In a move that reflects well-reasoned foresight, on 10 February, the Reserve Bank of India (RBI) released a draft framework for the establishment of new retail payment systems operators. The stage for this draft framework was set in January 2019 in a policy paper on the authorization of new retail payment systems operators. The policy paper noted that the National Payments Corporation of India (NPCI) had been established in 2008 as an umbrella organization for retail payment systems, and that a disadvantage of its share of payment system operations was the possibility that it had become too big to fail. Therefore, a thesis of the policy paper was that there should be an increase in competition by encouraging other entities to provide payment systems operations.
The draft framework states that its objective is to encourage the establishment of other pan-India umbrella entities focusing on retail payment systems. The scope of activities of any new entity would include setting up and managing new retail payment systems such as ATMs, Aadhar-based remittance services, and developing new payment methods and standards, operating clearing and settlement systems, identifying and managing risks such as settlement risk and credit, liquidity and operational risks, and generally engaging in business that further strengthens the retail payments ecosystem.
A new entity must be established as a company under the companies act, and can either be a for-profit or a “not-for-profit” company. Interestingly, NPCI was established as a not-for-profit company. The new entity would need to be licensed by the RBI under the Payments and Settlement Systems Act, 2007, and would be subject to the provisions of this statute. The new entity would be required to have a minimum paid-up capital of ₹5 billion (US$70 million) and a minimum net worth of ₹3 billion at all times. A person holding more than 25% of the shareholding of the new entity would be deemed to be a “promoter”, and must be “owned and controlled” by persons resident in India. Such a promoter must also have at least three years’ experience in payments as a payment system operator, a payment service provider, or as a technology service provider. At the time of application to the RBI, the promoters of the new entity should hold at least 10% of its capital. No single promoter or promoter group should hold more than 40% of the capital of the new entity. Promoter holdings would also be required to be diluted to 25% after five years from the commencement of business.
The promoters, the promoter group and the board of directors of the new entity must comply with the “fit and proper” criteria prescribed by the RBI. A director will be considered as fit and proper if he/she has a “record of fairness and integrity” and is not disqualified on the basis of such person being declared an undischarged insolvent person, or subject to an order restraining he/she from dealing in any financial system, or found to be financially unsound. The promoters must have a past record of sound credentials and integrity. The draft framework also prescribes that the RBI’s determination of fulfilment of the fit and proper criteria shall be final.
As part of its application to the RBI, the new entity would also need to provide documents to confirm its experience in the payments ecosystem and a detailed business plan covering the payment systems it proposes to establish and operate. The business plan must also include technology, security features, market analysis, proposed benefit, operational structure, time period for establishment, and the proposed scale of operations, together with an organisational strategy setting out how it would fulfil its responsibilities.
The move to encourage alternatives to the NPCI is an interesting one. That it was preceded by a policy paper that shows the regulatory thought process, and has not been shrouded in mystery, works in its favour. While having a single umbrella entity for retail payments systems has apparent benefits such as standardization and economies of scale, having more than one entity for such purposes to curtail systemic risk makes sense, and reflects positively on the RBI as a regulator. However, to ensure that there is no fracturing or multiplicity of standards in the retail payments space, the ReguRBI should ensure that, similar to the current depository framework, the overall number of such umbrella entities is limited, and all umbrella entities ensure interoperability for the convenience of retail users.
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