Implementation of the proposed market share rule in the UPI payments might not be put into effect by Dec. 31 deadline, as it may disrupt the payment ecosystem, according to people familiar with the matter.
The regulator, National Payments Corp. of India, might maintain the status quo given challenges such as inconvenience to users, disruptions to a growing payments ecosystem, and the lack of monetisation models for smaller players.
Furthermore, the aforementioned people told NDTV Profit that new entrants in the space are finding it challenging to comply with the proposed norms, which is causing delays in their investment plans.
At present, there are 36 authorised UPI third-party application providers, or TPAPs, in this space. However, PhonePe and Google Pay dominate the space.
NPCI declined to answer NDTV Profit's questions on the matter.
By the end of December 2024, the NPCI will review its proposal to set a 30% market share cap on such transactions by volume. The NPCI first proposed the cap in November 2020 and extended the deadline to December 2022 and then to 2024.
This would mean that the likes of market leaders PhonePe and Google Pay will have to reduce their share. PhonePe currently dominates, constituting over 48% of all UPI transactions. Google Pay stands at about 37%, according to the latest NPCI data.
So, what could be in store for these American-controlled giants—Walmart and Google—that are controlling a large volume of transactions on a digital pipeline built in India?
A status quo is likely, and the payments pie could remain unchanged, said a person with knowledge about the matter.
Notably, the RBI's concerns about the involvement of big tech firms in India's financial system, as highlighted in its Currency and Finance Report for 2023-24, could be undermined if the NPCI fails to enforce the market cap rule.
Disaster If Market Cap Comes In?
India's real-time digital payments system is a hit but still fledgling.
That is clear from the monthly data that NPCI puts out. The volume of transactions is increasing, with approximately 1,504 crore transactions valued at Rs 20.64 lakh crore in September 2024. With this, the platform has surpassed Rs 20 lakh crore in transaction value for five consecutive months.
Currently, UPI is being looked at as a social good, as a way of getting more and more people onboard the digital payments bandwagon, according to people mentioned earlier. The way postcards, inland letters, and even railways are heavily subsidised today, the digital pipeline of the Indian banking sector is being seen as a social good.
So if a market cap does come in, it could mean significant inconvenience to a large number of transacting users and a hit to the system of digital adoption itself. It would mean that people would either have to install other apps and re-register, which could act as a barrier.
The Policy View
"During Covid, we had over 30 third-party application providers on UPI," Alkesh Kumar Sharma, former Secretary of the Ministry of Electronics and IT, told NDTV Profit.
"By the end of Q3 of 2022, many of them had incurred losses and ceased operations. When this issue came up in 2022, to extend the market cap deadline, we wanted to give more time to ensure new apps, and this is how this extension was given," Sharma explained the earlier rationale.
According to the top former official, the demand and supply system itself should take care of market dynamics, but when we look at financial sectors, it involves a lot of issues, such as security, data, market control.
"If something happens to one system, almost 50% of customers can go out of market, which no country can afford. So at the time, we wanted more TPAPs to come into the market, and there should be maturity in the system. We should look at competition; when a startup or a new innovation thrives on some kind of support," he said.
The government does support UPI person-to-merchant transactions today; however, that amount is shrinking. In the current budget, the government has allocated Rs 1,441 crore for the promotion of RuPay debit cards and low-value UPI transactions, which is a 42% drop from last year.
The Brunt Of Free Payments
According to a PwC estimate, the cost of processing these transactions, without levying a fee from the payee or beneficiary, stakeholders including the payer’s bank, beneficiary’s bank and UPI app provider, and NPCI, typically incurs a cost of nearly 0.25% of transaction value for processing a UPI P2M transaction.
Going by the volume, this means that the stakeholders incurred a cost of about Rs 12,000 crore for UPI person-to-merchant transactions for FY24, assuming a flat average merchant discount rate of 0.25%. However, due to the zero merchant discount rate, the stakeholders are not able to recover the costs, and the same needs to be reimbursed to them through such incentives.
Despite Rs 12,000 crore in costs for FY24, stakeholders are being incentivised with Rs 3,000 crore only. Overall, about Rs 9,000 crore should be additionally allocated for all UPI P2M transactions, PwC said.
"The company with maximum transactions gets maximum incentives, so a major chunk of the government's Rs 3,000-4,000 crore as incentives is parked only with the major players. So they can afford to give more discounts, and that affects market dynamics. The BHIM UPI app can also not give it," Sharma said.
He spoke about resilience in the system, which can only come when there are a large number of players. "NPCI must come out with new incentives, new apps, and enter new geographies. A multi-pronged approach is necessary, but in the larger interest, there has to be some sort of a market cap to ensure entry of more players, even if it has to be kept for a certain duration," Sharma said.
Also Read: UPI Fee: Majority Users Indicate To Stop Using UPI If Transaction Fee Is Levied, Says Survey
The Foreign Lobby
While Google Pay agrees that UPI should be driven by more incentives and made more monetisable, it doesn't necessarily concur that a market cap is needed.
"Rather than an exogenous mechanism like an artificial cap, the solution to the UPI market share conundrum is to encourage more players in the market with a clear sight on monetisation," Sharath Bulusu, director, product management at Google Pay, told NDTV Profit on the sidelines of an event in Delhi.
"Our position has always been that a solution has to be market-orientated. In our opinion, the market-orientated approach is to have a diverse competitive ecosystem," he said.
"At the end of the day, they (companies) at least need to have the line of sight to say, How does this become a viable business, and therefore being able to monetise is also going to matter?" Bulusu said.
PhonePe, which is owned by Walmart, has also expressed concerns against the market cap. Speaking at the Global Fintech Fest 2024, Chief Executive Officer Sameer Nigam said "nervous about going public when there's a 30% market cap lurking."
According to Sudhakar Kaza, an industry expert in payment systems with over three decades in the RBI, while concerns about foreign control are often highlighted, the more pressing issue lies in the market concentration.
"Currently, approximately 86% of the Indian UPI ecosystem is dominated by firms located in foreign countries. This significant share raises substantial concerns about data access, as these foreign entities have the potential to access the personal data of a vast majority of Indians transacting via UPI. This situation is particularly alarming for policymakers and regulators, who are tasked with ensuring the security and privacy of citizens' data," he said.
As the market cap revision approaches, it is up to NPCI and the RBI to make the final decision. Till then, with the near-free UPI juggernaut rolling, it's the end customers who are in the best interest of both -- the companies and the regulator.
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