Is the National Payments Corporation of India (NPCI) a payments operator? Is it a viable corporation? Is it a regulator for digital payments platforms? Should it be listed on the stock exchange? What does NPCI’s future look like when competing institutions come up in the next few years? These are some questions that have cropped up over the last few months after the Reserve Bank of India (RBI) released its framework in August to authorise a New Umbrella Entity (NUE) for retail payments.
With the State Bank of India, in tandem with other banks, and the Tata Group eyeing an NUE license from the RBI to develop and operate new retail payments solutions, the NPCI’s role in the digital payments ecosystem is bound to change. Between April and September this year, the NPCI processed over 1,525 crore transactions worth over ₹66.85 lakh crore. In the same period of last year, it had processed over 1,153 crore transactions worth over ₹77 lakh crore, according to NPCI data. In September this year alone, it processed over 304 crore transactions worth ₹13.54 lakh crore, up by nearly 50% in terms of volume and 111% in terms of value compared to the same month in the previous year.
While the Covid-19 pandemic caused a dip in the value of transactions during the first six-months of this year, transactions across NPCI’s 10 product platforms have been growing consistently every month. Transactions on the Unified Payments Interface (UPI), the National Electronic Toll Collection (NETC), Bharat Bill Payments System (BBPS), and Aadhar Enabled Payments System (AEPS), for instance, have all recorded historical highs in the last four to five months.
The NPCI did not respond to queries sent by MediaNama last week.
A viable entity with a complicated history
A senior payments industry executive told MediaNama that from its start NPCI, which was not directly owned by the government nor the RBI, was given an unfair advantage in managing the retail payments systems. UPI became the “wallet killer” since money could be transferred immediately between people and merchants, while established payment gateways and bill payment companies were pushed into using the the BBPS architecture developed by NPCI, the executive said on the condition of anonymity. BBPS is an interoperable bill payment system that banks, fintech payment companies and biller merchants can use to send bills and accept payments.
NPCI was given a significant commercial and operational advantage in its initial years, when independently-run systems like the National Financial Switch, which was developed and operated by Euronet in 2004, and the Cheque Truncation System (CTS), which was operated by the RBI, were transferred to it, the payments executive quoted above said.
“Similarly, Rupay which is NPCI’s card network was provided with an outright advantage as these cards were issued as part of the government’s JanDhan-Aadhaar-Mobile financial inclusion program. The RBI’s NUE guidelines are very welcome because it will allow us to develop an alternative payments architecture which can compete with that of NPCI’s” — Senior payments industry executive
From its early days the NPCI was profitable, earning around ₹17.7 crore in revenue and ₹11.5 crore as net surplus back in 2009-10. A decade later, it reported revenues of ₹1,221.2 crore and a net surplus of ₹387.6 crore, both up by 24.5% and 26%, respectively, on a year-on-year basis.
A payments operator and quasi-regulator
At present, the NPCI is a Section 8 company or not-for-profit entity under the Company’s Act, 2013 and is the only RBI authorised “Retail Payments Organisation” under the Payment and Settlement Systems Act, 2007. While the government is not directly invested in the entity, it holds an indirect stake through public sector banks like SBI, Bank of Baroda, Union Bank of India and Punjab National Bank. Private banks like HDFC Bank, ICICI Bank, HSBC and Citibank have a stake as well. In total, the top 10 banks hold a 76.8% stake in the entity, according to financial disclosures as of March 31, 2020.
Although the RBI’s Board for Regulation and Supervision of Payment and Settlement System (BPSS) issues broad payment system regulations from time-to-time , the NPCI has become the de-facto regulator since it licenses operators and third-party apps on the platforms it owns such as BBPS, UPI and AEPS.
“As the only game in town, it has become a monopoly because there is no alternative to NPCI. So it is a quasi-regulator with rule-making authority in my mind. The problem is that one can choose to disagree with the rules but you will still have to abide by what it says whether in terms of the product platforms or the commercials aspects,” said a senior banker on the condition of anonymity. It remains to be seen how a NUE will compete with the NPCI if the latter continues to be a not-for-profit, this person added.
The system is not that transparent, said the first payments executive quoted above. “Look at the merchant discount rate (MDR) issue. If the government has told businesses not to charge MDR on the Rupay and UPI platforms, why is the NPCI continuing to charge switching fees from its partners? They make 10-15 paisa on every UPI transaction while none of the third-party apps make any money. So where is the regulatory foresight from the NPCI? It is a confusing set up,” this person said.
According to a payments industry expert, “the NPCI should be looked at as a payments platform operator which manages the network through rules and procedures, just like a stock exchange issues rules to its members. They do not have regulatory powers, but they have contractual powers that need to operate within the RBI’s regulations.” However, NPCI’s interventions and rule-making process, like the proposal for market share caps on UPI, are now alienating some of the large banks which is why some of them want to apply for an NUE license, this person said on the condition of anonymity.
Since the NPCI operates as both a payments system operator and a “quasi-regulator”, its functions fall foul of the principles laid down in the December 2016 report by the Ministry of Finance’s Committee on Digital Payments. The committee, headed by former finance secretary Ratan P Watal, recommended a de-coupling of ownership and regulatory powers when it came to the payments industry.
Tapping the stock markets
“The NPCI today is a consortium of banks. A listing would expand its shareholding to include fintechs and other financial services companies which would strengthen its network. As digital payments transactions will increase, the NPCI will need greater access to capital which a listing would provide,” the payments expert quoted above said.
“If some of the banks decide to create an alternative system to any of NPCI’s platform the NPCI will face competition on the product side, which is why converting it to a profit-making entity and then listing it on the stock exchanges could be a good option for the NPCI,” a second payments industry executive said on the condition of anonymity. If some banks are looking to set up an NUE, as existing shareholders they would need to sell their stakes to ensure there is no conflict of interest, this person said. “Further, if one or multiple NUEs come up in the next year, the NPCI will have to invest in their people to ensure they can attract and retain talent who may otherwise be willing to join the NUE which will a profit-making entity,” this person added.
However, interestingly, the government recently expressed its concern over the RBI’s NUE policy, which would allow private entities and even foreign companies to operate payments systems, as it would undermine the NPCI’s position, the Times of India reported.
If the government is apprehensive about the NUE and a multiple payment system operator regime which is motivated by profit-making rather than innovation and payments infrastructure stability, should the government participate in NPCI’s listing? “They [NPCI] are at their peak in terms of growth and profits, so if they go for a listing it would be a valuable investment for the government even after an NUE comes up in the next three to four years,” the payments industry expert said.
Watal Committee recommendations remain ignored
The RBI today regulates the payments industry through circulars and notifications under the Payment and Settlement Systems Act (PSS), 2007 and through the BPSS. As part of its recommendations the Committee on Digital Payments had called for the creation of a Payment Regulatory Board, which is yet to be implemented.
The Watal Committee said that a regulatory regime for the payments industry should be similar to one in the country’s telecommunications industry, wherein the commercial arms of the Department of Telecom were first segregated and thereafter an independent regulator — Telecom Regulatory Authority of India (TRAI) — was formed.
On the NPCI, the Watal Committee had two major recommendations. The first was that NPCI should be deemed a “Critical Payment Infrastructure Company” for the country as it plays a role similar to what stock exchanges play in the financial market. But this classification has still not been happened. The second recommendation was that the NPCI’s shareholding should be diffused and its functioning made independent. Though the committee had evaluated the idea of listing the NPCI, the RBI was against it as would create a “perverse incentive in NPCI’s corporate structure.”
“The Committee recommends that RBI should issue regulations which require important retail payment organisations to have a time bound plan to move towards diffused shareholding where no individual shareholder along with persons acting in concert can hold more than 5% of the equity
share capital. RBI should require NPCI to develop short term plan to move towards diffused shareholding structure and have majority public interest directors” — Committee on Digital Payments
However, four years on, the 10 major banks that own the NPCI continue to have a shareholding of 7.47% each. Bank of Baroda has a 9.6% stake in NPCI since this includes the equity held by Dena Bank and Vijaya Bank, which were merged into it in April last year.
There is little doubt that NPCI’s future in the digital payments space is under question, with the RBI looking to issue licenses to new entities that want to do a similar job. Nonetheless, if it taps the stock markets and expand its offerings internationally the NPCI might just be able to retain its dominant status.
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