Explained: What is NUE licence for retail payments and who's interested?

Customer retention, gains from float money and product innovation are the key reasons for banks to jump on the new for-profit platform for retail payments

In August 2020, when the Reserve Bank of India (RBI) came out with a framework for the authorisation of a pan-India new umbrella entity (NUE) for retail payments, little did it reckon that banks would make a beeline to be a part of the system. News reports suggest that there is an active collaboration among banks, payment banks, fintechs and technology providers to apply for the NUE platform (see table). While the regulator’s intent was to create a parallel to the National Payments Corporation of India (NPCI) so that the present system is decongested, banks’ interest in NUE stems from different aspirations.

According to RBI, NPCI had a 64.5 per cent volume market share and 4.07 share by value in the total payments landscape of FY20. In February, with 213 banks under its fold, NPCI’s Unified Payments Interface, or UPI, handled transactions worth over Rs 4.2 trillion, up from Rs 2.2 trillion a year-ago with 146 banks live on UPI. According to Accenture, India is expected to see 66.6 billion transactions worth $270 billion shift from cash to cards and digital payments by 2023 and this will increase to $856 billion by 2030.

Mahesh Ramamoorthy, MD-banking solutions, FIS India, also an NUE aspirant, expects the platform to be an opportunity worth Rs 3-4 trillion in the next decade. Therefore, with money at play, NUE could offer banks an opportunity to cash in on the money that temporarily moves out of their fold and in the process hedge against the competition that banks face from payments facilitators.

Picture this: A frequent online shopper maintaining certain balance with e-commerce players such as Amazon or Flipkart for ease of transaction, means loss of the deposit base for the customer’s bank and comes with the threat of losing the customer to better discounts offered by competition. Through NUE, the amalgamation of banks, payment platforms, fintechs and technology partners is aimed at plugging this gap. The customer, her current/savings account balance and the discount that the online players offer on purchases are contained within the NUE, making it a win-win for all.

The second attractive aspect is the likely gains from the money parked on the platform. Referred to as float money, the NPCI earned about Rs 100 crore of interest income in FY20 from investments by parking it in money market instruments, including Trea­sury Bills and government securities. While this is just about a tenth of NPCI’s total revenues, banks believe with NUE as a for-profit entity, they could do better using this money, compared to NPCI, which is a not-for-profit entity under the Companies Act.

“The ability to monetise the float could help the platform incentivise the digitalisation drive, and make it more profitable, given that the merchant discount rate (MDR) cannot be charged at this juncture,” said a senior executive of a private bank. MDR charges on RuPay and UPI platforms were discontinued from January 1, 2020.

Who's interested in NUE
 

Consortium 1

• Tata Group's Ferbine Pvt Limited along with MasterCard and PayU. HDFC Bank, Kotak Mahindra Bank hold 9.99% stake each in Ferbine. Airtel Digital to buy 10% stake

Consortium 2
 

• Paytm, Ola, IndusInd Bank, Centrum Finance, Zeta Pay and Electronic Payment and Services Pvt Limited

Consortium 3
 

• Amazon, ICICI Bank, Axis Bank, Visa, Pine Labs and Billdesk

Consortium 4
 

• So Hum Bharat (subsidiary of Infibeam Avenues); Jio Infosystems, Google, Facebook and YES Bank hold stake in the company

Consortium 5
 

• FSS, Indian Bank, Central Bank of India, NABARD and India Post Payments Bank

Consortium 6
 

• FIS, Union Bank of India and Punjab National Bank

In fact, in the early days, it was the deep-discounts model rolled out by players such as Paytm and Freecharge that pulled the crowd towards digital payments. Bankers say that if digital penetration should increase beyond the large metros, tier-1 and tier-2 cities, continued incentivising of retail payments is essential and gains from float would help the process.

The NUE isn’t restricted to payment products. It can offer point-of-sale (PoS) devices, regular and white label ATMs and Aadhaar-based payments and remittances services. While some of these are already open for wider participation, Ramamoorthy believes that by aligning banks into digital payments, it adds to the assurance for customers. With banks having monetised and penetrated the ATM and PoS segments, NUE is a step forward to retain the customer.

This is why “almost all banks that want to ride the digital transformation wave would be interested in the NUE opportunity,” Ramamoorthy said. With banks as stakeholders in the platform, Vivek Belgavi, partner, India-fintech leader at PwC India, says they can have closer alignment to the platform capabilities, which would help them innovate products for end consumers. “Currently that’s getting diluted with all members on a single platform,” he explained. However, NUE is a platform and not a product and Belgavi points out that banks will have to run it as a separate entity. To that extent, NUE may only help bridge some of the gaps for banks and not entirely absolve all concerns.

Further willingness to invest in technology on a sustainable basis will play a key role in shaping NUE’s success. Sonali Kulkarni, lead — financial services, Accenture India, calls for a redesign of technology architecture and a cloud-led transformation, both on the front and back-end IT systems to achieve better resiliency, low latency and cope with demand surges. With the country’s largest private bank — HDFC Bank — yet to resolve its technology glitches, how geared Indian banks are to shoulder a responsibility like NUE could be the central bank’s primary concern while sieving through applications.

Also, while banks have the skill of risk management, NUE calls for different skill sets — multiparty management, interoperability, resilience and technology availability. “Further, a platform needs critical mass to get started and the ability to bring people to the party will also be an important factor,” said Belgavi.

News reports so far indicate that there are six applicants for NUE. Those who make the final cut would reveal the regulator’s thought process around the platform.