The RBI's NUE Groove To Digitise All Payments Under One Roof

The digital payment ecosystem is up for some changes that come with the RBI's new regulations. Not just mainstream payment companies, but Reliance and Tata along with Google, Amazon and Paytm aim to set up a new umbrella entity (NUE) for payment systems. To better understand what an NUE is, let us take a look at the draft framework. It details the eligibility and governance criteria of the proposed NUEs. But what are NUEs, and why do Indian companies and consumers need them?

What is an NUE?

According to RBI, a company can obtain a license to set up a New Umbrella Entity (as a company or NPO). The NUE will provide all kinds of payments and their interoperability to a payer. Further, according to RBI, the company needs to set up, manage and operate new payment systems in the retail space comprising. This does not have to be limited to ATMs, White Label PoS, Aadhaar based payments and remittance services (AEPS). It can explore newer payment methods, standards and technologies. It can also monitor payment issues in the country and internationally while taking care of developmental objectives like enhancement of awareness about the payment systems.

Other than that, the company needs to operate with banks and NBFCs to identify and manage relevant risks. This includes settlement, credit and liquidity. The main aim of the NUE is to strengthen the retail payments ecosystem in the country. That is, it aims to not only enhance the user experience, but also interoperability.

The need for NUE and why are private companies aiming for it?

According to a Bloomberg report, four groups are looking for a license to set up the NUE. One consists of Amazon, Visa, ICICI Bank, Axis Bank, Pine Labs and BillDesk. The second consists of Reliance Industries with Facebook and Google. The third consists of Paytm and Ola with IndusInd Bank while the fourth consists of the Tata Group, Mastercard, Bharti Airtel Ltd., Kotak Mahindra Bank and HDFC Bank.

Currently, NPCI leads the Indian Payments Ecosystem with UPI, AEPS, RuPay, Fastag, etc. The NPO consisted of banks, thus, making it difficult for private players to work with technology freedom. Rather, they act as a third party. With NUE, these companies, rich in capital and userbase, will have a strong foothold in the digital payments sector.

Technically, NPCI, a government-entity has limited capabilities. With the privatisation of the digital payments sector, regulatory support and innovation attracting investors, the sector can flourish, reaching the masses in India. NUEs are also thought to further innovation in the digital and retail payment sector to complement NPCI and reduce risks of overload on the UPI infrastructure.

Who can apply for an NUE?

RBI needs that NUEs have a minimum paid-up capital of Rs 500 crore. The huge PUC requirement aims to support or address the need for capital for managing risks, invest in technological infrastructure and also business operations. This outlines that companies with huge funds and the ability to maintain the funds can apply for the NUEs. Further, the company needs to maintain a minimum net-worth of Rs 300 crore at all times. In fact, the date is so close, many companies have already applied for NUE. Some prominent names include the Tata Group, Reliance Group, Paytm, Ola, IndusInd, Google, Amazon, PineLabs and BillDesk, and Facebook. There have been no reports of application from WhatsApp, but if Facebook gets a licence, WhatsApp automatically does.

The Draft of the New Umbrella Entity by RBI

How to apply?

According to RBI, companies who wish to take licences for NUEs need to apply to RBI via post. Licensees need to send a detailed business plan covering the payment systems that they have to set-up; its operations along other documents. It should have experience in the payments ecosystem. Thus, it needs to attach what technology, security features will include in the plan. The company also needs to submit its market analysis or research and what benefit such payment systems and their structures hold. They need to lay down the time-period for setting up the payment systems and the scale of operations, etc.

The format: Application for New Umbrella Entity

Further, the company needs to send the application in an envelope with the subject Application for New Umbrella Entity (NUE)  to this address. Chief General Manager, Department of Payment and Settlement Systems, Central Office, Reserve Bank of India, 14th Floor, Central Office Building, Shahid Bhagat Singh Marg, Mumbai – 400 001. The last date to apply is March 31.

NUE vs NPCI

To those unaware, NCPI or the National Payments Corporation of India owns the UPI interface. The 4-year-old entity has taken the Indian Payment Ecosystem by fire. It allows users to link their phone numbers to their bank accounts. Thus, it has made transferring and receiving money via apps as easy as sending a text message. This has allowed high volumes of transactions at minimal cost which is why even WhatsApp now have a UPI payment feature.

Although NUE and NPCI are both payment entities, the key difference is that NUE can be a for-profit organisation, unlike NPCI. The people who win on NUE will win on NPCI. Yet, it is a win-win as NUE will be inclusive of UPI regardless of what tech innovations they do. The only catch here is that if NUE sets to be a for-profit organisation, RBI might change NPCI into one too. That means, all the consumers who use UPI today even for transfer of Re 1, will be charged a fee by their banks.

Revenue Model with NUE

Currently, the revenue model of these NUEs is unclear as they can operate as for-or-not-for-profit organisations. This means that RBI has given the companies free rein over their business model. They charge transaction fees to business or operate in new territories. Still, even if the companies decide not to charge transactions, they will have a huge volume of transactions. Pre-pandemic, the Indian Payment Ecosystem saw Rs 2 lakh crore worth of transactions. Post-pandemic, the figure rose by 103%.

Yet, we don't need to worry about what revenue model these entities will have. Because as fierce as the competition is, RBI will grant the license of NUE to only one or two companies. The process after the decision could take up to two years before the entity come into use.