How often do you have to retry digital payments through the UPI QR code or the app? Two years ago, the answer was almost zero. Now, it’s not the same. The average UPI transaction rejection rates of top 50 banks in India stood at less than a per cent in March 2021. In March 2022, it was nearly 1.5 per cent, the reason being the multitude increase in UPI usage.
Envisaging a situation like this two years ago, the RBI decided to create a new payments infrastructure called the new umbrella entity or NUE. A cut-off date of March 31, 2021, was fixed for interested entities to make their applications. Supposedly There were six applicants. Around September last year, it was almost official that the RBI placed the licensing process in cold storage, though subsequently, in February, the RBI Governor Shaktikanta Das said the applications are under review.
Three months have lapsed since, and industry participants say they are yet to hear from the regulator regarding the status of their applications. This brings us to the moot point – can the RBI afford to keep NUE on the back burner for long?
No, considering the growing volumes of digital transactions, and the plethora of businesses helmed by NPCI, the time for a credible alternative is now. But are the stakeholders – the RBI and the applicants – ready to embrace the system and, more importantly, is there a scope for incremental value adding proposition? Finding answers to these questions will help understand the need for NUE. Inadequate preparedness
The Payment and Settlement Systems (PSS) Act, which was enacted to govern digital or non-cash or cash equivalent payments, is about 15 years old. It was initially designed to handle some online money wiring and debit/credit card transactions. As the digital modes widened, the scope of PSS also increased, but there still are some weak links in regulations, which the RBI is gradually addressing.
“Before NUE licences are taken up, it’s important to strengthen PSS Act and that is being taken up as priority,” said a person close to the developments. The RBI’s decision to repeal redundant laws and replace them with ones which hold relevance currently is a step in that direction. Expect more on this front. Evidently, the regulator has more ground to clear before it can zero-in on NUE licences.
But how prepared are the applicants? Few minutes of conversation with representatives of the licence applicants is enough to understand that the applicants didn’t size up the NUE opportunity prudently. NUE was perhaps being seen as an opportunity to up the valuations game, considering that each consortium included an established fintech player.
At a time when valuations were starting to plateau, contending for a NUE licence would have bumped up their asking rates. But its well after furnishing their applications that concerns around NUE’s competitiveness against NPCI on UPI payments, when the latter has zero MDR or merchant discount rate charges or the gamut of NUE being quite restricted in comparison with NPCI, are surfacing.
“It seems as though the applicants took the plunge, assuming that with a little bit of lobbying and the restrictive regulations would be amended,” said a highly placed source associated with the licensing process.
While the regulator’s thought process isn’t known, with India’s digital economy expected to touch $800 billion by 2030, a near 10x jump from 2020 levels, it’s a matter of time that we have solutions to handle this expansion.
Coke-Pepsi, Mastercard-Visa and India’s very own BSE-NSE are examples of successful duopolies, who have retained the majority market share between themselves. For a country as densely populated as ours, NPCI alone may be inadequate to handle the volumes and validates the base case for a number two market infrastructure player in the payments business. But have we reached the scale yet?
Global payments market was sized at about $88 billion, and Visa and Mastercard handle 72 per cent of the global business. While in volume terms, India leads globally on the payments front, in value terms, we are a distant second to China, the market leader.
Therefore, without a justifiable scale, the need for a duopoly may not have arrived just yet and this may be the contention of the regulator as well.
In 2007, Subhash Chandra’s Zee Entertainment conceptualised the Indian Cricket League. It didn’t have the BCCI’s blessings, but the cricketing authority liked the idea and sowed the seeds for Indian Premier League next year. Today, the IPL has routed the traditional formats such as test and one-day cricket in terms of scale and eyeballs.
NPCI and its UPI offerings are at that spot where IPL currently is. Should the BCCI add more teams to IPL or create a parallel to IPL? The RBI needs to take a similar call and the answer to this boils down to one point – is there scope for differentiation?
NUE’s scope of operations include setting up, managing and operating a new payment system in the retail space, most of which NPCI already does. So, unless NUE can offer something truly new, there may be no incremental reason for existing UPI customers to migrate out of the platform.
Unless the NUE contenders have the will and wherewithal and, more importantly, the regulator’s blessings to do what NSE did, creating a new platform may just be a namesake exercise. In short, now is the time to take a call on NUE, given the volume explosion, but if there is resistance to do some out-of-box thinking, there is no need for something NUE.