The Reserve Bank of India (RBI) has run multiple experiments around the digital payments space, including licensing exclusive payment banks, setting up white-label ATMs, and even creating a separate retail payments body, the National Payments Corporation of India.
While a few initiatives have succeeded, some never took off.
Now, the banking regulator wants to overhaul the entire retail payments network by creating multiple NPCI-like bodies. Will it end up creating competitors or will the new players manage to break into fresh territory?
To get a sense of how things may play out, Moneycontrol spoke with a scrum of top payment industry leaders. While a few said this could be game changing, others struck a more pessimistic note.
“A step long awaited,” said AP Hota, who was the first chief executive of NPCI and is now a consultant with SWIFT India. He created the country’s first retail payments network, leading it from 2009 to 2017.
Hota said that the opportunity to build a less-cash society in India is huge, but NPCI alone cannot achieve this task. It will require multiple players.
“Hardly 150 million bank customers have turned digital to initiate transactions, though accounts of about 600 million are credited passively through digital means,” he added.
The central bank has been pushing for digitisation beyond the metro cities, but that has continued to be elusive. A Razorpay report released earlier this week pointed out that more than 80 percent of the consumers ordering products online in tier-2 cities and beyond still opt to pay cash on delivery.
Also read: Explained: Why RBI is pushing for new umbrella entities for retail payments, who can set them up and other questions answered
The market opportunity
Will the new entities manage to accomplish what cards, UPI and net banking together have not managed to solve?
“Over the last decade we have managed to take digital payments to 15 percent of overall transactions from 3 percent. Now, we should aim to take this share to 50 percent of the overall transactions and new entities like the NUE can help here,” said Naveen Surya, Chairman, Fintech Convergence Council, an industry body for fintech startups.
Surya, who ran ItzCash till 2017, when it was acquired by Ebix, said he is seriously considering participating in the NUE space in his personal capacity.
A strong digital payments ecosystem is critical for many businesses to thrive, be it ecommerce or ride hailing. IRCTC, for instance, was built on online payments for rail ticket booking and is currently valued at Rs 21,880 crore.
Could the NUEs help script more such success stories? Perhaps so.
But what stops NPCI from achieving this? Why are new players needed in the market?
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New entities will bring fresh energy
Take the case of USSD, a feature-phone based payments platform, where transactions can be done via structured messages. USSD has not picked up and continues to be underutilised by NPCI. A for-profit entity may be able to popularise feature-phone based transactions in the country.
“A for-profit structure brings to bear stronger incentives for product development and upgrades,” said Mandar Kagade, a fintech policy consultant.
Even Visa was a not-for-profit in its initial avatar, and then morphed into a for-profit listed entity that helped speed up product development. Something similar can be done by NUEs.
The regulator has cited the need for separate entities because of the concentration risk on NPCI. But NPCI still has a long way to go in the Indian payments ecosystem. While UPI has emerged as a flagship product, in terms of card payments, Visa and Mastercard still have the lion’s share of spends. A banker in the know of the matter pointed out that more than 70 percent of card spends are still with the two American giants.
“Payments should continue to be a public good and a for-profit entity might bring in predatory pricing,” the banker said.
The regulator will need to ensure that prices remain competitive and end users are not affected by increasing settlement charges.
Easier said than done
A section of the industry believes implementing this solution will remain challenging.
For instance, even today any single merchant is saddled with multiple QR codes from BharatPe, PhonePe, Paytm and card payment terminals. This has made reconciliation extremely tough. Having more payment options on top of this may create confusion in the market.
Also there is a possibility of walled gardens being created between players, where they do not speak to each other. While the regulator has mandated interoperability, how will different competing companies create interoperable payment systems, when they are expected to work on completely new technology platforms?
Industry insiders say there will be a need to develop a common messaging protocol between all the participants and developing this will be a very time-consuming and challenging process.
Abhishant Pant, founder of Fintech Meetup and an ex-Visa top executive, said players such as Reliance Jio, Paytm and a few enterprising fintechs could apply for this licence. Even Visa and Mastercard could team up with some local players and try to set up their own entities. All these players, while competing with each other, will end up creating walled gardens, thereby causing problems for consumers, he felt.
The elusive revenue in payments
Besides all the ecosystem hurdles, the challenges around creating a sustainable and profitable business from payments remain. In a country where the margin on payments is razor thin, and multiple payment modes are free for businesses, how do players make money?
NPCI takes settlement fees for every transaction. Now, businesses will have to play within that small space.
Even if someone with a large distribution play such as Paytm or Jio wants to enter the space, it can make some money. But for general corporate houses it makes no sense to venture here, said Bhavik Hathi, Managing Director of consultancy firm Alvarez and Marsal.
“Profitable entities will have to give 15-20 percent return on equity to their investors. In the absence of that there is a high chance NUE will go the payments bank way,” said Hathi.
The need of the hour is not new payment options, but expansion of the digital payments acceptance infrastructure. High-speed internet and reliable PoS infrastructure will help rural India digitise quickly.
Further, MSMEs need to start paying their employees digitally, like the government’s DBT transfers. This will encourage many blue-collar workers to pay directly from their bank accounts. It will also increase if tax compliance goes up among small businesses. Once businesses realise the cost of cash, they will automatically adopt digital payments.