RBI's checks & balances: Hurdles before new NPCI-like umbrella entity for pan India retail payments

A year ago, the Reserve Bank of India (RBI) had come out with a licencing framework for setting up multiple retail payment entities. The idea was to create another National Payment Corporation of India (NPCI) kind of institution to expand retail payments and also encourage innovations in the financial system. While NPCI has innovated game-changing payments infrastructure like UPI, which is a global hit, the retail entity has also become a 'too-big-to-fail' institution, and any IT outages or cyber-attacks could halt the entire payment systems in the country.

Post the RBI's new norms, many large players under a consortium have applied for a licence. These partners include names like Facebook, Google, Amazon, ICICI Bank, Tatas, Kotak, HDFC Bank, Flipkart, PayU Axis Bank, Visa, Pine Labs, BillDesk  Paytm, among dozens others. These entities are still awaiting the RBI's nod. Let's look at the issues before the regulators;

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Private and foreign ownership

The RBI's new licencing guidelines were a bold policy move shifting towards a more private-led  infrastructure system to manage the payments in the country. This has actually opened the doors for foreign players like Amazon, Facebook, and Google to participate as a promoter of  retail payment entities in India. The biggest issue is data privacy as many private players in the digital space had come under the scanner for data privacy issues in the past. The networks of some of the players who applied for the licence also suffered cyber attacks . "There are a lot of companies in India that have foreign ownership. At the end of the day, you need cutting-edge innovations to promote retail payments. I suspect there will be a strict Chinese wall built around," defends a leading player on condition of anonymity.

Conflict of interest

All the aspirants of the new umbrella entity are also payments players in the market. Be it banks, fintech, or the social media giants, all these players are also in the early stage of creating innovative payments models for the masses. The innovations or the initiatives of the NIU promoted by them could serve their own interest. There will be issues of arms-length relationship between the two entities. Will the RBI or the government allow large payments players to also sit on the board of the umbrella entity, which has a larger interest in serving the society?

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Distributed shareholding

NPCI was promoted by the banks with a very distributed shareholding, with no single player owning more than 10 per cent stake. But in the case of promoters of a new umbrella entity, the equity stake will be much higher. The RBI guidelines stipulate that no single promoter will have more than 40 per cent stake in the new payment entity. Even equity dilution to 25 per cent was allowed only after five years. This effectively means the consortium members will have a major say in the company for more than 5 years. At a time when digital payments are exploding in the market, especially post the pandemic, the consortium players could influence the decision-making.

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For-profit purpose

The current retail payment entity NPCI is a not-for-profit company. The RBI's new licencing norms have suggested 'for profit' entities in the retail payments space. The very idea of having a 'for profit' retail payment organisation would defeat the purpose as India is at an early stage of transforming to a less-cash economy. The cash in the economy is still very high at over 12-14 per cent despite the digitisation. The rural and semi-urban areas are still dominated by the cash economy. No private players would burn cash to resolve the infrastructure issues in the hinterland.

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