The Reserve Bank of India (RBI) logo is displayed on the bank’s building in Mumbai, India. (Photographer: Adeel Halim/Bloomberg)

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

Concerned about concentration risk and the dangers that could emerge from a ‘too big to fail’ moment in the retail payments space, the Reserve Bank of India has called for views on opening up the sector to encourage competition and innovation.

In a policy paper on retail payment systems in India, the RBI noted that while there are a total of 89 payment system operators in the country, a few entities have grown in a manner that has led to concerns around concentration.

Payment Systems in India have grown in a manner which is characterized by a few operators while there is a wide array of payment systems. This has given rise to certain questions which range largely around concerns of concentration, need for competition and the resultant impact on economic efficiency and financial stability
Reserve Bank of India, Policy Paper on Authorisation of New Retail Payment Systems 

The main concern for the regulator seems to stem from the role played by the National Payments Corporation of India and its importance in today’s payment economy.

NPCI is an umbrella organisation created in 2008 to develop and operate various retail payment systems. Historically the central bank managed, developed and operated various payment systems itself. In the early 2000s, it set up the National Electronic Funds Transfer (NEFT) system as also Electronic Clearing Service (ECS), which it operates to this day. But the scope and scale at which the RBI itself could operate payment systems reduced as electronic transactions gained traction. Therefore, with the support of government and private banks, the NPCI was set up.

Over time, the payment systems operated by NPCI gained a greater share of all electronic transactions as compared to those operated by RBI.

In its paper, the RBI pointed out that the ECS system for debt and credit is witnessing low volumes and even the share of transactions by NEFT has come down to 12 percent, as at the end of March 31, 2018.

Whereas by October 2018, 48 percent of all retail electronic payment transactions, by volume, were processed by NPCI. In value terms, the not-for-profit organisation processed 15 per cent of all retail electronic payment transactions.

In the coming months, ECS will be subsumed under the National Automated Clearing House (NACH), which is operated by the NPCI, leaving the RBI operating only the NEFT system, the paper added.

The issue, the RBI study noted, is that the NPCI has become pivotal to the operations of many retail payment systems of the country. There is a ‘concentration’ of many complicated systems and tasks under its ambit, which creates conditions for monopolistic behaviour in terms of quality of service or access to and charges on services.

Further, the fact that the majority of the retail payment systems are under the NPCI’s ambit could lead to ‘complacency’ and no drive for innovation.

However, the ultimate issue is that NPCI represents a too-big-to- fail entity. If it was hit by either a negative financial event or a data-security breach, the broader impact would be significant. Especially, when there is a ‘lack of redundancy and fall back arrangements,’ said the RBI in its paper.

Way Forward

The central bank, in its paper, said that it may be important to encourage competition and permit multiple entities to provide payment services. One way to do this would be to allow multiple players to operate similar payment services. “This may require additional investments, creation of suitable institutional infrastructure and time, and thus may have to be done in phases,” said the RBI.

In a market of multiple system providers, issues concerning standardisation, governance and regulation, and accessibility to different systems and services depending on the service provider will have to be addressed, the paper added.

The biggest challenge is ensuring all entities adhere to the same standards and regulations to ensure that inter-operability remains a core feature of the new payments system being thought of.
Reserve Bank of India, Policy Paper on Authorisation of New Retail Payment Systems 

The RBI also said that it could consider bringing in an ‘on-tap window’ for all entities in the payment systems space to enter or exit the market. Further, the central bank said that the idea of reducing the minimum net-worth requirement for payment system operators can be discussed.

Views have been sought from members of the public and industy by February 20, said the RBI in its press release.