While the National Payments Corporation of India (NPCI) has done a good job of handling retail payments and also encouraging innovation, it is time to diversify risks and usher in some competition. RBI’s paper on whether new retail payment systems should be initiated could not have been more timely.
While the National Payments Corporation of India (NPCI) has done a good job of handling retail payments and also encouraging innovation, it is time to diversify risks and usher in some competition. RBI’s paper on whether new retail payment systems should be initiated could not have been more timely. There can be no argument whatsoever against spreading risks. RBI must be apprehensive of creating a ‘too big to fail’ institution which is what NPCI could become given the pace at which retail electronic payments are growing and will continue to grow. There is, therefore, a sound reason to encourage the creation of more pan-India platforms. In October 2018, NPCI accounted for nearly 50% of the volumes of retail electronic payment transactions (excluding paper) and 15% of the value. There is enough of a case to have another two NPCIs since electronic payments are going to grow exponentially. Already, non-bank entities now co-habit the payments space either as technology service providers or by themselves providing retail electronic payment services. There is no reason why we can’t have more payments platforms with even non-banks promoting them.
Indeed, with the bigger banks calling the shots at NPCI—which now operates IMPS and UPI, including BHIM, National Financial Switch, Aadhaar enabled payments system (AePS), BHIM Aadhaar Pay, RuPay and other payment systems—the smaller banks feel their interests are being sidelined. In particular, the big banks have been opposed to increasing the inter-change rates for AePS, ostensibly for fear of losing market share in smaller towns. Consequently, they have been dragging their feet on the proposal for about a year now. Indeed, smaller banks are also upset that they do not have an option when it comes to CTS—cheque truncation—since it is operated by NPCI. RBI is right in suggesting there should be competition because, in its absence, innovation could be stifled. While UPI is a good innovation, there could always be technological advancements that might not be utilised on a broad enough scale if the larger banks don’t want them.
The Watal committee, while stressing the importance of competition, had pointed out that competition in itself may not foster innovation since very high levels of competition, could, at times, reduce the incentive to innovate as it could lower the profits of a firm trying to catch up with rivals. Nonetheless, the committee believed competition was critical to the growth of the payments market. It also noted the law currently does not impose any obligation on the regulator to promote competition and innovation in the payments market and that these should be amongst the primary objectives of the regulator.