NPCI, please implement your directive on UPI market share

Amidst the growing demand for a market cap in the UPI ecosystem, concerns have emerged regarding its potential impact on innovation.

By Nirupama Soundarajan

Since India’s presidency of G20, Unified Payments Interface (UPI) has gained immense traction with countries like Singapore, France and UAE integrating UPI in their financial infrastructure. While UPI is becoming an unstoppable force of innovation globally, India needs to address challenges at home that can potentially mar the growth of the whole ecosystem.

As per the latest NPCI data, PhonePe and Google Pay dominate the market, holding over 85 percent of the market share. This concentration raises concerns about systemic failures, fraud risks, and the emergence of a duopoly, which could compromise user security and the viability of smaller competitors.

To address these issues, NPCI had proposed a 30 percent market share cap for a single UPI app. It has now become imperative for NPCI to implement this cap urgently to ensure a level playing field among all participants. This cap aims to distribute market share more evenly, minimizing the impact of any single player's failure and ensuring a robust digital payment infrastructure for India and the world.

Why a cap on market share provides right incentives

Amidst the growing demand for a market cap in the UPI ecosystem, concerns have emerged regarding its potential impact on innovation. Critics argue that a market cap on transaction volume might disincentivize competition. However, market caps have the potential to foster innovation by preventing any single entity from dominating the market. When companies know their growth is limited, they are motivated to differentiate themselves through unique offerings and enhanced services, leading to a more dynamic ecosystem with diverse technological advancements.

It is important to recognize that the Indian digital payments market is still in a phase of significant growth. In October, India achieved remarkable milestones in UPI transactions, with a 10 percent increase in transaction volume and a 14 percent rise in value compared to September, processing 16.58 billion transactions during the festive season. Establishing a market cap would not diminish the incentive for innovation among market participants as the market is expanding and offers ample opportunities to engage new users who have yet to adopt UPI.

SOP to implement market share cap is ready

To facilitate this balance between competition and user experience, NPCI has established a Standard Operating Procedure (SOP)  for implementing market share caps. As the digital payments landscape evolves, NPCI's ability to monitor and regulate transaction volumes across different UPI applications is vital for maintaining a balanced market.

In the SOP, the NPCI recommends employing a rolling three-month calculation to assess the total volume of UPI transactions processed by each third-party application provider (TPAP). This method allows for continuous monitoring and ensures that fluctuations in transaction volumes are captured in real-time.

By analysing data over a defined period, NPCI can identify trends and ensure compliance with market share caps effectively. To prevent TPAPs from exceeding the market share cap, NPCI will issue alerts as they approach the 25-27 percent threshold. Upon reaching 27 percent, a second alert will prompt TPAPs to take corrective action. This communication strategy will enable providers to adjust their operations before breaching the cap, minimizing potential disruptions to users.

This SOP is a commendable approach to fostering competition while ensuring a positive user experience in the rapidly evolving digital payments landscape. Its proactive strategy minimizes disruptions for users and encourages innovation among TPAPs. However, it has been a long time since the SOP was introduced, and despite this, there has been no significant reduction in the market share of the two prominent players in the industry. This raises concerns about the effectiveness of the current measures in promoting competition. Delaying the implementation of market caps any further seems counterproductive, as it hinders the potential for new entrants to gain traction.

An alternative approach could consider introducing tiered caps based on user adoption rates, allowing for more flexibility and encouraging the entry of new players without compromising market stability.

Seamless adoption is doable

The SOP includes provisions for temporary exemptions when a TPAP reaches its volume cap. These exemptions can last up to six months and are intended to prevent sudden service disruptions. During this period, TPAPs can request allowances through their Payment Service Provider (PSP) banks, allowing them to manage their user base while working towards compliance. Existing TPAPs that exceed the 30% cap as of December 31, 2020, have been granted a two-year period to comply with the new rules in a phased manner. The NPCI extended the deadline for compliance to December 31, 2024. This gradual approach provides companies with ample time to adjust their operations and user onboarding processes without causing abrupt changes that could alienate users.

With over 50 UPI-enabled apps available on NPCI’s website, users have access to multiple alternatives if they encounter issues during onboarding due to market share restrictions. This diversity ensures that even if one app has limitations, users can still find other platforms to meet their digital payment needs.

(The author is Partner, Policy Consensus, and a policy professional.)

Views are personal and do not represent the stand of this publication.