New Umbrella Entity: Masterstroke or Disaster?
It takes decades to plant a sapling and grow it into a tree. It takes minutes for someone with a hacksaw to cut it down. We might be witnessing such a hacksaw moment for the payments ecosystem in India.
On Feb 10, 2020 the Reserve Bank of India issued a four page document titled, “Draft Framework for authorisation of a pan-India New Umbrella Entity (NUE) for Retail Payment Systems.” On the face of it, the document seems innocuous. After all, who can argue with its objective, “To set up new pan-India umbrella entity / entities focussing on retail payment systems.”
Till date, India’s payments backbone has been run by the National Payment Corporation of India (NPCI) which is a government regulated monopoly that has operated the payment backbone of the country, including the very successful Unified Payments Interface (UPI). NPCI has been set up (1) as a non-profit company (2) run as a utility and (3) with majority shareholding by Indian banks. With news coming in that a number of MNCs, including platforms with deep history of monopolistic behavior, are in the process of applying for the NUE license, all three design choices are at risk of being chopped down. The repercussions of the NUE licenses falling into the wrong hands will be deep, and the damage could take decades to repair.
Payments are the lifeblood of an economy, and control of this ecosystem is critical for digital sovereignty. In this context, India has done an outstanding job in setting up one of the most modern payment systems in the world that enables highly interoperable mobile payments and real-time settlements. More importantly, this has been done within the ambit of an entity controlled by Indian regulators. At a unique moment in history, when global regulators are struggling to govern digital platforms, India seems to be on the verge of squandering a colossal national advantage. For example, can you imagine the US allowing an Indian company to operate such critical infrastructure?
The NUE Draft Framework also says that companies applying for the NUE “may be a ‘for-profit’ or a Section 8 Company as may be decided by it.” In their excellent working paper on NPCI, William Cook and Anand Raman of the Consultative Group to Assist the Poor (CGAP) explained how Indian regulators actively shaped its formation. The 2007 Payments and Settlements Act allowed the RBI to authorize a company or a corporation to operate or regulate clearing houses of banks, provided that not less than 51 percent of such organization is held by public sector banks. This paved the way for the creation of NPCI, which was set up as a non-profit company that would be responsible to RBI, but independent. Cook and Raman assert that the decision to file as a non-profit underscored NPCI’s utility nature from the outset. The non-profit company status also allowed NPCI to be an agile organization that could hire the best talent available in the market.
By all yardsticks, all three design choices have served the country well, so far. While NPCI has provided the backbone infrastructure, banks and private sector players have innovated on top of it. The argument is that bringing in more competition for NPCI will spur innovation. While this is a potential best case scenario, the opposite cannot be ruled out at this stage. MNCs could use their financial muscle to elbow out Indian players, as we are seeing with Google Pay, which is exploiting the interoperable rails of UPI and converting it into a closed loop ecosystem where only Google Pay users can transact with each other. By forcing a non-profit NPCI to compete with for-profit organizations, the NUE guidelines might trigger a race to the bottom, which hurts the entire ecosystem.
There is enormous social value in having NPCI and the payments backbone remain a non-profit utility that offers utility pricing. This allows players to innovate on top of this infrastructure at a low cost, thus enabling financial inclusion. The history of stock exchanges converting into listed entities, which end up servicing high frequency traders while disadvantaging the investors and companies they were originally meant to serve, is proof that the private sector is not the solution for all ills.
Ideally, there should have been more transparency and discussion before initiating such a big move, with the objectives and regulatory roadmap clearly explained. Finally, there is the question of regulatory capacity of the state. When multiple NUEs start to operate, does the RBI have the manpower and skills to regulate them? What mechanisms does it have to ensure interoperability? How will it prevent the conflicts of interest that will arise when some of the NUEs provide privileges to their own services, to the detriment of others? What mechanisms are in place to enable dispute resolution? When RBI is unable to prevent the hijack of India’s indigenous UPI infrastructure by Google, how will it regulate much bigger NUEs? Over and above all, RBI must go to extreme lengths to ensure that entities that represent concentration of digital power are not able to control the NUEs.
