Four years after it first issued guidelines seeking to put a 30 per cent cap on the volume of transactions processed on Unified Payments Interface (UPI) by third-party apps, the National Payments Corporation of India (NPCI) seems to be going nowhere with its grand plans to mitigate monopoly by a few players and ensure a larger level playing field while protecting the UPI ecosystem.

On Friday, NPCI, which runs the UPI digital pipeline, announced an extension of the deadline for compliance with the UPI market share rules till December 31, 2024. The decision has come as a major relief to market leaders PhonePe and Google (GPay) which together hold 80 per cent of the market share.

According to a PGA Labs report, PhonePe’s market share in terms of volume increased to 47 per cent in August 2022, up from 46 per cent in July 2022. GPay was next at 33 per cent market share. With Paytm holding another 15 per cent, there is little presence of others in the market.

In its directive, NCPI noted, “… it is imperative that other existing and new players (Banks and Non-Banks) shall scale-up their consumer outreach for the growth of UPI and achieve overall market equilibrium”.

Amazon Pay and BHIM had 0.9 per cent and 0.4 per cent market share respectively, while payment platforms like ICICI Bank, Airtel Payments Bank, Axis Bank, WhatsApp Pay and Cred collectively claimed 3.9 per cent of the total volume of UPI transactions in August 2022.

Thus, for NPCI to attain the elusive equilibrium, these smaller players must up their game within these two years.

Can Customers Be Denied Services?

The November 2020 cap was to be effective from January 1, 2021. PhonePe and GPay were given two years to comply with the norms in a phased manner. However, the road to preventing the concentration of power by placing a cap is paved with several hurdles and one that NPCI had probably yet to think through. Growing market share is what companies do, so asking them to control it was akin to asking them to turn away a willing and paying customer.

Third-party payment providers argued that adhering to the market cap would slow down their growth, which runs contrary to the very essence of business. Moreover, it could impact their ability to attract new customers, especially when their existing market share indicated that customers preferred using their app.

“We are obviously relieved to see the UPI market share cap get extended by two years. Even when the market share cap was announced in November 2020, we had repeatedly protested the idea because there is no way for market participants to reduce their own market share without actively denying service to the end customer,” said Sameer Nigam, founder and chief executive officer of PhonePe in a statement.

He added, “At PhonePe’s scale, to reduce our UPI market share to 30 per cent, we would be forced to deny UPI payment services to crores of Indians, and that would be totally detrimental to the incredible Indian digital payments growth story over recent years.”

What About Financial Inclusion Goals

According to the data released by NPCI, 7.3 billion transactions worth Rs 12.11 lakh crore took place on the UPI platform in October 2022, which is up from a milestone of Rs 11 lakh crore in September 2022 with 678 crore transactions in volume terms. In August 2022, 657.9 crore transactions worth Rs 10.72 lakh crore had taken place. Payment through UPI had crossed Rs 10 lakh crore in May this year.

The majority of these were peer-to-peer (P2P) transactions, which involve money transfers between two individuals, rather than businesses. According to a Worldline research, 59 per cent of all UPI transactions by volume were done between people, with the remaining transactions flowing to businesses.

With PhonePe, GPay and Paytm emerging as the top platforms for P2P UPI transfers, a cap will only act as a stumbling block in the financial inclusion goals that the present government has set by hindering current and new adopters of UPI from using these platforms on their digitisation journey.

Flaw in the Rule

Prime Minister Narendra Modi has been quite vocal about how fintech will give India a quantum leap into the digital future. Maintaining that this sector would pave the way for a financial revolution in the country, he had recently stated, “If Jan Dhan accounts had laid the foundation of financial inclusion in the country, then fintech would form the basis of the financial revolution.”

With so much riding on the coattails of digital banking, the NPCI’s decision to put a volume cap on players who are helping India achieve its aspirations of financial inclusion runs contrarian to the central government’s game plans.

NPCI might have had the best intention when it came up with the plan to put a cap on third-party digital payments players to ensure there is enough elbow room for all entities to thrive in this landscape. However, its strategy for forcing the big guns to reduce their individual UPI market share to pave the way for players with meagre market share smacks of superfluous intrusion in a free economy where customers will make the final call.

A better alternative would be to incentivise existing players, especially those on the periphery, as well as new ones to ensure rapid digitisation of digital payments. That is a more pragmatic way to achieve market equilibrium, which is NPCI’s end game