By Bikash Narayan Mishra
India’s indigenously-developed United Payment Interface (UPI) has almost become the default payment option. While cash is still the king, increasingly a majority of peer-to-peer transactions are being done using the UPI.
According to the data released by the National Payments Corporation of India (NPCI), the UPI recorded over 7.82 billion transactions worth Rs 12.82 trillion in December 2022–a new record since it was launched in 2016. In fact, the volume of transactions has witnessed exponential growth from just 0.02 billion in FY17 to 60 billion until December this fiscal. Similarly, the value of transactions has spiked from Rs 0.1 trillion to as much as Rs 100 trillion during this period.
In order to avoid the concentration risk and provide a level-playing field, the NPCI had proposed a 30% volume cap for third-party app providers (TPAP).
At present, two apps-Walmart-owned Phone Pe and Google’s Google Pay- dominate the market of third-party UPI apps. Together they account for 82% of the UPI transactions by volume (Phone Pe with a 47% and Google Pay with a 35% market share) and 84% by the total value of transactions (Phone Pe with 49% and Google Pay with 35%).
In the UPI ecosystem, third-party application providers ride on the compliances of sponsor banks. There are 25 third party apps in the UPI ecosystem, of which two alone account for more than 8 out of every 10 transactions, raising the prospect of concentration and systemic risks, which the NPCI also acknowledges.
The risk of a single point of failure remains elevated when the two players dominate such a high volume of activity, resulting in disorderly services and disruptions in services.
The widespread disruption of UPI-led financial transactions for Phone Pe and other third-party app providers dependent on Yes Bank when the latter was placed under moratorium in March 2020 is a case in point.
There are other concerns, too. In a policy paper published in January 2019, the Reserve Bank of India (RBI) had flagged the dangers of concentration risks in retail payment systems, from a financial stability perspective.
The objective of UPI was to create an indigenous Indian payment system. For now, it’s the two US-headquartered companies-Walmart (Phone Pe) and Google (Google Pay) are in the lead. Even the two biggest challengers to the hegemony of these companies are Amazon and WhatsApp, both again headquartered in the US and with deep pockets.
As in the case of e-commerce firms, it has been observed that in order to gain market dominance, large players invest heavily in predatory pricing, give deep discounts, and offer cashbacks. This overall “price game” stifles innovation and makes it challenging for smaller players to deliver services at such a low cost due to economies of scale for large players.
Such price-led market concentration can end up raising the entry barriers for Indian fintech start-ups to innovate and be part of the UPI ecosystem. New fintech players are not getting in because this requires very deep pockets and along with the ability to sustain large volumes of cashbacks for a very long period of time. Besides, inadequate competition was resulting in complacency, as there was no need for constant upgrades in products and processes for retaining customers. This is hindering innovation.
It has been observed that certain payment service providers are entering into closed-loop agreements for digital payments. As per the UPI Procedural Guidelines, users should be able to see all UPI compliant applications on their mobile phones and proceed to pay with the same. The closed-loop agreements in the aggregator are a direct violation of the UPI procedural guidelines.
In an apparent move to minimise concentration and systemic risk, the NPCI came out with a detailed implementation standard operating procedure (SOP) in March 2021, stating that the existing third-party app providers (TRAPs), which command a market share of more than 30% will be subject to the “volume cap” stipulations after December 2022.
“The existing TPAPs, which are exceeding the volume cap will have a period of two (2) years i.e., from 01st January, 2021 until 31st December 2022 to comply with the SOP in a phased manner and NPCI will review the same on a half-yearly basis starting from January 2022”, it had said.
It took 18 months for the NPCI to make a procedural decision on the SOP paper. In December 2022, it was expected that the NPCI would enforce the market cap rule but it didn’t happen and it has again extended the deadline for compliance to December 2024. Indefinite extensions don’t help. But there must be reasons therefor. The NPCI circular says, the decision was taken after “taking into account the present usage and future potential of UPI and other relevant factors”. Further, “in view of the significant potential of digital payments and the need for multi-fold penetration from its current state, it is imperative that other existing and new players (banks and non-banks) shall scale up their consumer outreach for the growth of UPI and achieve overall market equilibrium,” adds the NPCI circular. While the large players are happy with the extension, the smaller ones will have to invest more time, efforts and money to survive and remain relevant.
Whether it is done in phases or in one go, it is expected that there will be no further extensions to the December 2024 deadline. How should it be done? The SOP issued by NPCI has a specific clause to restrict onboarding of new users if guidelines are not followed.
“If it is observed that the TPAP continues to on-board new customers without any moderation, NPCI shall issue a notice to stop. The provision of exemption will ensure that existing users are not put to inconvenience and new customer on-boarding is also not fully shut as mentioned in this SOP. This provision may help TPAP to continue to maintain the trust, while working towards achieving compliance. It is imperative that once the new customer on-boarding is stopped, the market share for such TPAP should reduce naturally”.
The onus to ensure the compliance lies as much with the payments players as with the NPCI. The review could gauge parameters, such as slowdown in new user onboarding and merchant acquisition, and reduction in marketing expenditure, etc.
The NPCI has two major responsibilities: (a) Grow the UPI ecosystem by deepening and widening its reach and (b) control market risks. Both pull in opposite directions. It should not be the umpire and the player at the same time. The responsibility of controlling market risks should be vested with the government or the sectoral regulator. India cannot afford regulatory gaps to prevent potential systemic disruptions that can trigger large-scale disruptions in the expanding digital payments landscape.
Notwithstanding the above, the show has to go on and it’s time to expand it to the under-touched zones–the villages. If we are able to continue with the stellar performance, we may soon touch the magic figure of one billion transaction a day, possibly in the next two years. At the same time, the users need to be educated on the use and misuse of the apps.
(The author is Senior Advisor at the Indian Banks’ Association. The views expressed here are personal)