The payments industry had raised some issues with parts of the Reserve Bank of India’s (RBI) draft framework on new umbrella entities (NUEs) for retail payments. While at least one organisation questioned the wisdom of licensing NUEs in the absence of a policy for licensing of new payment systems, quite a few players voiced their concerns over restricting control of NUEs to Indian residents.
The stakeholder comments were received by the RBI in response to the draft framework for NUEs released in February 2020. FE accessed them through a Right to Information (RTI) query. The regulator shared the unredacted comments without disclosing the names of the entities they had come from.
The RBI had first envisaged the authorisation of a fresh set of entities in the domain of retail payments in order to encourage innovation and greater competition in the space. At present, the National Payments Corporation of India (NPCI) is the sole operator of retail payment systems in the country. The licensing process was set in motion in August 2020 and the window for sending in applications closed on March 31, 2021. According to a report, six consortiums, including those led by Reliance Industries, the Tata Group and Axis-ICICI Bank, had sent in applications.
One of the entities found issue with the RBI’s decision to initiate a licensing process for NUEs without first establishing a system of licensing for retail payment systems. “As a general comment, the draft on authorisation of New Umbrella Entity (NUE) is too early given the fact that RBI is yet to announce a framework for authorisation of payment systems, even though it published a policy paper on Authorisation of New Retail Payment Systems and sought public inputs,” the entity said.
It pointed out that as things stand, payment systems can be run by operators even without having an umbrella entity as in the case of the card networks and ATM networks. The RBI has so far only published on-tap licensing for Bharat Bill Payment Operating Unit (BBPOU), Trade Receivables Discounting System (TReDS) and White Label ATMs (WLAs).
“In such a scenario, it is incomprehensible as to how an NUE will function as effectively it needs authorisation of payment systems for it to function and no objective framework for licensing them exists today,” the entity said.
Several other entities said it was a bad idea to exclude foreign players from holding controlling stakes in licensed NUEs. “The condition of control by residents may exclude several large and experienced international payment system networks and operators from acting as promoter or participating in promoter group and such entities may be relegated to be a non-promoter participant in a consortium, which may act as a deterrent for their participation,” one of the entities said in its comments.
This, in turn, could cause constraints in bringing global players with their technology and investment commitment to participate in NUEs. Hence, the RBI was requested to consider allowing entities incorporated in India but owned or controlled by non-residents to act as promoters. The RBI did not accept this recommendation in its final framework.
Some industry players sought clarity on the supervisory, monitoring and regulatory aspects of NUEs’ functions. “There should be clear demarcation between the regulatory, monitoring and supervisory activities that will have to be undertaken by the NUE. An exhaustive list of activities under each should also be provided in the final framework,” one of the players said. The final framework lays down the broad scope of activities, but does not clarify on the activities an NUE will be expected to undertake.
The draft framework stated that an NUE may choose to be a ‘for-profit’ or be registered under Section 8 of the Companies Act, that is, as a not-for-profit company. One of the responding entities requested that Section 8 NUEs be allowed to convert to for-profit entities in future, if required. NPCI is a Section 8 company. The final framework makes no mention of a provision for such conversion.
More than one entity stated that the policy of zero-merchant discount rate (MDR) is counterproductive to the operation of NUEs. “Since the proposed NUE(s) will be ‘for profit’ entity/ies, it is assumed that the NUE(s) will be free to decide on the interchange and MDR for its/their financial products,” one of the respondents said.
One player wanted the RBI to specifically bring the facility of revolving credit under the ambit of the NUE framework. “By revolving credit – we mean instruments like UPI 2.0 overdraft accounts, etc. It is important that the NUE framework brings this explicitly into scope, because revolving credit systems cover two areas of regulation simultaneously – payment and credit,” the entity said.
UPI 2.0 is a form of deferred payment which allows a user to pre-authorise a transaction for payment at a later date. Since it involves drawing money from an overdraft account, it is classified as a credit product.