Why a 30% cap on UPI may never be possible

Why a 30% cap on UPI may never be possible

On December 31st, the National Payments Corporation of India (NPCI) made two major announcements. First, they allowed WhatsApp to expand its UPI reach to its entire user base, which was previously limited to 100 million users. Second, they extended the deadline for enforcing their controversial 30% cap on third-party UPI apps. While these announcements might seem significant, let me explain why they’re unlikely to change the landscape of UPI.

Paytm has 100 mn monthly active users (MAU) while PhonePe has over 250 mn MAU overall.

PhonePe, the undisputed leader in the Indian fintech, holds a staggering 50% market share in UPI payments. However, NPCI is not happy with this dominance, and has been continuously attempting to implement the 30% cap on it since 2022. I had already predicted in 2021 that it might be impossible to implement this policy. NPCI also realises that stopping PhonePe’s progress would also negatively impact UPI growth.

UPI might have around 360 to 375 million monthly active users, but guess what? Only about 100 million of those users are responsible for 65% of the volume! This number is unlikely to change anytime soon. That means PhonePe and Google Pay are likely to keep their top spot. I think these 100 million users have already picked their favorite app.

The only way for PhonePe to come below 30% is for other apps to emerge strongly. My analysis says it is highly unlikely and here is the basis of my analysis:

• Only 3 new TPAs(Third party apps) (CRED, Super Money and Navi) have emerged in last 2 years that have started capturing a decent share but collectively they account for less than 3% share despite significantly investing in marketing & cashbacks to grow UPI. All 3 apps have deep pockets, and they could potentially continue to grow their UPI base. But, with no serious revenues to be made on UPI, they are unlikely to let UPI be a cash guzzler. CRED is limited by its own policy of not allowing users to be below a certain credit score. (may be they could launch a new standalone app with no entry restrictions).

• Paytm has over 100 mn MAU but only 40% of its base uses it as the primary UPI App. I don’t see this changing because Paytm seems to be highly focused on growing revenues and reducing cost and their current focus on P2M(person to merchant) and cross sell seems to be delivering the right ROI (return on investment) to them.

• There are no other large players with unlimited cash on the horizon which could challenge PhonePe. Jio Fin may not bite this bullet too.

• This brings us to WhatsApp Pay. Can it upset the PhonePe/Google Pay applecart? Highly unlikely! One may argue that now that they have no restrictions and can possibly bring all 500mn users to UPI, it changes the dynamics. I don’t buy this argument.

• It is important to note that WhatsApp was previously permitted to onboard 100 million users. Despite this, it currently has less than 7–8 million active users who utilise UPI. Therefore, it is unclear why WhatsApp has not aggressively pursued a larger user base for UPI, reaching 30–50 million active users. Notably, WhatsApp conducted a substantial cashback campaign last year, indicating their intention to achieve this goal. However, they were unable to maintain the momentum once they discontinued the campaign. WhatsApp’s absence from P2M flow due to its subpar user experience (impossible to find scan and pay) have hindered its adoption. Additionally, WhatsApp’s reputation for being susceptible to fraud and spam abuse has deterred many users from linking their bank accounts with the platform.

Consequently, the space remains vacant for PhonePe, and I see no one attempting to challenge it even remotely.

If for a moment, we believe that someone may just throw in billions of dollars in marketing & cashback and build market share, it is mathematically not possible to bring PhonePe down to 30%. Let me explain how:

UPI is likely to add 10% MAU year on year so we can safely assume that it may reach 450 mn users by 2027. If PhonePe was to stop growing from today onwards and not add a single user till 2027 and only let its current base continue using UPI, they will still be at 42% of the UPI base.

It will be exciting to revisit this article in December 2027 and compare notes. I look forward to continuous growth of UPI and digital financial infrastructure in India.