On Feb 10, 2020, the Reserve Bank of India (RBI) issued a four-page document titled, “Draft Framework for authorization of a pan-India New Umbrella Entity (NUE) for Retail Payment Systems.” It appears logical. After all, who would argue with the objective of setting up “…new pan-India umbrella entity / entities focusing on retail payment systems”, which could only strengthen the country’s digital payment ecosystem.
RBI’s purported goal of derisking the payment infrastructure layer and reducing dependence on NPCI is a valid and worthwhile one. However, there are serious concerns around digital sovereignty, concentration of Big Tech power and potential conflicts of interest, which should make RBI rethink how it goes about introducing such competition.
To begin with, the RBI notification does not explain why the apex bank wants to make deep and long-lasting changes to India’s payment sector. Further, just a year before this notification was released, the 2019 Watal Committee Report on deepening digital payments issued 73 recommendations. What is intriguing experts is the fact that the report did not even once suggest that India should create an entity (or entities) that would compete with the National Payment Corporation of India (NPCI) that undoubtedly gets the credit for helping India build one of the world’s most modern payments infrastructure.
If such is the case, why the need for this umbrella called NUE?
Since RBI has offered no explanation, no whitepaper outlining the need for NUEs and how crucial issues of interoperability and other regulatory matters will be handled, we are being forced to conjecture.
Till date, India’s payments backbone has been run by the NPCI–a government-regulated monopoly that has operated India’s payment infrastructure, including the successfully-run Unified Payments Interface (UPI). NPCI was designed with three broad elements mind: it was set up as a non-profit company that is run as a utility and has a majority shareholding by Indian banks.
Thanks to this careful institutional design, India’s payments ecosystem has been run as Public Digital Infrastructure (PDI), which is technology infrastructures built/managed by the government, for the people. This makes India different from other parts of the world, where payment networks are private sector monopolies (like m-pesa in Kenya) or duopolies like MasterCard and Visa globally, and AliPay and WeChat in China. In contrast, the UPI network, which is run as PDI, enables 200 banks to offer UPI as a service on an interoperable backbone.
RBI’s intention to welcome NUEs will alter this structure and have repercussions that we need to be cognizant of. News reports indicate that six consortia that include telcos, a number of MNCs, and platforms that are data monopolies, have applied for the NUE license. If one or more of these consortia are given the approval for setting up the NUE, RBI would negate all three design choices that went into the creation of NPCI.
This, I believe, would adversely impact India’s digital payment ecosystem. Here are four reasons:
- Digital Sovereignty: It is safe to say that, in this day and age, there are very few countries that would allow MNCs to enter a strategic sector like payments infrastructure. Payments are the lifeblood of an economy, and control of this ecosystem is critical for digital sovereignty. Russia learnt this the hard way when US sanctions brought MasterCard and Visa transactions to a grinding halt in 2014, leaving millions of Russians stranded. This forced Russia to create its own card network called MIR.
In this context, India has done an outstanding job in setting up one of the most modern payment systems in the world that enables highly interoperable mobile payments and real-time settlements. More importantly, this has been done within the ambit of an entity owned in India and controlled by Indian regulators.
At a unique moment in history, when global regulators are struggling to ensure control over critical digital infrastructure, India seems to be on the verge of squandering a colossal national advantage. For example, can you imagine the US allowing an Indian company to operate such critical infrastructure?
The argument some offer is that bringing in more competition for NPCI will spur innovation. While this is a potential best case scenario, the opposite case cannot be ruled out at this stage. MNCs could use their financial muscle to offer low initial pricing, elbow out NPCI, and raise prices when their monopoly is secure. Google Pay is one such example. It is exploiting the interoperable rails of UPI and converting it into a closed loop ecosystem where only Google Pay users can transact with each other. At the OTT level, it is easier to minimize the impact. However, when such monopolistic practices play out at the infrastructure layer, the negative effects are magnified.
If RBI has a plan to deal with the Digital Sovereignty issues that are likely to arise as a result of the NUEs, it would be good to read their white paper on this. On the other hand, if this is an oversight on RBI’s part, it needs to be rectified at the earliest.
- Social Value of a Non Profit Utility Infrastructure: There is enormous social value in having NPCI and the payments backbone remains a non-profit organization that offers utility pricing. This allows players to innovate on top of this infrastructure at a low cost, thus enabling financial inclusion. The history of stock exchanges converting into listed entities, which end up servicing high frequency traders while disadvantaging the investors and companies they were originally meant to serve, is proof that the private sector is not the solution for all ills.
In the case of the NUEs, the four-page RBI note does not offer any clues about the business model. A note by Digital Fifth, a BFSI consulting firm, points out that payment instruments have largely been moving towards zero pricing and this phenomenon is expected to continue in future. Therefore, the most likely scenario is that the NUEs must be banking on leveraging payments data to sell other products and services.
The history of Big Tech shows that they will invest billions of dollars to create powerful data monopolies. This is exactly the kind of situation that NPCI was created to avoid. If RBI has a valid reason for this 180 degree flip from non-profit payment infrastructure to for-profit NUEs, it would be good to see these laid out in a white paper. In any case, how does RBI expect a non-profit NPCI to compete with for-profit entities?
- Conflict of Interest: Most infrastructure players inevitably end up as quasi regulators. Do we want to hand over such powers to the telcos, Big Tech and MNCs who have applied for the NUE license, at a time when global regulators are wrestling with the monumental challenge of regulating Big Tech and protecting Digital Sovereignty?
Escalating costs for the banking sector: A note by the consulting firm, The Digital Fifth explains that each new payment product rollout typically costs banks upwards of 150,000 USD in most cases. It also leads to operations, settlement and reconciliation costs, which might push small banks out of this segment.
By all yardsticks, the decision to make NPCI a non-profit that offers utility pricing that is majority owned by Indian banks, has served the country well. While NPCI has provided the backbone infrastructure, banks and private sector players have innovated on top of it. Thanks to the thoughtful design of NPCI, we have built a powerful moat that protects our sovereignty in payments and has enabled competition and innovation. By forcing a non-profit NPCI to compete with for-profit organizations, the NUE guidelines might trigger a race to the bottom, which will hurt the entire ecosystem. ( Figure 1.0 shows the consortia and some of its members comprising banks, global tech giants, fintechs. The list however is not comprehensive and many more may soon join the bandwagon.)
Ideally, there should have been more discussion before initiating such a big move, with the objectives and regulatory roadmap clearly explained. Finally, there is the question of regulatory capacity of the state.
When multiple NUEs start to operate, does the RBI have the manpower and skills to regulate them? What mechanisms does it have to ensure interoperability? How will it prevent the conflicts of interest that will arise when some of the NUEs provide privileges to their own services, to the detriment of others? What mechanisms are in place to enable dispute resolution? When RBI is unable to prevent the hijack of India’s indigenous UPI infrastructure by Google, how will it regulate much bigger NUEs?
Over and above all, RBI must go to extreme lengths to ensure that entities that represent concentration of digital power are not able to control the NUEs.
One only hopes that RBI will put the NUE licenses on hold and issue a detailed white paper on the need for NUEs and how they will be operationalized. In my opinion, if competition to NPCI is brought in, it should be through another non-profit that offers utility pricing. For-profits and MNCs should play on top of this network infrastructure and not at the infrastructure layer itself. If we ignore the lessons from global tech policy discussions, we will have to pay a heavy price.
(The author Venkatesh Hariharan is a technology policy analyst based in Mumbai)