New Umbrella Entity for Payment System – Explained, Pointwise

Introduction

The RBI in August last year released a framework for setting up New Umbrella Entity or entities. These Entities will carry out various payment services, similar to the ones being provided by the NPCI right now.

Recently the Reserve Bank of India said that it is not in favour of having direct and supervisory control over the New Umbrella Entities. Instead, the RBI wants agencies such as the National Payments Corporation of India (NPCI) or a newly formed body to take over the role.

However, creating a regulatory agency is not only time and money consuming but also reduces RBI’s power to control the entity itself.

What is New Umbrella Entity?

In February 2020, RBI proposed to create an alternative umbrella organisation for retail payments. This is to prevent the monopoly of the National Payment Corporation of India(NPCI). Presently NPCI is taking care of all retail payments systems in India.

As envisaged by the RBI, New Umbrella Entities will be a not-for-profit company. They will set up, manage and operate new payment systems. New payment systems include wallet transactions, Aadhaar-based payments, and remittance services, UPI transactions, ATMs, white-label PoS, etc.

Need for New Umbrella Entity:

1. Enhance competition: At present, the NPCI is the only entity handling the payment system. So, it is not for sure that the transaction costs are the lowest, or they cannot be reduced further. Similarly, the competition will also provide a variety of product offerings in the payment system.
2. The monopoly of NPCI: Private players in the payments space have expressed few concerns with the NPCI. Further, the NPCI is the only entity managing all retail payments systems in India. So, the New Umbrella Entities will enhance the competition and improve the service delivery in the retail digital payment ecosystem.

Functions of New Umbrella Entities

As per the RBI, the following will be the functions of these NUEs;

• They will develop new payment standards, methods, and technologies.
• They will operate in clearing and settlement systems. Furthermore, they will also identify and manage relevant risks. This includes risks related to settlement, liquidity, credit, and operation.
• New Umbrella Entities will also preserve the integrity of the retail payment system.
• These entities will monitor the system both nationally and internationally to prevent shocks, frauds, and challenges that affect the system in general.

RBI framework related to the New Umbrella Entities

The RBI in its framework mentioned certain guidelines for New Umbrella Entities. These are,

• Capital: The pan-India new umbrella entity(NUE) or entities will focus on retail payment systems with a minimum paid-up capital of Rs 500 crore.
  • However, the RBI will not permit any single promoter or group to hold more than 40% investment in the NUE. Also, the NUE should maintain a minimum net worth of Rs. 300 crore at all times.
• Ownership: Further, the promoter or the promoter group of the NUE should be ‘owned and controlled by residents’ with 3 years of experience in the payments ecosystem.
• Governance: The entity has to follow corporate governance norms set by the RBI. The RBI will retain the right to approve the appointment of directors and nominate a member on the entities’ board.
• Foreign Investment: As long as the NUE’s comply with the other guidelines the Foreign Investment is allowed.

Need for the New regulator/NPCI to regulate New Umbrella Entities

1. The quantum of digital transactions in the country: The retail transfers in the country expanded enormously. For example, in 2020-21 alone Rs. 165 lakh crores of money transferred in 27 billion transactions. This requires a regulator to oversee the transactions and ensure proper service delivery.
2. RBI is not having the capacity: RBI will need a huge upfront cost to create a regulatory body for these NUEs. So the RBI thinks it can be left to NPCI or any new regulator.
3. Better functioning of NUEs: The new regulator/NPCI can handle the customer queries, granting licenses, monitoring the functions of the NUE in a better way.

Challenges with vesting the regulatory control of NUE to NPCI or a new regulatory body

1. Various challenges with letting NPCI regulate NUEs:
   • Many of the New Umbrella Entities are also the shareholders of the NPCI. So, if the regulatory control is vested with them, then there will be a conflict of interest between developing the NUE and controlling NUE.
   • Further, the NPCI is seen as a competitor to the NUEs. So letting them regulate might diminish the competition.
   • Also, the NPCI is performing very well in promoting the digital leap of India. Asking it to take over the regulatory function will also reduce its capacity and hamper India’s digital progress.
2. Various challenges associated with creating a new regulator:
   • Creating a new regulator with enough capacity, manpower and regulatory capability from the top-down is a great challenge.
   • Delay in creating the regulator or hurrying it to work faster will pave way for the New Umbrella Entity to exploit the loopholes.
3. Other challenges: By leaving the power of regulation to NPCI or a new body will distant the RBI from the digital payment ecosystem. As the digital payment ecosystem is considered as the future of the economy, thus it is important that it is regulated directly by a capable body like RBI.
4. The question of data privacy and data theft: The new regulator/NPCI will have to strengthen the data security infrastructure right from the beginning as digital payments are already increasing in the country. For example, the recent data breach in BHIM and Mobikwik payment apps.
5. Ambiguity in the function of the regulator: There is no clarity on RBI’s relationship with the regulator post the formation. For example, will the RBI have regulatory control over the regulator? If the regulator is independent, then it may not function as efficiently as the RBI.

Solutions to regulate New Umbrella Entities:

• Create a new body or restructuring the NPCI: The RBI can set up a new regulator for NUEs, or it can restructure the NPCI board to avoid conflict of interest.
• The RBI has to take up the regulatory responsibility of NUEs. Because;
  • The RBI can use the existing capacity to generate enough infrastructure to regulate these NUEs.
  • Also, the cost of setting up the infrastructure for the regulator will be the least for a regulator like RBI than the new regulator. As there is enough manpower, capital, technological capability available.
  • So, the RBI has to set up a separate branch/division to regulate these New Umbrella Entities.
•  The multiplicity of the regulator: India so far has created too many regulatory bodies in the financial space such as RBI, SEBI, PFRDA, IRDAI, etc. So, the government has to perform the review and consolidation of these regulatory bodies. This will ensure consistent and predictable signals to the market. Further, limited regulators can work cohesively and efficient manner.
• Building privacy by design: The government has to pass the Data Protection Bill. This will make NUE store data within India and provide users the right to privacy in the digital space. Further, the government has to strengthen the RBI’s digital capability.

Conclusion

The New Umbrella Entities are transforming India’s retail payment system from cash to cashless transactions. With further digitization, their operations are going to expand. So regulating them is a necessary step to infuse checks and balances in the retail digital payment space. But, the RBI has to take responsibility for that, instead of transferring power to others.