UPI | Why put a cap on competition and innovation?

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Is imposition of ex-ante (before the event) volume cap in the payments sector ideal?

The National Payments Corporation of India (NPCI), the body in-charge of management and operation of the Unified Payments Interface (UPI), issued a notification on November 5 imposing volume caps on transactions processed through the UPI. From January 2021, Third-Party Application Providers (TPAP) and Payment Service Providers (PSPs) must ensure that their total volume of transactions processed (under UPI) shall not exceed 30 percent of the overall volume of transactions processed during the preceding three months on a rolling basis.

The existing TPAPs crossing the 30 percent threshold would be given two years to comply with the said cap in a phased manner. The notification states that this is being done ‘to address the risks and protect the UPI ecosystem…’

However, the notification is silent about what the risks are and how imposition of volume caps would effectively address the same. It is expected that the standard operating procedure (to be published soon) might throw some light on this.

While the NPCI has the power to formulate prudential regulations to streamline the UPI ecosystem, it is critical to analyse if imposition of volume caps is the most suitable option to address these risks; and if this would have any unintended effect on the market.

Such ex-ante blanket regulations could significantly dampen the existing (vigorous) competition in the nascent UPI space, which could, in turn, dilute innovation and the incentive to offer better products to consumers. Also, this move could potentially reduce the competitive suspense in the market, and increase the likelihood of coordination/collusion among market participants.

Moreover, the UPI success story is attributable to the ease of use from an end consumer’s perspective. The introduction of volume caps would affect the usability (for example, rejection of transactions/blocking) and also require a re-alignment of the TPAPs business model. This could potentially hamper investments in this space.

Furthermore, in digital markets, especially economies of scale and scope brings in significant efficiencies, which could be passed on to the consumers. Therefore, ex-ante regulations that prevent efficient players from expanding to a bigger size could have an irreversible impact on the sector. It is for this reason jurisdictions such as the United States and the European Union are careful while implementing ex-ante prescriptive regulations, particularly in relation to digital markets.

Global Perspective

The European Commission (EC) recommended three factors to be considered before implementing ex-ante regulations in the electronic communications market. One, the presence of high and non-transitory structural, legal or regulatory barriers to entry. Two, the market structure does not tend towards effective competition within the relevant time horizon, having regard to the state of infrastructure-based and other competition behind the barriers to entry. Three, competition law alone is insufficient to adequately address the identified market failure(s).

Interestingly, in India, there are no barriers to enter the payments space and the same is evident from the presence of large players such as Jio, Google, Facebook, Amazon Paytm, Walmart etc.

In a 2014 article, Maureen K Ohlhausen, the former Commissioner of the Federal Trade Commission (FTC), warned about the shortcomings of ex-ante regulations for the online/technology markets. First, she argued that the dynamic nature of the sector makes it impossible for the regulator to continually update the rules. Second, since these ex-ante regulations are an attempt at predicting the future and the march of technology, some unanticipated harms may occur. Third, such prescriptive regulations may hinder innovation significantly.

What’s The Fix?

If the intent behind imposition of these volume caps are to de-risk the ecosystem, the NPCI ought to have consulted/worked with the Competition Commission of India (CCI) to carry out a regulatory impact assessment. Such an assessment would raise the following questions: if the problem has been identified accurately?; if ex-ante regulatory intervention is justified?; are ex-ante regulations the most suitable form of intervention?; are the existing regulations inadequate to address the problem?; and, if the benefits of regulations justify the costs?

The Competition Act, 2002, under Section 21 and 21-A, expressly provides for regulators and the CCI to engage/co-ordinate on matters that might spill over to each other’s area of expertise.

On the other hand, (as perceived by some sections of the market) if the regulation seeks to prevent monopolistic capture of market by a few players, then the Competition Act, 2002 (Section 3 (prohibition of anti-competitive agreements) and Section 4 (prohibition of abuse of dominant position) provides for a robust ex-post regulatory regime. The exercise of jurisdiction by the CCI would be on a case-to-case basis, while keeping the dynamics of the market in mind — rather than a ‘one-size fits-all’ approach.

The CCI has been bestowed with significant investigatory powers and has the ability to pass any interim measure to limit/minimise the damage caused by any anti-competitive conduct. Therefore, any market disruption/anti-competitive behaviour that the NPCI seeks to prohibit, could be achieved through ex-post competition enforcement.

Furthermore, the proposed volume cap assumes that 30 percent market share could lead to anti-competitive effects in the market; whereas, Parliament, in its wisdom, while formulating the Competition Act stayed away from adopting an arithmetic threshold of market share to determine market power.

It should be noted that the NPCI is a commercial entity with some regulatory functions much like the NSE and the BCCI. Therefore, the business practices/policies of the NPCI are not beyond the CCI’s scrutiny.

Finally, regulations should protect the competitive process and not competitors; doing otherwise, would amount to denying the benefits of competition and innovation to the consumers.