The National Payments Corporation of India (NPCI), the first and only umbrella entity to operate retail payment and settlement system, has earned many a plaudit for itself and the country in its stellar 11-year journey. It hit a purple patch from day one. Starting with the NFS (National Financial Switch) — the ATM switch — during 2009, it now boasts of a highly innovative and exponentially growing suite of 20 products/services, including the widely successful UPI (Unified Payments Interface), which has caught the attention and interest of global Big Tech. It is the largest tech platform ever built in India.
Seamless and frictionless high-value customer experience through active engagement with Fintech and trust and reliability of settlement through banks are the hallmarks of its operating model. The Reserve Bank of India (RBI) has helped create this organisation. It was benevolent and thoughtful at the same time.
During FY 19-20, it clocked a transaction volume of 30 billion (both financial and non-financial) with a value of Rs 53 lakh crore. Exponential growth has been the NPCI’s mantra.
Despite its not-for-profit status (Section 8 company), the NPCI has been earning profits consistently of a couple of hundreds of crores. But given its not-for-profit status, it has not been distributing dividends and reinvesting. It is not listed either.
Citizen Scale Opportunity
The progress of NPCI notwithstanding, the Nandan Nilekani committee report (though it has not recommended explicitly new umbrella entity), brings out a lot of gaps and huge opportunities to broaden and deepen digital payments at a much larger scale, ie, Citizen Scale.
It particularly points out that there are only about 100 million unique digital customers. There is an opportunity to bring another 600-700 million customers into the digital payments fold. The UPI is highly smartphone-centric and enabling it on feature phone would unleash the genie.
It also points out that there is a considerable gap between issuance infrastructure and acceptance infrastructure. Against one billion debit cards, we have hardly fewer than four million PoS (Point of Sale), and this acceptance infrastructure needs to be ramped up at scale. Unique PoS is much lower. QR code adoption is slow. Lots technology developments are taking place in acceptance infrastructure like offline and Internet of Things.
There is a huge gap between digital credit and digital debit (cash withdrawals) relating to AEPS (Aadhaar Enabled Payment System) and there are around 200 million cash withdrawals. Bridging this gap would save a lot of time wasted in long queues. This last mile digitisation improves productivity for all stakeholders.
Moreover, the per capita digital transactions are quite low at about 22 against Singapore‘s 782 and less than 10% when compared with many other countries. The NPCI may have to pivot to retain and improve its premier position.
Advantage New Players?
The RBI has recently issued guidelines to license a New Umbrella Entity (NUE) to be interoperable with the NPCI, ostensibly to create competition, foster innovation, broaden and deepen digital payments, accelerate financial inclusion and mitigate single point of failure. Given the huge opportunity, one would expect significant interest from new players with deep pockets.
Most importantly, the RBI has also clarified that the new organisation may also be in for-profit format unlike the not-for-profit format of the NPCI. This appears to signal a departure from the Public Good policy.
Secondly, the new framework provides for “carrying on any other business suitable to further strengthen retail payment ecosystem in the country”. One may infer that the NUE may also undertake activities in the lucrative B2C space and even adjunct financial markets and ecommerce than merely the current B2B format of the NPCI. E-commerce and digital payments feed each other. Of course, clarity from the RBI may guide the prospective players.
In terms of ownership and control, it restricts the entry of players to resident Indians. But it welcomes FDI/FPI within the present FEMA (Foreign Exchange Management Act) framework. It would be interesting to see how the big Chinese/Japanese/players and Big Tech of the US respond and work around the ownership and control requirements.
Good Space for Deep Pockets
Digital payments are not viable business on a standalone model before huge capital burn happens. Many of these pure-play payment companies, including Payments banks in India, are bleeding huge cash. However, the motivation is not just about foray into the huge digital payment markets but payments as a building block and a gateway to entry into other lucrative financial services like insurance, mutual funds, lending and pension products.
Despite huge losses, digital payment businesses command huge valuation. For instance, Paytm has been incurring losses over the years and during the last two years alone, burnt around Rs 4,200 crore and Rs 2,900 crore. But the last round of funding was done on valuation of $16 billion. PhonePe, an app provider that rides on UPI platform, had incurred a loss of Rs 1,900 crore and is reportedly seeking a valuation of $7-10 billion. Huge customer acquisition costs and massive incentives/cash backs contributed largely to these losses and, of course, it is a norm in startups. This space is a good place to bet for deep pocket players who can sustain cash burn for initial years.
Come to think of it, what would be the valuation of the NPCI, which has been raking in modest profits consistently over the last several years and has built and runs the largest tech platform in India? Besides, it has over 1,200 banks on its platform, with over monthly financial transaction volume run rate of over 4.02 billion, 2.4 lakh ATMs, 5 million PoS, 650 million Aadhaar mapper, etc.
It could be in tens of billions of US$. The NPCI may have to explore avenues to change its status to for-profit, even list on stock exchanges and monetise value. This is essential to rearm itself to brace for the competition. Even the State Bank of India (SBI) claims $40 billion valuation for its YONO digital platform.
On a different note, ANT Financials in China (affiliate of Alibaba), started in 2004, is launching its IPO with a valuation of $225-300 billion. Its rival, Tencent, is valued at $500 billion. PayPal commands a valuation of about $190 billion. They started off as digital payment players but transformed into highly profitable financial services aggregator behemoths. They operate in the B2C space with full suite of citizen services, including financial, non-financial areas like ecommerce, medical, advertising and technology.
This business model contributes to huge valuation. Their SuperApp platforms are more convenient than mere mobile payments. These attracted huge FDI and India’s market size is nearly as big as China. This offers insights both for the NPCI as well as prospective players.
Brace for Big Tech
UPI/digital payments is hotting up as a battleground for global Big Tech. Will they kill innovation and even competition by the small as alleged by US Congress in recent hearings or spur further innovation? Would they do what they have done to the advertising business? Would it be a kiss of death for Indian Fintech or happy marriage with fat dowry? Leveraging and navigating them is a huge challenge. It would be interesting to watch how this pans out.
The NUE is not just about digital payments but about a billion consumers market that is up for grabs. The Big Tech may dump capital to gain access to customers/data through their apps or otherwise, and create huge monopolies in payments as they have done in other sectors. They can burn huge capital for long periods of time and drive out most other players and we may get into a typical winner takes it all. Government’s price prescription in a wicked way suits capital dumpers. The minimum requirement of Rs 500 crore capital is small change for the Big Tech and the initial cash burn needs much more capital.
Can Indian regulators/government do what the US counterparts are unable to do in tackling the monopolies? Amidst all this, where does the Indian Central Bank Digital Currency stand? WhatsApp’s sibling, LIBRA (Facebook’s own digital currency), is round the corner. Mastercard reportedly launched virtual payment rails for digital currency for issuance, distribution and even government.
This is far ahead of the much celebrated UPI. Basking in UPI glory, does NPCI run the risk of trailing behind in this high impact innovation?
Right doses of regulation would determine the scale, scope, nature and value of digital financial markets, including payments. Hopefully, the experience of telecom and Payments banks will not be lost. This is the right opportunity for the NPCI to pivot.
Philosophically speaking, scale and scope at some level is a mirror image of concentration of not just economic but social and political power. Not properly handled, digital utopia turns dystopia.
(The author is former Director and CEO of IDRBT and Chairman, NPCI. He was earlier Director on the board of NPCI. The views expressed are purely personal. [email protected])
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