NUE may make India the cradle of cutting-edge global payment systems

The unified payments interface, or UPI, will dominate its turf for many years to come, say experts, though the Reserve Bank of India (RBI) is tight-lipped on how many new umbrella entities (NUEs), alongside the homegrown National Payments Corporation of India (NPCI), will be allowed to operate.

The central bank has also not commented on how many applications it received, and the deadline for them ended on March 31.

UPI, the NPCI’s flagship payments platform, touched a record high both in terms of volume and the value of transactions in June after a slump in April and May. The platform recorded 2.8 billion transactions, worth Rs 5.47 trillion in June, up 10.6 per cent in volume terms and 11.56 per cent in value terms over May.

In short, the NPCI-floated payments system is one jump ahead of its competitors.

But experts say this has given rise to concentration risk, which may have prompted the central bank to invite applications for NUEs.

The NUE will be a direct competitor to NPCI and develop the payments infrastructure for the country, similar to what NPCI has done. This infrastructure will be used by payments companies, banks, and payments operators to develop products and offer them to the customer. Currently, they are routing the payments transactions through NPCI.

There is a huge interest around the NUE, not only in India but also globally. Since foreign participation has been allowed, the world’s biggest tech companies have applied in consortium with the largest firms in India. As many as six consortiums are in the fray to bag the coveted licence to set up a for-profit body like NPCI for retail payments.

The race to get the licence saw competition as a number of banks, fintech companies, payment firms, tech, and e-commerce giants have shown an interest in being part of consortiums.

Tata Group, Reliance, Nabard, Mastercard, Paytm, Ola, Razorpay, PayU, PolicyBazaar, Google, Facebook, Amazon —all have applied in various combinations and tie-ups. No one entity can hold more than 40 per cent in the company even as it can be “for profit”.

People eyeing the space say the RBI could extend not more than two additional licences for now. A total of three payments system providers can be managed comfortably. Beyond that might end up testing the RBI’s capabilities.  

And those licences could be contingent heavily on what new technology the applicants are proposing. Where global technology companies are involved, the RBI might also look at how well they have implemented their data localisation policy. The entrants might also have to bring in innovation on encryption technology.

While there has been a lot of interest from big tech companies as far as the NUE licence is concerned, in the recently released Financial Stability Report, the RBI has shown concern.

“Big techs present at least three unique challenges. First, they straddle many different (non-financial) lines of business with sometimes opaque overarching governance structures. Second, they have the potential to become dominant players in financial services. Third, big techs are generally able to overcome limits to scale in financial services provision by exploiting network effects,” the RBI said.

More importantly, the new entities would be considered “public infrastructure” companies, even as they would be privately held. Therefore, the whole nature of operation of the NUE could end up being dictated by the regulator.  

“Let us call it a public-private partnership in the technology space, where the shots are called by the regulator,” said a senior official with a multinational payments company.

According to the expert, getting an NUE licence would be an opportunity for all, but it is more of an innovative data lab for the global payments system.

To be fair, there is no parallel to the UPI globally. And the RBI is one of only a few central banks that facilitate round-the-clock payments of all kinds. Much of it is due to innovations at NPCI.

“With the data of a billion-plus people and trillions of payments, tech companies can quickly learn to scale up similar payments operations the world over. That is the main lure for global tech firms, not the profit, though that will also be there,” said the person.

But that doesn’t mean the NUE can run on losses.

Since licensing is with the intent of reducing concentration risk by having several NUEs, it should address the business viability of the participants. Without that, the players may have constraints to constantly upgrade technology to keep pace with market and regulatory needs,” said Srinath Sridharan, corporate advisor and independent markets commentator.

“The bigger ask is to have the assurance of safety of user data and privacy norms. Involvement of BigTech companies in the space begs a question: Are our regulations geared up sufficiently to supervise those entities? It would be a comfort if the regulations take care of the concerns of consumer data cross-usage by the NUEs,” Sridharan said.  

Experts say the RBI may leave out applicants not willing to invest constantly in cutting-edge technology. As for the safety of money, ultimately the custodian of the money would be the payment issuer and receiver banks, and they are tightly regulated by the RBI.