Consumer benefits of implementing market caps in the UPI ecosystem

By Ram Rastogi

Consumer choice is a vital pillar for market regulators to uphold in ensuring the health of an economy. Through rapid innovation, India has established a robust digital public infrastructure that has made digital payments more accessible and transformed how Indians manage their finances. Today, the Unified Payments Interface (UPI) has become synonymous with convenience, enabling seamless transactions across various financial touchpoints. More than 60 players, including banks, third-party applications, and payment service providers, contribute to the success of UPI, both domestically and internationally. As this ecosystem continues to evolve, safeguarding it from potential risks while fostering competition and innovation is becoming crucial, with consumer protection at its core.

The Reserve Bank of India (RBI) and the National Payments Corporation of India (NPCI) have set ambitious goals for UPI, aiming for 100 billion monthly UPI transactions within the next 3-5 years. To protect the ecosystem from concentration and systemic risks, the NPCI introduced a 30% market cap on UPI transactions processed by any single player in a notification released in 2020, with implementation initially slated for the end of 2022, later extended to December 2024. However, as the deadline approaches, speculation about a potential delay has arisen, with regulators neither confirming nor denying such rumours. While the regulatory objective is to encourage UPI growth and adoption, it is equally important to implement checks and balances urgently to mitigate potential risks for consumers.

Currently, two foreign-owned companies, Google Pay and PhonePe, dominate the UPI market, controlling a combined 80-85% market share as of November 2024. While their dominance has greatly expanded the reach of digital payments, it has also raised concerns about the lack of competition and innovation, creating challenges for smaller players trying to gain traction. This situation limits the diversity of options available to consumers. Today, when asked about the apps used for UPI transactions, most people mention Google Pay, with PhonePe as a close second. These dominant market positions illustrate the influence of market dynamics on consumer behaviour, underscoring both the benefits and challenges of driving digital adoption through policy measures.

Also read: The UPI 30% Market Cap: Trying to solve a problem that does not exist?

In markets with insufficient competition, consumer risks increase. In monopolistic or oligopolistic environments, consumers may find fewer alternatives, sometimes leading to unfavourable terms and conditions. Therefore, incentivizing competition is critical to safeguarding consumers. Over the years, NPCI and RBI have fostered significant trust in the UPI ecosystem. However, if consumers perceive that their choices are limited or that service quality declines due to a lack of competition, trust could diminish. The enforcement of market caps will ensure parity and protect consumer choice in one of India’s fastest-growing financial ecosystems. Transparent communication from regulators about the purpose of the market cap and how service quality will be maintained is essential to building consumer confidence.

Enforcing market caps would also allow smaller fintech companies to introduce unique solutions tailored to specific consumer needs. In a country as diverse as India, with varying demographics and consumer behaviour, such diversification is critical. Smaller players often bring fresh perspectives and innovative technologies that can enhance the overall UPI ecosystem. For example, companies like Cred, Slice, and Paytm are already exploring niche markets and offering consumer incentives to attract users away from the dominant platforms. The market cap could give these companies a stronger foothold, contributing to a more dynamic and competitive marketplace.

Indian companies are well-positioned to challenge foreign domination in this space. With established brand recognition, a loyal customer base, and deep local market knowledge, they can leverage their resources to innovate and adapt to the evolving regulatory landscape. Furthermore, these companies are uniquely positioned to address the urban-rural divide in UPI adoption, helping to reach previously underserved consumer bases.

The introduction of market caps within the UPI ecosystem represents a critical juncture for India’s fintech landscape. By enforcing a 30% cap on transaction volumes for any single player, the NPCI has the opportunity to create a more equitable environment that fosters innovation and competition, particularly for smaller fintech companies. This strategic move could revolutionize the UPI space, enabling a wider variety of players to serve India’s diverse and vast consumer base. As the ecosystem transitions, the implementation of market caps can smooth the way for a more inclusive and competitive future, balancing consumer choice with the need for systemic stability.

(The author is the chairman – governance council at the Fintech Association for Consumer Empowerment. Views expressed are the author’s own and not necessarily those of financialexpress.com.)