Framework for Authorisation And Operation Of New Umbrella Entity – A Positive Step Towards Development Of Retail Payment System In India

Introduction

Over the last few years, India has encouraged embracing cashless payments at all levels of financial transactions. Cashless payments have also become the most preferred method of retail payment in India because of advantages like speed and ease of transactions. Government initiatives along with statutes providing security, facilitating and promoting cashless payments has further helped digital payment to grow exponentially in the recent years. The Government of India has been focusing on transforming the economy into cashless economy and has been campaigning for cashless transactions. In the years 2018 and 2019, digital payment grew by over 300%. Unified Payments Interface (UPI) transaction volume declined by 5.9% in March 2020 and further by 19.8% in April 2020 to slightly less than one billion transactions because of CoVID-19. However, it recovered as the lockdown was gradually lifted. As per data released by the Reserve Bank of India (RBI), UPI transaction volume for the month of June 2020 was 1.34 billion transactions.

Retail payment system in India

Currently, National Payment Corporation of India (NPCI) is the sole entity responsible to manage the cashless retail payment in India. NPCI is an umbrella entity established for operating retail payments and settlement systems in India. NPCI is set up by the Reserve Bank of India (RBI) and Indian Banks’ Association as an umbrella entity under the Payment and Settlement Systems Act, 2007 (PSS Act) with the objective to create and develop a robust payment and settlement infrastructure in India. NPCI has made significant impact on the retail payment systems in India with its products like Unified Payment Interface i.e. UPI and RuPay. However, the infrastructure created by NPCI is taking the toll of sharp increase in the volume of cashless retail payments. In 2018, NPCI processed nearly 48% of retail electronic payment transaction in volume. Concentration of payment system operation in one entity has its advantages with respect to regulating and governance but also carry a huge risk arising out of any  adverse event. Apart from high impact of failure, having a single entity also results in inadequate competition and monopolistic trends. As a consequence, there may arise a lack of innovation or upgradation in the present infrastructure and also may negatively impact customers on quality of service.

RBI had issued a policy paper on Authorisation of New Retail Payment Systems in January 2019 after considering the looming risk and to further enhance the retail payment systems in India. In February 2020, the RBI had released a draft regulatory framework for authorisation and operation of new pan-India umbrella entities for retail payments in India and after due deliberations on the feedbacks received, the RBI published its final framework on 18 August 2020 (Framework).

Overview of the Framework

The Framework essentially allows private players to set up independent pan-India entity focusing on retail payment systems. As per the Framework, the entity has to be a company incorporated under the Companies Act, 2013 and shall be authorised by RBI under the PSS Act. The entity is required to have a minimum paid up capital of INR 5 billion and maintain a minimum net worth of INR 3 billion at all times.

Unlike the NPCI, which is a not for profit entity, the Framework allows a ‘for profit’ company to make an application. All entities eligible to apply as promoter / promoter group of the umbrella entity shall be owned and controlled by resident Indian citizens’ with 3 years’ experience in the payments ecosystem as Payment System Operator (PSO) / Payment Service Provider (PSP) / Technology Service Provider (TSP). Any entity holding more than 25% of the paid-up capital of the umbrella entity shall be deemed to be a Promoter. Further, no Promoter / Promoter Group shall have more than 40% investment in the capital of the umbrella entity and shall upfront demonstrate capital contribution of not less than 10%. As per the Framework, the entity and its promoter/ promoter groups shall confirm to the fit and proper criteria of RBI.

The Framework requires the entities to submit security features along with a business plan to the RBI. As per the PSS Act, RBI is required to consider the technical standards or design of the system proposed by the applying entity. Additionally, entities will also be required to adhere to the RBI framework on storage of data and the standards prescribed under the IT Act. In this regard, it should be noted that the Personal Data Protection Bill, 2019, which is yet to come into effect, will also cover foreign body corporates and individuals having business connection in India. Therefore, it is advisable to all the interested entities to have a robust security feature which should at least be in lines with the Personal Data Protection Bill, 2019.

The Framework provides a broad scope of activities which the umbrella entity is required to carry out. The activities include setting-up, managing and operating new payment systems, incorporating and monitoring new payment methods, operating clearing and settlement systems and managing and monitoring risks associated with them, frame policies to ensure the system is safe and sound. The entity is also expected to interact and exchange information with the systems operated by NPCI and carry on other businesses which are suitable to further strengthen the retail payments ecosystem in India.

With respect to the Foreign Direct Investment or Foreign Portfolio Investment, the Framework provides that such investment shall fulfil the capital requirement as prescribed under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (Non-Debt Rules) and shall be subject to the necessary approval. The Non-Debt Rules in its Schedule I enlists financial services which do not require prior approval of the Government. Retail payment systems falls under ‘Other Financial Services’ as mentioned in this schedule where 100% foreign investment is permissible under the automatic route. As per this schedule, foreign investment in ‘Other Financial Services’ activities are subject to conditions specified by the concerned regulator. This essentially means that any foreign investment in an umbrella entity would be subject to the minimum capitalization and shareholding norms and restrictions prescribed by the RBI in the Framework.

Conclusion

In the recent years the retail payment system has grown exponentially with a commendable technical and infrastructural development and NPCI has been its backbone. The RBI has rightly suggested for new umbrella entity which will be working in harmony with NPCI and further helping in developing the existing technology and infrastructure. By proposing a minimum paid up capital and minimum net worth along with experience in payment ecosystem and technological infrastructure, the RBI has taken positive steps which will allow companies with financial stability and robust management to participate.

The Framework is expected receive a better reception from industry players as the umbrella entity is expected to play an important role in retail payment sector and considering that the qualifying standards set under it are very minimal and ‘for profit’ organisations are allowed to participate.

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