Synopsis–NUEs seek to set up, manage and operate new payment systems — therefore, replicate and augment the Unified Payments Interface (UPI) network, which processes more than two billion inter-bank transactions per month. But what problems are NUEs meant to solve?
They say that the road to hell is paved with good intentions. And when those intentions include overly ambitious promises that the devil himself is loath to offer, the probability of the outcome improves considerably.
The pay-off of RBI’s decision to rapidly expand payments digitisation through the creation of New Umbrella Entities (NUEs) similarly hangs in the balance.
NUEs seek to set up, manage and operate new payment systems — therefore, replicate and augment the Unified Payments Interface (UPI) network, which processes more than two billion inter-bank transactions per month. But what problems are NUEs meant to solve?
According to RBI, which has made payment ubiquity and penetration a non-negotiable goal, the sheer volume processed by UPI constitutes systemic risk. NUEs are meant to drive financial inclusion, while disburdening UPI of processing risk. But there are some fundamental issues that could undermine this strategy.
For starters, the scope of a payments network speaks to its utility across payment form factors and instruments, and the nature of transactions. NUEs have been allowed a wide scope. They are meant to operate networks and payments infrastructure at physical locations and online, while promoting ATMs, enhanced point-of-sale (POS) systems, Aadhaar-enabled payment services, remittances, transit payments and B2B transactions.
But the scale of a payments network is driven by two-sided market acceptance. At one end are consumers, represented by banks and card-issuing entities. At the other are merchants, supported by banks, payment processors and other payment companies. Today, UPI caters to more than 130 banks, along with all major mobile wallets and payment intermediaries. Is it conceivable that NUEs will succeed in bringing together the sheer number of payment entities that UPI has enrolled? As public sector banks (PSBs) are prohibited from applying for NUE licences, and already enjoy the benefits of UPI, the only reason they would utilise the NUEs is if these networks, as promised, vastly enhanced the reach of the market.
Beyond the alignment of promises, however, lies the profit motive. One wonders why any of these NUEs would invest in developing India’s payments infrastructure farther afield when banks abandoned this course because it made no commercial sense. Furthermore, UPI operates without a merchant discount rate (MDR) that facilitates acceptance with merchants, but which makes it unattractive to banks and payment companies, whose earnings are consequently nullified. NUEs may have a hard time competing if they charge merchant fees to recoup their investments.
Grand NUE Offer
Another characteristic of payment networks is that they regulate and authorise transaction processing without directly owning consumer and merchant relationships. However, NUEs — who have till March 31 to file their licence applications — led by Paytm, Amazon, Reliance and the Tata Group, have selectively partnered with major private banks, non-banking financial companies (NBFCs), social media giants, existing payment networks and payment processors, many of whom already enjoy direct relationships with consumers, merchants, or both.
There is obviously a clear conflict of interest when existing networks like Mastercard and Visa take ownership positions in competing networks. But there is an equally serious conflict of interest when large private banks, retailers and advertisers seek to set up payment networks to enrol larger or smaller competitors, whose customers may be captured over time through POS incentives, or subverted through attributable realtime advertising.
Interestingly, even after the US Supreme Court forced banks, who had earlier issued only Visa or Mastercard cards, to issue cards on the American Express network, financial institutions complied reluctantly, and in a very limited way.
Finally — and RBI has provided no clarity — there is the demand for network interoperability. This is complicated because a digital payments system involves three functions: brand acceptance, transaction processing and rules enforcement. Typically, the network controls all of these functions in its role as system owner. When a Visa card is presented for payment at a terminal, the payment processor recognises the Visa brand, passes on the transaction information to Visa — who passes it to a member bank — for authentication. In case of any dispute, Visa sets and enforces the rules. The same holds true for a UPI transaction.
But when competing networks control all or part of POS infrastructure, transaction processing, payment gateways, clearing and settlement, maintaining a common set of technical, processing, data encryption and dispute-resolution standards — to say nothing of the disparities in fees, payment acceptance requirements, and the threat of network steering by NUEs or merchants — can cause havoc without clearly established rules, and an unaffiliated third-party ombudsman to enforce them.
Which brings us back to the question: what is an NUE meant to achieve? If it is enhanced payment adoption and acceptance, the lack of sufficient profitability may impede progress in underserved segments and markets. If it is to derisk UPI, the danger of NUEs becoming private networks for a limited number of private banks and corporations could restrict scale.
It may be wiser to create another neutral payments utility — under a banking association — and enable UPI and the new payments network to charge MDR fees in order to make the networks both viable and commercially attractive to members. The coming months will show RBI’s intentions. But pragmatism, rather than ambition — if pandemonium is not the destination — should inform the path of choice.
The writer is former head, Citi Merchant Services, US