Unraveling the concept of “NUE”

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.

Current payment landscape

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 and what are the benefits?

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.

Who can apply?

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 requirements

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.

Governance Structure

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.