Context

• Last week 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.

What are NUEs

• Once established, 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).
• NPCI 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.
• The NPCI is at the epicentre of the digital payments in the country.

If NPCI is doing its job well, then why NUE?

• Between the UPI, 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.
• NPCI is the fulcrum around which everything digital revolves.
• Perhaps RBI’s concern stems from having the operations of so much of the country’s payment system concentrated in one entity.

Are the concerns of RBI valid?

• There is nothing wrong with having all digital transactions flow through a single entity—so long as that entity is neutral.
• If RBI’s 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.
• Creating multiple umbrella entities is not the answer to this problem, as NUEs would be allowed to establish themselves as profit-oriented entities.
• There is also the question of whether the trade-off is even worth it as replicating the NPCI infrastructure will require heavy investments to make participants in one NUE can seamlessly interact with those in every other.
• Ensuring interoperability while still maintaining the security of the underlying infrastructure is going to be difficult and expensive.
• 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 entity.

Issues with NPCI

• There would be consequences to letting NPCI only entity in handling the payment system.
• Any sort of monopoly results in market inefficiencies.
• Of 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.
• 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 NPCI had just small products in its portfolio it was able to perform both functions efficiently.
• The effort of just keeping the system working seems to be taking a toll on NPCI’s ability to develop the protocols and standards that are needed to encourage innovation in this boom sector.

What is the solution to issues faced by NPCI

• One possible solution might be to create a separate and independent standards-setting body.
• Such body would come 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 World Wide Web, for example.
•  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.

Consider the question “Examine the role played by the NPCI in revolutionising the payment system in India.”

Conclusion

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.

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