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RBI Opens Up Payments Space to Private Sector: Startups, Tech Companies Can Now Compete with NPCI

Aug 23, 2020 4:36 AM 4 min read

In the past few days, there were two significant developments in the payments space in India. 



The RBI released draft guidelines for Self-Regulatory Organisations (SROs), batting for self-regulation of entities in the payments industry.

SROs would be non-governmental organisations that would coordinate with stakeholders to set up industry standards in terms of rules and regulations. They would basically serve as a “two-way communication channel” between payment operators and the RBI.

This framework was floated in February 2020, and the draft guidelines are open for public comments till September 15th (official press release).



The Central Bank also issued guidelines for possible new umbrella entities to manage payment systems. These entities can be startups, tech companies or other private businesses. They would be allowed to set up and operate payment systems in the retail space, where the National Payments Corporation of India (NPCI) is currently the unchallenged tsar. 

Applications for new NPCI-like entities will be accepted till February 26th 2021 (official press release).

Now, the first development is fairly straightforward. It’s also still a draft document - the final one won’t be in our hands until public comments are considered.

It’s the second development that needs some delving into.

The idea to open up the payments space to the private sector and add a sprinkle of competition to the ballooning industry is not a new one. It has been in the making for over two years.

Let’s rewind a bit. 


A Payments Tsar is Born

About a decade ago, the digital payments ecosystem in India was still in its infancy. Cash was the undisputed king and the concept of paying with your smartphones was limited to big cities.

But it was becoming clear that the fintech revolution was knocking. So in 2008, the RBI and the Indian Banks' Association (IBA) got together to set up the NPCI, a not-for-profit organisation, to facilitate digital payments, build the necessary infrastructure and popularise the medium.

NPCI executed its job very well. Tens of millions of Indians embraced fintech and a myriad of applications and platforms emerged in the industry.  

Today, NPCI manages or supports UPI, FASTags, NEFT, BHIM, Aadhaar-enabled payments, IMPS, ATM transactions and the RuPay card.

It is the undisputed leader in the space, with all the big fintech players like PayTM, PhonePe, Google Pay, Amazon Pay, Freecharge etc. Reliant on the infrastructure it provides. As per an RBI release, in October 2018 NPCI had processed nearly 48% of the retail electronic payment transactions in volume aggregating to 15% of value of retail electronic payment transactions.

That’s the Indian fintech space right now. At least 89 payment system operators - and one infrastructure provider.

As anybody who has read anything Finance-related will tell you, monopolies are always bad. And the NPCI has a dangerous monopoly over the retail payments ecosystem.


But What’s the Problem?

One issue is obvious - monopolies kill innovation. If there is only one player in an industry, it has less incentive to invest in innovations or offer better or cheaper services.

Another is the risk factor. The payments industry deals with sensitive data on a daily basis. And there is always the threat of a system failure or a data leak. This can be assuaged if the risk is distributed amongst different operators instead of just one goliath.

An additional concern involves possible conflicts of interest. Presently, NPCI is managed by a consortium of 56 banks - both public and private. We need checks and balances to ensure that the banks that run NPCI don’t exploit their position. (BTW: NPCI has repeatedly maintained that it is not a public authority and argues that it doesn’t come under the ambit of the Right to Information Act.)

To its credit, the Central Bank has raised concerns over monopolisation earlier as well, hence the eagerness to encourage competition in the sector. In 2019, an RBI policy paper warned that the NPCI was becoming “too big to fail”, and that there was a growing threat of “concentration risk” in the space.



Now, one contention here could be that having a single umbrella body can actually help standardise procedures across payment systems, which could ensure smoother oversight and governance. But this can’t come at the cost of competition and data security.

That’s why the RBI has mandated that any new candidates have in place interoperability mechanisms so that payment systems can interchange between them and the NPCI at ease without bothering the consumer.

Other requirements include requiring the candidate to have a minimum paid-up capital of ₹500cr ($67m) and at least three years’ experience in the payments ecosystem. (The entire list of requirements can be read in the press release linked above.)

This push to diversify the payments ecosystem becomes all the more urgent when you consider that the fintech revolution in India has barely begun. Digital payment systems are being used by only about 125 million Indians. In a country of 1.3 billion people and 500 million smartphone users, that’s barely scratching the surface. There is a vast market rife with potential, waiting to be tapped.

And with COVID-19 accelerating the push to digital, the prospect of a cashless economy is quickly becoming a question of when rather than if.


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