NUEs Can Lead the Next Innovation in Digital Payments: Deloitte

The main objectives of setting up NUE are to minimize concentration risk and at the same time foster innovation.

The changing needs of consumers, especially in the last 18 months or so, has given a boost to India’s digital payments ecosystem. In 2021, the total volume of digital transactions in India stood at more than 43.7 billion, an average of 119.8 million daily transactions. This number is expected to increase 15 times to an average volume of 1.5 billion daily transactions by 2025. However, experts believe there are numerous challenges in the digital payments space that needs an immediate attention.

The need of the hour is to strengthen the existing retail payments landscape and avoid any points of failure. On February 10, 2020, the Reserve Bank of India (RBI) issued a document titled, “Draft Framework for authorization of a pan-India New Umbrella Entity (NUE) for Retail Payment Systems,” which aimed at strengthening the country’s digital payment ecosystem.

According to a recent report by Deloitte titled: ‘Pan-India new umbrella entity: Another milestone in India’s payments infrastructure resilience roadmap’ analysts believe, RBI backed NUE Payments is likely to change the face of digital payments in the country, de-risking the risk borne by NPCI as the soul digital payments infrastructure provider for digital payments.

What makes NUEs particularly attractive is the diversity of the players involved; the consortia that have bid for NUE licences include banks, fintechs, big tech, and large corporates. These establishments can use their expertise in particular domains to foster innovation through competition leading to improved access and customer experience. For example, the hinterland in the country continues to face internet connectivity issues. For digital payments to boom further there is a need to have consistent internet connectivity, said Deloitte.

Future innovation in digital payments must accommodate for digital solutions that don’t require internet and use alternative technologies such as digital money cheques. NUEs, consisting of several different stakeholders in the digital payments’ ecosystem can help bring about this innovation, helping transform the last mile digital payments micro market.

As Sandeep Sonpatki, Partner, Deloitte India told CXOToday, “NUEs can further foster innovation and improve customer experience in digital payments; addressing certain white spaces such as instant cross-border payments, micro and offline payments, bill payments, and Govt subsidy payments, carving out another milestone in India’s already advanced payments infrastructure resilience roadmap.”

Filling the gap in the B2B payments space

Driven by trends of COVID-19 and social distancing, several small merchants in the B2B space, who were warming up to digital trends have fast moved to the digital payments space in an effort to continue their payments cycle.

Many of them recognise the ease of transacting digitally and are unlikely to go back to cash as their preferred mode of settlements. This is likely to be driven by hygiene concerns or permanently changed payments preference during COVID.

Innovation by NUEs can lead to product offerings that cater to pain points of merchants in the B2B sector such as real time confirmation of transaction confirmation, real time loan offerings etc.

Critical Factors for the success of NUEs

According to the Deloitte report, while the payments landscape in India is brimming with opportunity, less than one-third of the Indian households opt for digital payments despite 68% percent of them owning smartphones. To appeal to the section of the population that has yet to adopt digital means of payment, NUEs should ensure that their products and services will be widely accessible, with easy on-boarding and a simple user experience. Overall, NUEs should consider seven key success factors:

Bringing strategic partners

The NUE consortium may be structured in a way that brings complementary capabilities from strategic partners:

• Banks, payment aggregators, intermediaries, or even e-commerce players who have access to a large customer or merchant base – to drive large transaction volumes
• Large fintech, cards, and payments organizations with proven ability to launch innovative payments solutions to tap into existing white spaces
• Organizations with a reputation for strong technology or operations for robust clearing and settlement, fraud management, and scalable platforms
• Financial investors with a longer investment horizon

Scalable, secure, and open platform

The NUE needs to be a technology-centric organization and build a future-ready platform that will support high transaction throughput while being nimble enough to support innovation. An open API and micro-services based architecture with a sandbox environment to promote innovation may be a bare minimum expectation. Further, it may need to bring the newest database technologies such as in-memory computing and robust security measures.

Frictionless experience

NUEs should lay emphasis on building platforms that are easy to operate, giving customers and participants a frictionless user experience. This will help NUEs distinguish themselves from other products and services in the market and make a good first impression. The move is vital to shaping brand loyalty amongst patrons. Ensuring ease of operation will make NUEs reach a wider audience as the easier a platform is to use, more customers it will reach. It can also drive positive feedback, which can aid in gaining more users.

Competitive pricing

NUEs are expected to depend on revenues from existing products, such as UID-based payments and ATMs, in the initial period. Hence, they should price their products and services competitively to gain customers. They will have to balance this with a large capital expenditure required to enter this space. NUEs can look at offering a lower interchange fee and considering implementing a tiered switching fee, which is based on the number of non-straight-through processing transactions processed.

The lean and agile organization

Like all large payments organizations, the NUE may need to have a lean and agile organization with extensive use of automation and intelligence operations for day-to-day clearing, settlement, reconciliation, etc. The NUE may also need agile product development, testing, quick roll-out with self-onboarding for participants, and quicker certifications.

Robust governance

The key will be robust, unbiased governance that addresses potential conflicts of interest and upholds the interests of all members – both banks and non-banks, irrespective of ownership. NUEs will have to balance both partner and participant interests while also managing their relationship with NPCI and RBI.

In other words, as per Deloitte, NUEs need to be adept at managing such conflicts of interest. They will also have to establish a comprehensive framework for ownership of Intellectual Property (IP) and assets, especially those that are created and adopted after the NUE is set up. NUEs must uphold the spirit of fair competition and ensure inter-operability with NPCI and other NUEs.

“To attract new customers to digital payments, NUEs will need to ensure that their products and services are widely accessible, with easy on-boarding and a simple user experience. Other key considerations for the success of NUEs will be setting competitive prices for products and services, building robust and scalable systems, maintaining a lean and agile organization, and developing a strong governance framework,” summed up Sonpatki.