Understanding New Umbrella Entity (NUE)

Reserve Bank of India (RBI) came up with a framework for the pan-India umbrella entity for retail payments back in August 2020.
The RBI notification said that the objective of the framework is to set up pan-India umbrella entity or entities focusing on retail payment systems.
The guidelines said that the RBI retains the right to approve the appointment of directors as also to nominate a member on the board of the umbrella entity.

Though cash remains the King in India, yet with usage of Smartphones the Digital transactions are increasing on daily basis. Digital transactions doubled in the last two years, faster than any major country outside China, and are forecast to reach $2 trillion in 2023. Such exponential growth hasn’t been trouble-free, however, leading to concern about the wisdom of relying on a single payments system.

To address the ‘risk concentration’ of only one platform and offer consumers more options, the RBI in 2020 invited private companies to bid for a license to set up a new platform (New Umbrella Entity (NUE).

What are NUEs?

As envisaged by the RBI, an NUE will be a for-profit entity that will set-up, manage and operate new payment systems, especially in the retail space such as ATMs, white-label PoS; Aadhaar-based payments and remittance services. In addition to this, they will develop new payment methods, standards and technologies as well as operate clearing and settlement systems.

  • NUE (New Umbrella Entity), a digital platform which will be for-profit and be allowed to charge fees for online transactions, unlike the existing system
  • The new entity or entities will be able to earn interest from the float that customers maintain in their online shopping accounts

"The promoters/promoter groups shall upfront demonstrate capital contribution of not less than 10 per cent, i.e., Rs 50 crore at the time of making an application for setting up of the umbrella entity," it said, adding that the balance capital shall be secured at the time of commencement of business or operations.

The promoter shareholding can be diluted to a minimum of 25 per cent after five years of the commencement of business of the umbrella entity and a minimum net worth of Rs 300 crore shall be maintained at all times.

The RBI said that the umbrella entity shall conform to the norms of corporate governance along with 'fit and proper' criteria for persons to be appointed on its board.

The guidelines said that the RBI retains the right to approve the appointment of directors as also to nominate a member on the board of the umbrella entity.

What’s the system now?

Digital transactions are processed by the National Payments Corporation of India, a non-profit, umbrella organization backed by more than 50 retail banks. It is in operation since 2016, its Unified Payments Interface allows users to link their mobile phone numbers to their bank accounts. NPCI operates settlement systems such as UPI, AEPS, RuPay, Fastag, etc. It has made transferring and receiving money via apps as easy as sending a text message, at minimal cost. With several payment apps to choose from and a quick and simple interface, its popularity has soared: The platform processed transactions amounting to Rs31.7 trillion ($450 billion) from April 2020 to January 2021. It handled about half of India’s nearly 41 billion retail online transactions, which are expected to double this year.

What is the need for NUEs?

Players in the payments space have indicated the various pitfalls of NPCI being the only entity managing all of retail payments systems in India. As the traffic builds, it’s getting riskier to depend on one system. During the pandemic, with people spending more time at home and relying on the internet for shopping and entertainment, there’s been a rising incidence of internet fraud, cyber-crimes and transactions that got reversed or declined, including at top banks and NPCI. In February, some transactions by mutual fund investors were disrupted during an upgrade of the system. To address the “risk concentration" of only one platform and offer consumers more options, the Reserve Bank of India in 2020 invited private companies to bid for a license to set up a new platform.

RBI’s plan to allow other organisations to set up umbrella entities for payments systems aims to expand the competitive landscape in this area. For the players planning to establish these NUEs, the aim is to get an even bigger share in the digital payments sector.

Which players are planning to set up NUEs?

Till now six groups are in the forefront:

  • A consortium consisting of Amazon, Visa Inc., Indian private lenders ICICI Bank Ltd and Axis Bank, and two financial-services startups, Pine Labs and BillDesk.
  • Another group led by Mukesh Ambani, and his Reliance Industries, partnering with Facebook and Alphabet Inc.’s Google, which invested more than $10 billion in Reliance’s digital services unit, Jio Platforms, in 2020.
  • India’s digital payments leader Paytm has joined hands with ride-hailing startup Ola and at least five companies.
  • The Tata Group -- India’s biggest conglomerate -- combined with Mastercard Inc., telecom operator Bharti Airtel Ltd and two Indian banks, HDFC and Kotak.
  • Financial Software and Systems is applying with Indian Bank, Central Bank of India, National Bank for Agriculture and Rural Development and India Post Payments Bank Ltd.
  • U.S.-based payments firm FIS joined with Union Bank of India and Punjab National Bank.

What’s in it for customers?

The systems will operate in parallel, increasing options for users.
Those running the platforms will have to compete, possibly offering incentives to online vendors in a bid to gain market share.
Eventually that will help boost transaction volumes for both platforms as e-commerce expands and reaches deeper into India’s unbanked hinterland. In the World Bank’s most recent report on financial inclusion in 2017, some 190 million Indians did not have a bank account and more than half did not make or receive digital payments.
A key benefit: Customers faced with a failed transaction currently have few options. In the new regime, they’ll be able to try the other platform.

Key Differences Between NPCI and NUE

  • NPCI is State owned and NUE is Privately Owned
  • NPCI is Non-Profit Co. and NUE is For-Profit Co.

RBI has extended the deadline to apply for a NUE license from February 26 to March 31, 2021.

Please click on the following link for reading complete: Framework for authorisation of pan-India Umbrella Entity for Retail Payments

Source: rbi.org.in, Livemint, Economic Times, Business Standard, Indian Express, Indiatimes.com

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