Explained: The RBI mooted NUE for digital payments and how it will impact NPCI

The country’s digital payments ecosystem in India, which is currently dominated by the  National Payments Corporation of India (NPCI), is getting ready for a major change. 

What’s happened?

On Wednesday, The Economic Times reported that Amazon is set to partner with ICICI Bank, Axis Bank, Visa, PineLabs and BillDesk to form a consortium for floating a New Umbrella Entity  or an NUE. The proposal is to be presented to RBI (Reserve Bank of India) before February 26, the current deadline for submitting NUE bids. 

According to the report, all of “these firms may have near-identical stake with slightly varying rights.” The NUE will run parallel to the Unified Payments Interface (UPI) payments business. 

Both international and domestic players are competing to build their market share in the space, especially now that China is mostly closed for global players. 

Digital payments in India grew at a run rate of 55% in the past five years, in terms of transaction value and volume.

What is the NUE plan?

News about the NUE plan for digital payments surfaced back in February 2020, when the Reserve Bank of India (RBI) released a draft framework for authorisation of a pan-India NUE for retail payment systems. 

A final framework for authorisation came out in September last year. 

Under these guidelines, an NUE will be able to set up, manage and operate new retail payment systems including ATMs, white labelled point-of-sale (PoS), Aadhaar based payments and remittances among others. 

To apply for an NUE license, companies had to have a net worth of at least Rs 300 crore at any given point, paid up capital of Rs 500 crore, and a prior experience of minimum three years in the payments space. No single promoter or the group of promoters in the entity would have more than 40% shareholding, or less than 10%. The promoter/ promoter group shareholding could be diluted a minimum of 25% only after five years of operations.  

A UPI rival in the making?

NUE is expected to threaten National Payments Corporation of India’s (NPCI) monopoly, which operates (UPI) and RuPay card networks. 

UPI has been the core behind almost all the payments apps including Google Pay, PhonePe, Paytm, Amazon Pay, WhatsApp Pay and others — just to illustrate the importance and control of the technology over which these apps run and the digital payments ecosystem. 

However, around the same time when the framework was being developed, NPCI announced that it would cap third-party UPI transactions at 30% of total UPI transactions volume for each app. Given that Google Pay, PhonePe and Paytm alone cover 80% of the digital transactions in the ecosystem, the move would threaten their volumes.

Who is interested?

Late last year, e-billing payment gateway CCAvenue operator Infibeam Avenues decided to invest an undisclosed amount in Payments Council of India (PCI) bosses founded So Hum Bharat Digital Payments to apply for a NUE license with the RBI. So Hum was incorporated in May 2020 by PCI’s chairman Vishwas Patel and chairman emeritus Navin Surya.

Other interested entities in NUE include mainstream banks, Reliance Group through Jio, Tata Group, a consortium of banks led by SBI, Paytm Payments Bank, Google, Facebook and Amazon.

Payment gateway and technology provider Razorpay, which has NPCI and UPI as a client has also been exploring the space checking for a minority stake. 

In an earlier interview with TechCircle, co-founder and CEO Hashil Mathur said, “NUE is a great idea, especially in a country like where there are diverse businesses and needs and a huge mass to cater to. It will be difficult for a single entity to do that. NUE can be complementary to NPCI. We are actually talking to players looking to explore NUE, if there is a role we can play. If we find an opportunity where we can build differentiated products and innovate, we would like to participate.” 

What’s in it for users?

More competition in the space would mean better products and offers--customers getting more alternatives to choose from. Just imagine a situation, where UPI or one of its apps like Google Pay, PhonePe or Paytm with most volumes fail, the inconvenience would be to millions users with no other alternatives.

Moreover, the NUEs will also be focussing on creating other fintech products beyond payments for individuals as well as SMEs. With options like PoS systems and lending on the cards, the space is only set to evolve in the coming years.