Why is RBI creating a private-led digital payment backbone?

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National Payments Corporation of India (NPCI) is set to lose its monopoly over the retail digital payment ecosystem in the country soon. The Reserve Bank of India (RBI) has begun the process of issuing licenses to private entities which will help device new and innovative products and systems, complimenting NPCI’s efforts towards enhancing retail access and scope in digital payments.

The central bank has said that the new entities, once approved by the RBI, will set up systems that are interoperable with those already in place, built by the NPCI. To draw more participation, RBI said the new entities can operate for profit, unlike NPCI.

Several consortiums led by Tatas, Reliance Industries (RIL), financial/ non-financial tech giants and banks are now vying with each other to get a license from the central bank. What’s not clear is the number of licenses the RBI plans to issue this time around.

At present, NPCI is the sole operator for various retail payments systems such as Unified Payments Interface (UPI) and Immediate Payment Service (IMPS) and among others.

The banking regulator, which started the consultation process way back in January 2019, has now extended the deadline by a month, to March-end. The chosen consortium will set up NPCI-like payment gateways that can be used by e-commerce players, banks or non-banking finance companies.

The central bank’s move stems from the concerns of a potential collapse of the system as India rides an unprecedented upward swing in digital payments. It wants to minimise concentration risk and promote innovation and competition.

As the Indian payments space evolved into a few operators against a wide array of payment systems, it raised concerns of concentration, raising a need for competition. The RBI believed that a single operator for payments system would provide standardisation, economies of scale and governance, but it could result in systemic and operational risk, lack of innovation and upgradation and inefficiencies.

The new entities will help device new products and innovative systems complimenting NPCI’s efforts towards enhancing access to digital payments. The central bank has said the new entities would need to set up systems that are interoperable with those already in place, built by NPCI. To draw more participation, RBI said the new entities can be for-profit entities, unlike NPCI.

In October 2019, the RBI had opposed creation of an independent payments regulator recommended by a government committee. The central bank didn’t want to part with the authority of controlling payment companies in the country.

The inter-ministerial committee had proposed to set up an independent payments regulatory board (PRB) outside the purview of RBI to regulate the payments sector with an aim to foster competition, consumer protection, systemic stability and resilience in the payments sector.

At least half-a-dozen applications from various consortiums have reached the central bank while a few others may make their application soon.

Among the prominent applications are Tata Group consortium, led by a subsidiary Ferbine supported by Airtel Digital, HDFC Bank and Kotak Mahindra Bank; Paytm-Ola-IndusInd Bank consortium; and Amazon-ICICI Bank consortium. Another consortium is led by RIL’s subsidiary Jio Infosystems and So Hum Bharat Digital Payments, a subsidiary of Infibeam Avenues, and tech giants Google and Facebook as partners.