The Reserve Bank of India (RBI) has come out with guidelines to set up new NPCI-like umbrella entities for retail digital payments. Put simply, the regulator wants more NPCIs to popularise as well as bring innovation to digital payments in the country.
The draft framework was released in February 2020 for public comments.
After taking in the industry feedback, the banking regulator has released the guidelines. While no large corporate has publically expressed interest in setting up a new entity yet, industry sources say Paytm, Reliance Jio and other payments players see a lot of potential in this space.
But what is a retail payments entity? Does this mean another UPI?
May be there will be another UPI equivalent, but it will not be restricted to that. The regulator wants more from a retail payments entity. It will run the railroad for digital payments. National Payments Corporation of India (NPCI) is a retail payments entity that supports UPI, IMPS, RuPay cards, ATM transactions and others. This organisation, too, will have to offer similar payment rails, which can be then adopted by banks, fintechs or other financial services companies.
Got it! So, who can get into this space?
The RBI’s guidelines for applicants are exhaustive. Some of the important points are listed below:
a) An applicant has to an Indian or should be residing in the country and have at least three years of experience in digital payments space. To be a promoter, the applicant will have to hold more than a 25 percent stake in the company.
b) The company will need a minimum paid-up capital of Rs 500 crore. Out of this, Rs 50 crore will have to be brought at the time of application. A constant paid-up capital of Rs 300 crore will have to be maintained at all times.
c) The RBI has its own “fit and proper” criteria for promoter groups, which, too, will have to be followed.
That’s a lot of work. What kind of business can an entity hope to do?
The RBI has said the organisation will have to set up, operate and manage its payments system. It will also be responsible for payments and settlement system for its banking and non-banking (fintechs) partners. The system will need to be interoperable with NPCI so that consumers are not affected.
It is a huge opportunity. Even with all the products and innovations, digital payments are used by not more than 125 million Indians. In a country of 1.3 billion people with more than 500 million smartphones, there is a big market waiting to be tapped.
In the last 10 years, the number of active digital payment users has jumped to 15 percent from 5 percent. The challenge is to take that share to 50 percent in the next decade.
So, why not just use NPCI? Why do we need new players?
A new player has no legacy issues, will have the zeal as well as the fervour to innovate and try new solutions. NPCI innovated on P2P payments, brought UPI on top of the IMPS rails. It also brought FAStags, RuPay cards, AePS payments and much more.
NPCI has come to dominate the space, a little competition won’t hurt.
And if India gets two or three such bodies, it will mean more innovation. The RBI has mandated interoperability between NPCI and new players, so consumers will not be affected and instead will have more choices. They will be able to choose the payment mode they are most comfortable with.
NPCI will be challenged on its turf?
Yes, definitely. New players will try to create parallel solutions on peer to peer and merchant payments and also target the digitally savvy, the user base of NPCI products.
The idea is to offer choices to the consumer and not create confusion.
NPCI is not new to competition. It has carved out a space for itself in a market dominated by American giants like Visa and Mastercard and it will innovate to protect as well as expand its turf. Competition always helps the market grow.
Sounds good but what are the services these platforms can start with?
Toll and transit payments are low-hanging fruit. Low value but a massive volume of transactions can make good money. Private bus corporations and other public transport systems all need digital payment solutions for fare collection, automated settlements and prevention of fraud. That, too, can be a money-spinner.
Another is offline payments—can payments be made offline and settlement done later? This will change the way rural payments are conceived as internet connectivity remains patchy in many parts of the country.
We also need innovation in bulk payments. B2B payments are getting rapidly digitised and RTGS continues to be the prevalent payment mode. Can the current account network be leveraged for quick settlements between businesses?
These are some of the things that can be worked on.