India’s Fintech and Payments Ecosystem — Part 2: NPCI, UPI and NUEs
NPCI, UPI, NUEs and their contribution to India’s payments ecosystem…explained! Part 2 in a two-part series on India’s payments ecosystem.
In my previous piece, I delved into the overview of India’s fintech and payments sector. Along with multiple structural and cyclical factors shaping the fintech space, the current pandemic has provided a huge fillip to the sector. However, any analysis of India’s payments ecosystem mandates a look at some of the game-changers and their groundbreaking innovations. Cue NPCI, UPI and, futuristically, NUEs…
NPCI — National Payments Corporation of India
The National Payments Corporation of India, an initiative of the RBI and the Indian Banking Association, was established in December 2008. Registered as a not-for-profit company, the NPCI is responsible for operating the retail payments and settlements infrastructure in the country. Some of the breakthrough products introduced by the organisation include IMPS (Immediate Payment Service), RuPay (a credit card payment system similar to Visa and Mastercard), NETC (the National Electronic Toll Collection which uses FASTag payment mode) and UPI (Unified Payments Interface). Ownership of NPCI resides with various shareholders, the top ten being big banks like SBI, Union Bank of India and Bank of Baroda. Recently, the organization expanded its ownership and there are currently 67 shareholder entities including payment banks, small finance banks and fintech players. This consortium’s share in the Indian retail payments space was 64.5% by volume as of March 2020. That’s quite a significant chunk. NPCI’s introduction of UPI brought forth quite a transformation in India’s payments system.
UPI — Unified Payments Interface
UPI is a system that allows for real-time payments and fund transfers between bank accounts via a mobile app. Built by the NPCI, UPI is utilised by many fintech players at the backend. BHIM, an app developed by NPCI itself, is also a UPI payments platform. What UPI does is that it assigns a UPI ID to one’s bank account. This ID can be utilised by senders to transfer money directly into the receiver’s bank accounts. A user can hop onto any platform that supports UPI payments, create a UPI ID and PIN and engage in direct fund transfers to and from other accounts. A completely digital procedure, fund transfers can be made 24*7.
MDRs (Merchant Discount Rates) and PSP (Payment Service Provider) fees are some modes of monetising UPI transactions.
- The MDR refers to the percentage of transaction value that merchants have to pay for getting assistance from the UPI system. This would be shared between the sender’s bank, the receiver’s bank, the fintech platform and NPCI.
- The PSP (Payment Service Provider) fee refers to the processing charges that UPI players and beneficiary banks receive.
Both of these have been recently abolished by the Government. So, currently, UPI payments are free of cost for both person-to-person and person-to-merchant transactions, though some banks are looking at charging such transactions. Recently, the Indian Banking Association and various payment bodies also met with the Government as part of the pre-Budget discussion to broach the topic of reviving MDR.
Apart from introducing products, NPCI also performs regulatory and supervisory functions. The entity recently placed a 30% cap on UPI transactions through UPI apps which include Google Pay and PhonePe. Now, these two players together control over 80% of the UPI market. This measure has been criticised as an innovation stifler by many and, accounting for the abolition of PSP and MDR fee, the incentives for UPI apps seem to be dwindling. However, with UPI platforms offering many more services apart from payments, the impact may be cushioned.
UPI has turned out to be a breakthrough ecosystem accelerating digital payments adoption in the country. However, there’s a lot of room for improvement and NPCI alone may not be able to facilitate mass digital onboarding. NPCI is currently the sole guardian of the system and, with rising usage, the over-dependence on one entity to manage billions of transactions isn’t ideal. Hence, the RBI recently invited applications for New Umbrella Entities (NUEs) that would complement, not compete with, the NPCI.
NUE — New Umbrella Entity
NUEs would be for-profit entities which develop and manage payment platforms and technologies, monitor and contribute to the retail payments ecosystem in the country. Clearing and settlement systems can also be operated. These platforms are expected to be compatible with NPCI’s existing infrastructure and interoperability is emphasized. Promoters or groups having at least 3 years experience in the payments ecosystem as PSPs, payment system operators or as technology service providers and who are ‘fit and proper’ can apply for an NUE license. The NUE entity must have at least ₹500 crores of paid-up capital, with each promoter holding a maximum of 40% investment in the entity’s capital. Further, promoter entities have to be owned and controlled by resident Indian citizens, limiting the scope for foreign participation.
Though RBI has released the NUE framework, there isn’t a clear definition of what an NUE is and the proposed scope of activities seems extremely broad and generic. Industry participants have been seeking clarity regarding the boundary between the NUE’s monitoring, supervisory and regulatory roles. Cogency regarding potential conflicts of interest that may develop when an infrastructure provider also launches consumer-facing products is required. Data protection hasn’t been addressed through the framework either, though the Data Protection Bill, which is currently under works, may help with that. The level of regulation that the NUEs themselves have to abide by, and how it compares to the NPCI’s obligations is another area requiring greater clarity.
Industry giants like SBI, Reliance Jio and the Tata Group are some folks looking to tap into the NUE opportunity. Indeed, despite some shortfalls of the framework, the possibilities for innovation in the fintech space is immense and NUEs may be well-positioned to bring them to the market. Customers would have a plethora of choices and more people are expected to embrace digital payments. Naturally, whenever there’s a single entity operating in a monopolistic manner, innovation can get stifled. However, with new entrants, there would be a good level of competitiveness. Concentration risks can be minimised as well. Companies belonging to NUE consortia would receive prime access to an immense market and gain a lot of visibility.
Overall, the digital payments infrastructure of the country is expected to grow at a rapid pace and the fintech space seems set for further innovation to redefine the customer experience.
