The Reserve Bank of India (RBI) has announced that it’s considering to table alternative retail payments system dubbed New Umbrella Entities (NUEs) to possibly rival the National Payments Corporation of India (NPCI – a banks-owned non-profit company). The “Draft Framework for authorisation of a pan-India New Umbrella Entity (NUE) for Retail Payment Systems” was released on February 10, 2020, by the central bank on its website – open to public comments till February 25, 2020.
With the objective being the establishment of new pan-India umbrella entity / entities focusing on retail payment systems, RBI stated that the company will be authorised (and governed) by the central bank u/s 4 of the Payment & Settlement Systems Act, 2007 (the PSS Act). The entity shall be a company incorporated under the Companies Act, 2013, and could be a ‘for-profit’ or a Section 8 Company – as it decides. It was also clarified by the RBI that the Memorandum of Association (MOA) of the applicant entity should account for the proposed activities of operation pan-India NUE for retail payment systems.
In regards to the scope of activities of such entity / entities, the RBI has made it clear that the NUE shall perform business suitably to additionally strengthen the retail payments ecosystem in India, and also do the following:
- Set-up, manage and operate new payment system(s) particularly in the retail domain. These include, for instance, ATMs; White Label PoS; Aadhaar-based payments and remittance services; development of novel payment methods, standards, and technologies; monitoring allied issues arising in India and internationally; managing developmental objectives, such as increasing payment systems’ awareness; and more.
- Operating clearing and settlement systems; identifying and managing pertinent risks, viz. settlement, credit, liquidity and operational risks, and preserving the system(s) integrity; monitoring retail payment system developments and allied issues in India and internationally to circumvent shocks, frauds and contagions capable of adversely affecting the system(s) and / or the economy in general.
- Executing its policy objectives and making sure principles of fairness, equity and competitive neutrality get implemented in determining system participation; draft necessary rules and the allied processes to ensure system safety and soundness, and that payments are efficiently exchanged.
In regards to the Business Plan of the NUE, it has been mentioned that the application shall contain a detailed Business Plan (incl. technology, security features, market analysis / research, mentioning advantages of such payment systems, payment systems’ operational structure, time-period for establishing the payment systems, proposed scale of operations, etc.) encompassing the payment system(s) proposed to be established, plus other documents to duly establish its experience in the payments ecosystem.
As for the Application, the application is to be submitted in the prescribed form (Form A) in an envelope super-scribed “Application for New Umbrella Entity (NUE)”, addressed to the Chief General Manager, Department of Payment and Settlement Systems, Central Office, Reserve Bank of India.
In terms of the Processing of Applications, the applications will be processed by the RBI and scrutiny of applications will be done by an External Advisory Committee (EAC), which shall submit its recommendations to the RBI. The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) will act as the (final) deciding authority on issuing authorisation for establishing NUEs. The RBI has also mentioned in the draft framework that eligible entities intending to apply as a promoter or promoter group for the NUE will require to be owned and controlled by residents having 3 years’ experience in the payments ecosystem as a payment system operator (PSO) or a payment service provider (PSP) or a Technology Service Provider (TSP). Also, the NUE will be required to maintain a minimum net-worth of Rs. 300 crore at all times along with a paid-up capital of Rs. 500 crore for supporting the capital requirements for activities including risks’ management, technological infrastructure investing, and business operations will have to be maintained.
The rationale given by the RBI behind considering the establishment of NUEs is to promote competition, innovation and minimise concentration risk to gain financial stability in the retail payment system. NPCI currently accounts for processing around 60% of retail electronic payment transactions. As precedence to this, a Policy Paper released by the RBI in January 2019 stated that NPCI is the primary means to the operations of multiple critical retail payment systems of India, and that a “concentration of many tasks” exists in the NPCI. The paper also mentioned that the concentration of operational risk inside of a single entity rendered it ‘too big to fail’. Following this, in January 2020, the RBI in its Policy Paper on new payment systems, expressed (flagged) the concern of the perceptible risks of a monopoly.
Apart from this, the RBI is also planning to offer non-bank entities (incl. FinTech and insurance companies) a direct access to RTGS and NEFT transactions processing. Due to this, non-banks in India might be soon receiving a direct access to Centralised Payments Systems (CPS).