As Biggies Rush To Apply For An NUE, Where’s The ‘Ah Ha!’ Idea?
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As Biggies Rush To Apply For An NUE, Where’s The ‘Ah Ha!’ Idea?


The Reserve Bank of India’s invitation to set up a new umbrella entity for retail payments has drawn in a rush of entries. From Amazon and Google, to Mastercard and Visa, global giants are coming together with a bunch of local aspirants to apply for an NUE licence ahead of the revised March 31 deadline, reports Bloomberg.

The idea is to have another institution like the National Payments Corporation of India to spearhead innovation in financial technologies related to payments and credit, among others.

The entity (or entities), when set up, will have a profit motive, be promoted by Indian residents and work on technology platforms, which must be compatible with existing offerings under the National Payments Corporation of India.

The question still being asked is what this entity will achieve that NPCI hasn’t or can’t do and whether it will create a public-private divide in the payment sector.

A Universal Payments Licence

As one specialist in the space had explained, the lure of the NUE is similar to that of a universal banking licence. Hypothetically, armed with an NUE licence, you could develop a host of solutions ranging from payments to credit and perhaps more. This person preferred to speak anonymously.

That’s the hypothetical. In reality what will you do with an NUE licence is a question not easy to answer.

First, the RBI has specified that all systems must be compatible with the NPCI platforms. So the risk or opportunity (depending on which side of the fence you sit) to cannablise the payments being routed via NPCI systems is limited.

Second, in terms of payments, NPCI has developed and now runs a wide variety of solutions. There are about 12 payment platforms that it runs. So, is there a wide open field that NPCI has left untapped, which the NUE can target? No one has a ready answer to that.

The expectation is that the next rung of innovation may come on the credit side. And that is the area the NUE can tap. But even there, potential solutions are already emerging. Bengaluru-based software products think-tank iSPIRT Foundation, which helped conceptualise UPI, has built a lending tool, called the ‘Open Credit Enablement Network’. This, according to Infosys co-founder and non-executive chairman, Nandan Nilekani, will “democratise credit”, improve access and reduce the cost of loans, particularly for small businesses.

Still, the belief is that a lot more can be done on the credit side to facilitate access. But credit is not payments and the eventual business of credit will reside with the banks, no matter how much innovation a distributor offers.

There are a lot of ideas but there is no ‘ah ha’ moment, the specialist aptly explained.

That’s not to say that an NUE will have no utility.

Gautam Chhugani and Manas Agrawal at Bernstein say that an NUE can customise the networks to their business model and distribution capabilities. For instance, “if a conglomerate is strong in e-commerce, the NUE could customize to the specific needs of that use-case,” they wrote in a note dated March 1. “NUEs customised design and self-governance could provide stronger capabilities. Unlike UPI's generic payment network, NUEs will have customized networks based on use-cases,” they added.

The PSU-Private Divide

The other thing that the NUE, when it comes in, will do is create a public-private divide in the space of financial technology innovation.

The NUE is permitted to be a for-profit organisation and if deep pocketed payment organisations promote these, they will come in bags of money to get the best financial and technology minds.

NPCI on the other hand will remain what it is. An organisation promoted by a consortium of banks, which broadly functions autonomously. Like all such organisations, banks don’t really take much ownership in driving operations or growing the organisation. It is possible that NPCI can turn to a for-profit organisation but it still may not have the kind of money heft that the NUE may come with.

In some ways, this would create a PSU-private divide that we have seen in the banking sector. While the government may continue to push some of its objectives through NPCI, the new and shiny NUE may take over the mantle of innovation.

Will the system eventually benefit though as it did with the entry of private banks? Bernstein analysts believe that the NUE could help by accelerating the spread of digital payments.

India’s digital payments still have significant headroom with penetration still under 20% of personal consumption expenditure versus other developed nations. Despite the rapid growth of UPI, UPI would have reached ~200 million handles (100 million handles in December 2019). Even the most successful product (UPI) has not reached ~80% of India. The government wants to involve the private sector, particularly technology players, conglomerates, banks and telecom players, who have deep distribution in India.
Gautam Chhugani and Manas Agrawal, Bernstein Research

Creating Tech Redundancies

While we wait to get a clearer sense of how well any licenced NUE will convert possibilities on paper into real change, perhaps the best one can say is that it will help reduce concentration risk and create redundancies. Think of the NUE to NPCI as the National Stock Exchange to the Bombay Stock Exchange.

After all, that was one of the core issues that led the RBI to open up the field for an NUE. The regulator had feared concentration risk building with NPCI and believed that it would be a good idea to have, in some ways, a parallel but interoperable network. Underneath that fear of concentration risk was also some degree of institutional politicking between the RBI, the NPCI and the government.

With the licensing of an NUE some of these concerns about NPCI’s monopoly, justified or not, will get resolved. As for what the customer gets out of it, we’ll reserve judgment on that.

Ira Dugal is Editor - Banking, Finance & Economy at BloombergQuint.

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