Payment businesses from global names like Google, WhatsApp, Visa, Mastercard , to the country’s banks, its postal service, e-commerce firms and telecom companies are all competing for customers. All of these entities rely on the common network and payment infrastructure designed and created by the RBI and NPCI. (Photographer: Samyukta Lakshmi/Bloomberg)

How RBI Can Shake Up India’s Retail Payment Systems

It was about a decade-and-a-half ago, in 2004, that the Real Time Gross Settlement was introduced in India. It was the first major step towards electronic payment systems in India. Then came the National Electronic Funds Transfer, the Immediate Payment Services and most recently the retail-payments focused Unified Payments Interface.

For the most part, each of these systems have been developed with the help of the Reserve Bank of India, with banking companies as the center-point. But the regulator now wants to change this.

Earlier this week, the RBI sought public comments on authorisation of new retail payment systems. The core idea behind this is to reduce concentration risk, said R. Gandhi, former RBI deputy governor. Gandhi is also an adviser to Paytm Payments Bank.

The central bank wants several more players for the payment-system operations so that the total exposure or the total risk posed by a single party will not be big. It is a risk-mitigation policy. If there are more players around it brings in more efficiency and technology will improve the timeline for processing transactions.
R Gandhi, Former Deputy Governor, RBI 

At present, there are around 89 licensed payment system operators managing and operating card networks, pre-paid instruments, instant money transfer and ATM networks, as well as other systems. But operations are concentrated in the hands of a few.

TR Ramachandran, group country manager for Visa - India and South Asia, said that the paper signalled the RBI’s intent to increase consumer choice. Given the heterogeneous nature of the Indian market, different segments require different solutions, he said.

Also read: Is NPCI Too Big To Fail, Asks RBI In A Policy Paper On Retail Payment Systems

Banks Vs Non-Banks

One criticism of the existing payment system is that it is too dominated by banks. Many argue that it does not provide equal access to non-banks, like fintech or e-commerce firms.

For instance, despite having the capability in terms of technology and operations, often non-banks can only access these payment-systems through the banks.

This is one aspect that needs to be corrected through the new policy.

In terms of penetration, the real problem is that many of the payment systems work only through banks. We need continuous experiments to happen in order to improve penetration and the current regime does not allow for that.
Naveen Surya, Chairman Emeritus, Payment Council of India

Surya explained that differentiation between entities should be based on specific-risk factors and principles which all players, bank and non-bank, can comply with. For instance, one criteria for entry is ‘track record’ of the company. But innovation and track record do not always go hand-in-hand.

“Such discrimination is an obstacle to the goal of financial inclusion, innovation and more competition,” he said.

Dominance Of One Firm

The other concern, also addressed in the RBI’s policy paper is the dominance of the National Payments Corporation of India.

NPCI manages over ten different payment platforms. These include the National Financial Switch, Cheque Truncation System, Immediate Payment Service, Unified Payments Interface, National Automated Clearing House and Aadhaar Enabled Payment System, in addition to others. This “concentration” of payment-systems under one entity, like the NPCI, is what the RBI says creates the “possibility of single point of failure and also makes the entity too big to fail.”

Can another entity be created to reduce this dominance?

Yes, but only with the level of regulatory support that NPCI got, said AP Hota, the former chief executive officer of the body. Hota is currently a consultant with SWIFT.

It is possible to create another entity like the NPCI provided that the RBI supports it. When NPCI was set up, the RBI handed over business on a platter through the National Financial Switch and therefore it could become cash positive right from day one.
AP Hota, Former CEO, NPCI

BloombergQuint sent queries to the representatives of NPCI, but they did not immediately comment.

As of the end of November, the share of transactions processed by NPCI’s systems account stood at 45.6 percent in terms of volumes, whereas it accounts for 4.1 percent of all payment-system transactions in terms of value.

Not everyone agrees that NPCI falls in the too-big-to-fail category.

“I think the ‘eggs in one basket’ argument is not true because, even today, the volumes being processed by NPCI are not that high compared to other international organisations,” said Nikhil Kumar, entrepreneur and volunteer, iSPirit Foundation. Kumar gives the example of Alipay. It was able to process 1,36,000 transactions per second whereas UPI processes around 1,000-2,000 transactions per second. It has the capacity to increase this to 10,000 per second.

While the volume of transactions controlled by NPCI may not be a problem for Kumar, he does question whether the not-for-profit structure of the organisation is conducive for innovation. “What is the motivation for NPCI?” to create new versions of existing payment platforms, like UPI, going forward, he asked.

To be sure, whatever incentive it may have at the current juncture, as a dominant player its push for innovation could reduce further if private competition comes in.

So What’s The Future?

Gandhi said that the central bank could begin with introducing more operators across the various payment systems but settlements and clearing needs to be housed within one single entity.

“In payment-systems, it all depends on the underlying numbers, if more transactions are being settled with a set of members, then you may find that they want their own settlement arrangements. Inter-group settlement will be a tedious process and it will add inefficiencies,” he told BloombergQuint.

He added that it does not add much value to have multiple operators for clearing and settlement of same type of transactions; otherwise there would only be additional costs in terms of arrangements for inter-operability.

Hota shared a similar view.

According to him, banks may not be eager to participate in the creation of another NPCI-like entity. And so, maybe as a start, some payment platforms could be handed to a new entity.

“Banks are quite happy with a single system as it makes commercial sense to only connect to one system. Either a couple of the payment platforms should be handed over to the new entity or the RBI should strongly back it and instruct the banks to participate,” he said.

Surya hoped that whatever direction the new policy takes, it proves to be more equitable.

“We need to bring risk and principle-based solutions and open-access, after which the specific platforms can be opened up to different entities. The policy needs to solve issues of access and flexibility to bridge the gap in terms of penetration,” Surya said.