Why NPCI had to extend UPI market cap deadline by two years

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January 1, 2023 would have brought in a bizarre regulation (if I may call it so) that would have restricted popular UPI apps from growing.

The National Payments Corporation of India (NPCI) on March 2021 had came up with a novel idea to save the unified payments interface (UPI) from concentration risk.

The guidelines mandated each UPI third-party app to adhere to a 30 percent transaction volume cap by December 31, 2022, to avoid the concentration of UPI volumes in the hands of a few players. Currently, three players — PhonePe, Google Pay, and Paytm — account for approximately 96 percent of monthly UPI volumes.

But on December 2, in a widely expected move, the NPCI extended the deadline for UPI players to adhere to a market cap of 30 percent by two years, to December 31, 2024.

Well, the NPCI’s original intent was not entirely unfounded, as the UPI was suffering from large tech outages starting from a big bang issue that happened in 2020 when PhonePe went down due to a moratorium on Yes Bank. That’s when we all realised our dependency on an app to make daily payments.

When the NPCI came up this restrictive policy in 2021 (to be implemented phase wise from January 2023), the UPI was seeing close to 2.5 billion monthly transactions. PhonePe with 45 percent share, and Google Pay at 36 percent share were walking away with the bulk of it. In October, the UPI grew by 193 percent to 7.3 billion transactions. In terms of app share, nothing changed. In fact, PhonePe cemented its leadership further by increasing its market share.

The CEO of PhonePe, Sameer Nigam had made it very clear in 2021, and reiterated it few months ago, that the company was not going to abide by this erratic regulation of imposing 30 percent cap. Many, including this author, then wrote why the rule was never going to work.

What Led NPCI To Extend Deadline?

In 2021, the NPCI believed that WhatsApp Pay will take off, and will naturally balance out the app share. Sadly that never happened, and even after a year and a half it is struggling to make a dent whatsoever.

Here are some reasons why the deadline was extended:

• P2M (payments to merchants/shopkeepers) grew much faster vs P2P (money transfer between two people). P2M now has 55 percent share vs 40 percent back then. P2M is mostly a time-sensitive transaction and a failure there would impact multiple stakeholders. If the rule had been strictly enforced, consumers would be juggling between UPI apps to complete a transaction thus driving up failures. P2M assumes significance as it is now the most dominant way to pay in the offline and online place, and helps drive the digital economy.
• PhonePe and GPay formally submitted the request to the NPCI on delaying the implementation because both were worried about the user experience in their app. Apparently, according to some media reports, MEITY and the RBI were not in favour of this either which helped the cause.
• UPI is still onboarding new users. The new users coming to UPI now are not very tech savvy hence putting them through this loop of trying multiple apps would have dented UPI’s popularity and ease of usage.
• Technology improvement at third party application providers (TPAP) is leading to lesser large scale outages allaying the fear of systematic risk.
• The NPCI doesn’t have enough teeth to rein in the TPAPs. They aren’t a regulator, but a mere service provider/switch or a facilitator.
• Credit cards on UPI has been allowed recently (only RuPay for now), and the next 12 months would be critical for its adoption, with hopes of Visa and Mastercard join the bandwagon. Any disincentive for the TPAPs at this stage would make this offering dead on arrival. There are over 40 million active credit card users online and bringing it on the UPI platform may bring in savvier users to these apps. If their first experience isn’t seamless then they are likely to switch back to using cards in its plastic form.
• UPI usage is still dominated by top 30 million consumers, and forcing them to look for alternate app mid-month once their favourite app has capped out was illogical.

What Next

While this has been deferred by two years, nothing much would change from the current scenario unless we see another dominating app, like WhatsApp, taking off in payments; the likelihood of that at the current stage looks very difficult.

Also, it’s a very long period in the fast-changing fintech industry so we are not sure what future dynamics would be at play. The New Umbrella Entity (NUE), which was positioned as a UPI competitor, has been delayed by the RBI, but it may take birth during these three years. The NUE is an attempt by the RBI to create a new retail payment system for India comprising of but not limited to the ATMs, White Label PoS; Aadhaar-based payments, and remittance services.

I hope all players find ways to overcome the technology overhang risks and work on improving the infrastructure instead of finding consumer unfriendly ways like usage capping.

Deepak Abbot is co-founder, Indiagold. Views are personal, and do not represent the stand of this publication.