New Umbrella Entity (NUE) in India: How It Impacts Digital Payments

Over the recent years, cashless payments have become one of the preferred modes of retail transaction in India – particularly in urban markets. Unified Payments Interface (UPI) has allowed users to link their mobile phone numbers to their bank accounts since 2016. That’s made transferring and receiving money via apps as easy as sending a text message, at a minimal cost. With several payment apps to choose from and a quick and simple interface, the popularity of UPI has soared.

However, as the traffic builds, it’s getting riskier to depend on just 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 and cyber-crimes. 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 new platforms or pan-India umbrella entities to boost the retail payment in the country. These entities are otherwise known as New Umbrella Entities or NUEs.

What is an NUE & Why is RBI Introducing It?

At present, only the National Payments Council of India (NPCI), an umbrella organisation set up by the Reserve Bank of India (RBI) and the Indian Banks’ Association and incorporated as a not-for-profit entity, supports various payment systems, including RuPay, UPI and National Automated Clearing House, which manage inter-bank transfers. Players in the payments space have indicated the various pitfalls of NPCI being the only entity managing all of the retail payments systems in India.

The concerns regarding the systemic risk arising from concentrating operations of a significant portion of retail payments in one entity had been on the radar of the RBI for quite some time now and coupled with the pressure to open up the sector for competition from private players, the RBI has now put in place a regulatory framework that allows private players to establish and operate retail payments systems that enables fund-transfer and merchant payment systems.

The RBI’s move is aimed at developing a network parallel to NPCI, which can maintain interoperability with services such as UPI yet foster innovation and inclusion in the payments space offering more retail payment solutions to customers along with expanding the competitive landscape in this area.

How is NUE Different from NPCI?

NUEs will be for-profit (could also be registered as a Section 8 company under the Companies Act, 2013 as may be decided by it) and will be allowed to charge fees for transactions, unlike NPCI. They will be able to earn interest from the float that customers maintain in their online shopping accounts.

According to RBI Guidelines, the NUE licence would give companies the opportunity to set up, manage and operate ATMs, White Label PoS, Aadhaar-based payments and remittance services, develop new payment methods, standards and technologies and monitor related issues in the country and internationally.

RBI will authorize these NUEs under section 4 of the Payment and Settlement Systems Act, 2007.

Eligibility & Who Can Apply for NUE?

All entities owned and controlled by resident Indian citizens (as defined under FEMA rules) with at least three years of experience in the payment ecosystem as a Payment System Operator (PSO), Payment Service Provider (PSP) or Technology Service Provider (TSP) can apply for NUE.

Promoter: Any entity holding more than 25% of the paid-up capital of the NUE shall be deemed to be a promoter. A promoter will hold at least 25% and up to 40% in the operator and must be an Indian resident.

In case of Foreign Direct Investment (FDI) / Foreign Portfolio Investor (FPI): The applicant entity should –

• Comply with the FDI policy and guidelines of the Indian government
• Comply with capital requirements as per FEMA rules / regulations
• Comply with corporate governance norms issued by RBI
• Obtain RBI’s approval for the appointment of board members.

RBI’s fit and proper criteria for applicant entity and promoter – Should have a track record of financial integrity, good reputation & character and honesty. Such a person should not be convicted by a court for any economic offence or any offence under RBI laws; should not be declared insolvent and not discharged; should not be financially unsound or of an unsound mind.

Capital & Governance Requirements for NUE

At the time of application:

The entity, applying for NUE, should have a minimum paid-up capital of INR 500 crore.

The promoter should be able to demonstrate a capital contribution of at least 10% i.e. INR 50 crore at the time of application (to be further increased to at least 25% at the time of commencement of business)

A single promoter or group cannot hold more than 40% investment in the capital of the NUE.

Foreign companies can own a maximum 25% and are therefore teaming up with local players.

Subsequently

A minimum net worth of INR 300 crore should be maintained at all times.

The promoter/promoter group shareholding can be diluted to a minimum of 25% after 5 years of commencement of the business.

Latest Updates on NUE Licensing by RBI (2024)

The Reserve Bank retains the right to approve the appointment of Directors as also to nominate a member on the Board of the New umbrella entity.

The Application Process

Once an entity applies for the license of NUE, a scrutiny of applications will be undertaken by an External Advisory Committee (EAC). The EAC will submit its recommendations to the RBI. Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) will be the final authority on issuing authorization for setting up the NUE. This whole process should tentatively be completed within a period of six months.

Who had applied for NUE license and Recent Developments?

Six groups have applied for the NUE licence, for which the deadline was March 31, 2021:

1. 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
2. Another group is led by Reliance Industries, partnering with Facebook and Alphabet Inc.’s Google
3. Paytm has joined with ride-hailing startup Ola, IndusInd Bank Policy Bazaar among others
4. The Tata Group has combined forces with Mastercard Inc., Airtel Digitel and two Indian banks, HDFC and Kotak
5. Financial Software and Systems is applying with India Post Payments Bank Ltd., RazorPay and others
6. U.S.based payments firm FIS joined with Union Bank of India and Punjab National Bank

However, the Reserve Bank of India (RBI) has put on hold licensing of the New Umbrella Entity (NUE) network, a fintech institution planned as a rival to National Payments Corporation of India (NPCI).

All the applications for the NUE licence were submitted in March-April 2021, but there has been no communication from the RBI after that, reason being none of the applicants have proposed anything novel or a great technology breakthrough that would have made RBI happy and all applicants plans were similar to the model of NPCI.

Hence, the regulator would not permit any of the six consortiums to open for operation since they have all failed to live up to the RBI’s standards.

Will NUEs Replace NPCI?

NUEs will not replace but complement NPCI in taking India’s digital payment success story to new heights. RBI’s decision to allow fintechs and payment companies like Visa and Mastercard to process NEFT and RTGS payments is a step towards creating an enabling environment for NUEs to succeed.

FAQs on New Umbrella Entity (NUE)

Q: What is a New Umbrella Entity (NUE) in India?
A: A New Umbrella Entity (NUE) in India is a private entity that operates and manages payment systems like UPI (Unified Payments Interface), which was previously managed by the National Payments Corporation of India (NPCI). The NUE aims to foster competition, innovation, and enhance the efficiency of India’s digital payments ecosystem.

Q: Why did the RBI introduce NUEs?
A: The Reserve Bank of India (RBI) introduced NUEs to promote competition and innovation in the payment systems market. This move aims to reduce dependency on a single entity (NPCI) and encourage diverse players, including fintech companies and banks, to enhance the quality and security of digital payment services.

Q: How does an NUE work?
A: An NUE operates by managing, promoting, and overseeing payment infrastructure like UPI, mobile wallets, and other financial transactions. It ensures the interoperability of digital payment systems, sets up the technical framework, and works towards improving the efficiency and accessibility of digital payments.

Q: Is NUE different from NPCI?
A: Yes, NUE is different from NPCI. While NPCI is a non-profit organization that has been the backbone of India’s digital payment systems, NUE is a private entity that will oversee a broader range of payment systems. NUE will foster greater competition, innovation, and offer more advanced solutions compared to NPCI’s existing model.

Q: Who is eligible to apply for an NUE license?
A: Eligibility to apply for an NUE license includes entities that have experience in payment systems, technology infrastructure, and financial operations. Eligible applicants include private entities, consortiums of banks, fintech companies, and tech-driven financial service providers with sufficient resources and expertise.

Q: What is the minimum capital requirement for an NUE license?
A: The minimum capital requirement for an NUE license is ₹500 crore. This ensures that the applicant has the financial resources to build and maintain a reliable and secure payment system infrastructure.

Q: Can foreign companies apply for NUE?
A: Yes, foreign companies can apply for an NUE license in India, provided they meet the eligibility criteria outlined by the RBI. However, they must adhere to the RBI’s regulations and India’s financial sector policies.

Q: How long does it take to get an NUE license from RBI?
A: The process to obtain an NUE license from the RBI can take several months. The RBI evaluates each application thoroughly, assessing the financial, technical, and operational capabilities of the applicant before granting approval.

Q: How will NUEs benefit India’s digital payments ecosystem?
A: NUEs will bring in more competition, leading to innovative products, better security, and enhanced services. They will improve the efficiency of digital payments, reduce costs, and encourage more players to enter the market, benefiting both consumers and businesses.

Q: Will NUEs replace NPCI?
A: No, NUEs will not replace NPCI. Instead, NUEs will coexist with NPCI and offer competition in managing payment systems like UPI. The intention is to provide greater choices and improve the digital payments landscape.

Q: Can NUEs operate UPI payments like NPCI?
A: Yes, NUEs can operate UPI payments, similar to NPCI, if granted the necessary licenses. However, the RBI’s regulatory framework ensures that NUEs will adhere to the same high standards for security and interoperability as NPCI.

Q: How does NUE impact businesses and banks?
A: NUEs will provide businesses and banks with more options for digital payment solutions, which will lead to enhanced service offerings, improved competition, and reduced costs. This will further drive innovation and enable businesses to offer more secure and efficient payment methods to their customers.

Q: What are RBI’s regulatory requirements for NUEs?
A: RBI’s regulatory requirements for NUEs include compliance with strict capital requirements, technical standards, cybersecurity protocols, and adherence to customer protection norms. NUEs must also ensure the interoperability of their systems with existing payment platforms and maintain transparency in operations.

Q: Why has RBI put NUE licensing on hold?
A: RBI paused NUE licensing due to concerns over market competition and the potential for monopolies. The central bank is reviewing its approach to ensure that NUEs will not disrupt the existing payment infrastructure and that they operate in line with regulatory goals.

Q: Can an NUE consortium include banks and fintech companies?
A: Yes, an NUE consortium can include banks, fintech companies, and other financial service providers. This collaboration enables sharing of expertise, resources, and technological infrastructure, which can lead to more robust payment systems.

Q: Which companies applied for an NUE license?
A: Some of the notable companies that have applied for an NUE license include large private banks, fintech firms, and technology companies. These applicants have experience in payment systems and technology infrastructure and are looking to contribute to India’s digital payment revolution.

Q: What is the latest update on NUEs in 2024?
A: As of 2024, the RBI has yet to release new guidelines or grant NUE licenses. However, it continues to assess applications and is expected to reopen the licensing process once its concerns about market competition and system stability are addressed.

Q: Will RBI relaunch the NUE licensing process?
A: It is anticipated that the RBI will eventually relaunch the NUE licensing process, but the timeline remains uncertain. The RBI is likely to resume issuing licenses after refining the regulatory framework and ensuring that the payment system remains secure and efficient.

Q: How will NUEs affect UPI transactions for customers?
A: NUEs are expected to bring more competition to the UPI ecosystem, potentially offering new features, enhanced security, and faster transaction processing. For customers, this means improved user experiences and access to a broader range of payment options.

Q: What security measures will NUEs implement?
A: NUEs will be required to implement robust security measures, including end-to-end encryption, fraud detection systems, and compliance with RBI’s cybersecurity protocols. These measures will ensure the integrity and safety of digital transactions for users and businesses alike.