entities Contribute to the Digital Payments Ecosystem of India?

Apr 3, 2021 11:49 AM 5 min read

Yesterday was the last day for desirous entities to apply for authorisation as a National Umbrella Entity (NUE) for retail payments as provided under the RBI's mandated framework.

The framework was conceived and guidelines pursuant to the same were released by the RBI. The aim is to create an alternate processing body for digital payments in the country to the existing National Payments Corporation of India (NPCI) which runs the government's flagship projects - UPI and RuPay. (Read more on the guidelines here).

That was in August last year. A lot has happened since then, not the least of which is the beeline made by various tech, e-commerce firms, banks, payments services companies and conglomerates to set up partnerships amongst themselves and contend for the coveted NUE qualification. Let's find out why the buzz is intense and increasing for this potential venture.

Why the Rage For the NUE Race? 

A regulatory body renouncing exclusivity in regulation is fairly unprecedented. So when RBI expressed interest in taking the retail payments monopoly from NPCI's hands and distributing it among private players, it was a bountiful opportunity for them. As many as six major partnerships have been forged among different businesses to obtain the licence for launching NUEs.

RBI’s rationale: In order to move towards a true cashless economy, there ought to be more players in the marketplace to offload some of the burden from NPCI while driving up competition and in turn making the system more efficient. 

And it turns out, the competition is fierce since it is reported that RBI is expected to offer just one or possibly two licenses from among all the bids. In any case, the clearance to operate as "for-profit entities", the chance to capitalise on the burgeoning digital payments market in India, the incentive to create innovation in retail payments services and finally the opportunity to take on a whale like NPCI are far too lucrative for corporates and banks to dismiss as an option. 

Take a look at SBI, for instance. The country's largest public sector bank's keenness in contending for an NUE license is so strong that it continues to plead with the Ministry of Finance for letting it play in the ring after the Ministry flagged its application submitted in partnership with HDFC Bank and Bank of Baroda. 

Speaking of which, the Government's stance on the creation of NUEs is not as liberating as that of RBI's. It feels that the payments system should be treated as a "core government function" on similar lines as issuing voters' ID or Aadhaar and the private sector should be kept out. 


A Callous Pit of Conflicts 

The biggest conflict is with state-owned banks double-dipping into the payments space by enlisting as NUEs and rivalling NPCI in which they hold major stakes. 

Let's circle back to the proposed SBI-led venture. SBI, HDFC Bank and Bank of Baroda combinedly own 24.2% stake in NPCI and process more than 50% of all digital transactions. If these entities are allowed to operate as independent NUEs, that would pose serious competition risks to NPCI. Imagine the dichotomy of state-owned banks promoting ventures to compete against flagship government projects like RuPay and UPI, thanks to their common ownerships in NPCI and the proposed NUE. 

Bet the Government blocking SBI's application doesn't look so unjustified now! 

Conflict number two. One must consider the relationship between RBI and the NUEs to account for the former's institutional neutrality. After all, NPCI was the brainchild of RBI. If there has to be parity across payment system participants in the long run, the RBI needs to visibly dissociate itself from the umpires' stand, possibly by outsourcing regulation to an independent third party. 

Conflict number three. Will the new guidelines extend just to NUEs or to NPCI as well? If they are to be industry competitors, they must be categorised as similar entities. And one simply can't presume to treat similars dissimilarly by applying the new guidelines to one class and the Payments and Settlements Systems Act, 2007 to another.


NUE Problems for Banks? 

The cost and burden of bankrolling the innovations and infrastructural deployment in the NUE venture are quite meaningful which might eventually fall on the banking partners. While for the NUE, there is a call for a regular net worth upkeep of ₹300cr ($41m) in addition to a minimum paid-up capital of ₹500cr ($68m), banks will perhaps need to adequately support liquidity for each new product and uptick in customer transactions. 

On top of that, as payment instruments gradually move into a zero-pricing regime, courtesy of cut-throat competition in the space, the banks would perhaps offset those costs themselves. 

The questions around how the new NUEs' for-profit products monetise themselves along with who and how one ultimately ends up paying a fee for it are noteworthy. These take elevated relevance especially when they are up against UPI’s largely not-for-profit mandate. But there is a caveat - the new entities can generate interest income from the float that customers maintain in their accounts. This income stream, in effect, could be quite meaningful.  


NUE Problems For Non-Banks? 

The combined UPI transaction value in India exceeded ₹4Lcr ($54.6bn) in February 2021. The three leading players (PhonePe, GooglePay and Paytm) accounted for a value share of 94.5% in the above, presenting a tripoly scenario of their own in the private digital payments space. While these contenders (among others) are hoping to march steadfastly into the NUE territory, they also pose multifarious questions. 

For instance, how much interest should be ideally allocated to the corporate liaisons in an NUE venture? Even though they bring technological input, the banking partners will maintain a more intricate presence in the partnership by virtue of their payments infrastructure. Not to forget, the venture's success is moot altogether if companies depended on their valuable input to be enforced by the famously-erratic online banking infrastructure of Indian banks lately. 

 Most importantly, how far will the RBI help with privatisation of digital payments systems, given its existing discord with the Government on the issue? The latter, of course, has the final say in the country's governance and economy. Will the corporations, conglomerates and tech entities continue to invest their resources in NUEs without expecting their privileges to be cut short in the future? 

Having said that, India has set new standards internationally in the design and feature of digital payment systems, most notably, UPI. Let us not forecast the future in this sector too soon and see how the implementation of the NUE framework plays out first.


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