The National Payments Corporation of India, which enables the country’s digital payment and settlement systems, is set to get a competitor after operating as a monopoly for the last eleven years of its existence. What more? The competitor will have the blessings of the Reserve Bank of India, which created NPCI as well.
In a set of draft guidelines issued on Feb.10, the banking regulator said it would seek applications for a ‘New Umbrella Entity’, focusing on retail payment systems. This can be a for-profit company, the RBI said, suggesting that private promoters can apply to set this up after due clearance.
In a policy paper released by the central bank in January 2019, the regulator had given a hint of what’s coming by flagging the concentration risk emerging in the sector. While noting that there were 89 payments system operators, the RBI had said that NPCI is the only “umbrella” organisation for retail payments.
“Payment systems in India have grown in a manner that is characterised 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,” the regulator noted in its paper.
Yet, the regulator’s proposal has raised a number of questions. Among them:
- Has NPCI become too big to fail and are the regulator’s concerns about the concentration of risk justified?
- How will any new player co-exist with NPCI?
- And will there be a level playing field between the incumbent and any new entrant?
NPCI: Past And Present
To answer the first question, a brief history of NPCI is useful.
The organisation was set up in 2008 when the banking regulator felt the need for a separate organisation which would develop and encourage retail payments. After a nudge from the RBI, six state-run banks, two private banks, and two foreign banks participated in setting up NPCI.
Today, NPCI’s shareholding is split among 56 member banks, which includes 19 public sector banks, 17 private banks, three foreign banks, 10 cooperative banks, and seven regional rural banks. The ten banks who were the initial shareholders retain control of the organisation.
It operates as a not-for-profit organisation.
Over the last few years, as digital payments became a policy objective, NPCI’s role became more prominent. In 2016, it helped launch the Unified Payment Interface, which has been a runaway success. After demonetisation in November 2016, UPI became popular and was used by banks, payment service providers and even the government to launch payment platforms. In January this year alone, UPI reported more than 100 crore transactions worth around Rs 2 lakh crore.
Also Read: As UPI Transactions Surge, Fraudsters Hone In On Vulnerabilities
The NPCI has also promoted the Aadhaar-enabled payments services and the RuPay card network.
The product development role of NPCI has gone together with quasi-regulatory and market development functions. NPCI is often being called in to take decisions on the pricing of transactions via different platforms. It’s also responsible for clearing new payment services built on platforms like the UPI.
The NPCI also continues to undertake research and development.
An email sent to NPCI on Wednesday, seeking their views on the RBI’s draft guidelines, went unanswered.
R Gandhi, former deputy governor of the Reserve Bank of India, agrees that NPCI has become too big over time. Competition, Gandhi says, is welcome.
“Market infrastructures are typically monopolies. That’s why they are directly regulated. Competition, by definition, is welcome; but it does split liquidity. Thus, there is dilemma. In India, at least in the securities market, we have tried competition and it’s working. Similarly, I won’t see it as a negative if we bring in competition in payments area,” he says.
Arundhati Bhattacharya, chairman of SWIFT India and former chairman of State Bank of India, says the RBI is trying to tackle two issues through this new draft framework. The first is that of ‘redundancies’, i.e., who will act as a backup if something fails at NPCI. Second, is that of competition.
“If something happens with NPCI today, there is really no other option out there. By allowing new companies to come up in the space, the RBI will be creating available channels,” Bhattacharya said. “Also, by allowing for-profit organisations to come in to the space, better efficiency can be brought in.”
The Competitor: Who And How?
The RBI has left the field open to any qualified private promoter, with its usual caveats. These include that the promoter should be fit and proper and should have relevant experience.
The minimum capital base has been set at Rs 500 crore. A net worth of Rs 300 crore has to be maintained at all times. The maximum promoter holding has been set at 40 percent, the minimum at 10 percent. The promoter will need to bring down shareholding to 25 percent eventually.
The criteria proposed by the RBI differ from NPCI’s structure in two ways. NPCI operates as a not-for-profit and is widely held by public financial institutions. The competitor could have more concentrated shareholding with a profit motive attached.
Gandhi does not see this as a problem. Neither does Bhattacharya.
“Card organisations are also umbrella organisations and they are for-profit organisations,” Gandhi said. Any type of construct should be okay as long as we ensure good governance and public interest is served, he said.
It may not be a completely level-playing field but these differences also exist between public and private banks, Bhattacharya said.
Still, the new entrant will have to come up with a business model which competes with NPCI on quality, rather than pricing, said Nikhil Kumar, co-founder and chief evangelist at Setu.
Since payments has been established as a utility, the competitor will have to come up with a model which ensures that it offers a better utility than NPCI to be competitive. For example, currently UPI has some downtime, which could cause some economic loss for merchants. If the competitor were to create a parallel UPI with lower downtime, then it becomes more competitive and can charge higher for its services.Nikhil Kumar, Co-Founder and Chief Evangelist, Setu
Another way of competing with NPCI would be to reimagine retail payments altogether, rather than challenge NPCI on its own ground. For this, the competitor could look at other payment channels such as the automated teller machine network, or innovative ways to tackle merchant payments, Kumar said.
Another challenge will be to ensure scale in its operations.
“When NPCI was created, the RBI facilitated handing over of payments platforms for ATM switching and the banks joined the network, as a direct support. But whoever sets up the new entity, they will have to start from a clean slate and may not get the same advantage,” said Naveen Surya, chairman, fintech convergence council and chairman emeritus, Payments Council of India.
Also Read: Can India’s UPI Become A Global Model? Google Thinks So.
Surya added that the RBI would rather support an innovator, than someone who merely copies the services which NPCI already offers. The guidelines are promoting an open policy that widens the scope for innovation across various segments like international payments, ATM payments, stock market investments, feature phone payments, vendor financing and others, Surya said.
If an entity wants to create a new version of UPI, for example, then the RBI may or may not be open to it. It would rather prefer to give the license to an entity that wants to create a new and unique solution in an area that has not been addressed.Naveen Surya, Chairman, Fintech Convergence Council
The RBI is seeking responses on its draft proposals till Feb. 25, after which it will issue final guidelines for the proposed umbrella entity.
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