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Ex Machina
Umbrella entities for digital payments are on their way
If we create a standard-setting body for digital payments, we may be able to fast-track innovation
Last week, following on from a policy paper that it had issued in January 2019, the Reserve Bank of India (RBI) released a document setting out the framework it plans to adopt to authorize the establishment of new umbrella entities (NUEs) for retail payments. Once in place, these newly authorized entities will be able to operate their own clearing and settlement systems; establish new standards and technologies; and develop innovative new payment systems that enhance customer access, convenience and safety. All NUEs will have to be interoperable with the National Payments Corporation of India (NPCI)—the umbrella entity that currently manages the entirety of retail payments in India—but, somewhat surprisingly, would also be allowed to set themselves up as for-profit entities, and they will themselves be able to participate in RBI’s payment and settlement systems.
I had studied the policy paper when it was issued last year and remember being surprised that RBI was going down this path. The NPCI is at the epicentre of the explosion in digital payments in the country, and I could not for the life of me figure out why the central bank was trying to fix something that was not broken.
But then, if you take a closer look at the extent to which NPCI has insinuated itself into the digital payments ecosystem, you may begin to get a sense of what RBI might be concerned about. Between the Unified Payments Interface (UPI), Immediate Payment Service (IMPS), Aadhaar-enabled payments, Bharat BillPay, and all the other payment systems that it manages, 48% of all electronic retail payments in the country pass through the NPCI infrastructure. It is not an understatement to say that when it comes to payments, NPCI is the fulcrum around which everything digital revolves. That being the case, perhaps RBI’s concern stems from having the operations of so much of the country’s payment system concentrated in one entity.
But, surely, there is nothing wrong with having all digital transactions flow through a single entity—so long as that entity is neutral. If the concern is technical, we could build sufficient redundancy into NPCI’s technical architecture to ensure that there is no single point of failure in the system. What is clear to me is that creating multiple umbrella entities is not the answer to this problem, particularly since the framework document allows for NUEs to establish themselves as profit-oriented entities that can participate in the payments ecosystem. How will an NUE be able to assure neutrality when it has so much skin of its own in the game?
And then there is the question of whether the trade-off is even worth it. Replicating the NPCI infrastructure will require heavy investments, especially because this time around, we will need to ensure that all the participants in one NUE can seamlessly interact with those in every other. As much as it may be technically possible to make each umbrella entity interoperable with every other, doing so while still maintaining the security of the underlying infrastructure is going to be difficult and expensive. And then there is the cost of the additional regulatory burden that RBI will have to shoulder, now that the banking-sector regulator will have to manage not just one but multiple umbrella entities.
Having said that, there would be consequences to letting NPCI be the only game in town. Any sort of monopoly results in market inefficiencies, and if we have just one umbrella regulator, we will never be sure if transaction costs are as low as they could be, or if the variety of product offerings available to us could be better.
The way I see it, the real problem is that the NPCI is expected to both manage the digital payments industry as well as come up with the frameworks necessary to foster innovation. When it had just a small number products in its portfolio (and far fewer market participants to manage), the NPCI was able to perform both functions efficiently. Now that more than half of the country’s digital payment transactions pass through its pipes, the effort of just keeping the system working seems to be taking a toll on its ability to develop the protocols and standards that are needed to encourage innovation in this boom sector.
If this is the real problem, one possible solution might be to create a separate and independent standards-setting body that is tasked with coming up with the protocols and standards required to foster innovation in the digital payments space. This is how most successful digital infrastructure systems work. Take the internet, for example. The World Wide Web Consortium (W3C) develops new standards for the internet that are then adopted by various layers of the infrastructure that the internet depends on to function.
All I am suggesting is that we create a similar standards-setting body for digital payments in India. Any new standard that this body creates will have to first be approved by the NPCI, but then it can be rolled out throughout the digital payments ecosystem.
This will free up the National Payments Corporation of India to focus on what it, and only it, can do—make sure that the Indian digital payments system continues to work smoothly.
At the same time, by establishing a neutral and independent standards-setting body, we can make sure that the system as a whole in our country evolves in the best traditions of digital infrastructure adopted anywhere in the world.
Rahul Matthan is a partner at Trilegal and also has a podcast by the name Ex Machina. His Twitter handle is @matthan
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First Published:25 Aug 2020, 08:39 PM IST
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