India’s payments landscape is at a point of inflection, aided by the widespread use of smartphones. Rapid digitalisation, reasonably affordable data and smartphone penetration have ushered in easier payment systems, dismantling technology and income barriers. The default payment option, even for small purchases, is now through India’s indigenously created United Payments Interface (UPI) system. UPI recorded its highest number of transactions in October 2022, amounting to ₹12.11 lakh crore.
For a healthy development of the payment system, it is of utmost importance to have regulations that prevent a scenario where it becomes a one- or two-man show. (Mint File Photo)
While this is commendable, there is a risk emerging. Two United States (US)-headquartered apps, Walmart-owned PhonePe and Google’s GPay, currently dominate the market. Together, they account for 82% of UPI transactions by volume and 84% by total value. The objective of UPI was to create and develop an indigenous payment ecosystem. Instead, we are witnessing major dominance by two US firms. The story of self-reliance is getting affected.
In the UPI ecosystem, third-party apps ride on the compliance of sponsor banks. In an apparent move to minimise concentration and systemic risk, the National Payments Corporation of India (NPCI) issued detailed standard operating procedures (SOP) in March 2021, stating that existing third-party apps that command a market share of more than 30% are exceeding the volume cap and will have a period of two years, ending December 31, 2022, to comply with the SOP. The document said when an app’s share is between 25% and 27%, the first alert will be sounded to the firm and the bank via email or letter, which must be acknowledged. The second alert will be given when market share is between 27.1% and 30%, and if any service provider crosses the 30% threshold, they’ll have to stop onboarding new clients. Any defiance will lead to penalties, though some exceptions may be allowed, said the regulator, adding that it will undertake a review on a half-yearly basis, starting January 2022.
By definition, a systemic risk refers to the possibility that an unforeseen occurrence in a company could potentially endanger the stability of an industry, which can then impact the economy as payment systems drive economic growth. India’s UPI success story has emerged as a template for the world. Therefore, regulators cannot ignore the signs of a potential systemic and concentration risk.
Prima facie, a market share of more than 80% by two players presents a textbook case of a concentration risk. It took 18 months for NPCI to take a procedural decision on the SOP and several extensions have been allowed since. It is time to decide on a timeline. How should it be done? Whether it is done in a staggered manner, in phases or at one go is a matter of detail. But, clearly, more extensions will only end up deepening the concentration risk. With the rapidly increasing use of UPI, it is of prime importance to begin the process of tackling the concentration risk.
To begin with, NPCI should restrict onboarding new users for all those third-party apps whose existing market share exceeds 30%. NPCI’s SOP clearly states that: “If it is observed that the TPAP (third party application provider) continues to onboard new customers without any moderation, NPCI shall issue a notice to stop. The provision of exemption will ensure that existing users are not put to inconvenience and new customer on-boarding is also not fully shut as mentioned in this SOP. This provision may help TPAP to continue to maintain the trust, while working towards achieving compliance”.
The SOP even talks about how third-party apps need to communicate with potential customers once they breach the market share. With less than two months before the volume cap stipulations are scheduled to kick in, another basic question arises. Is it time to separate the development requirements and regulatory roles of UPI to two distinct entities?
NPCI has two major responsibilities: Grow the UPI ecosystem by deepening and widening its reach and control market risks.
Regulation and development go hand in hand. So, for a healthy development of the payment system, it is of utmost importance to have regulations that prevent a scenario where it becomes a one- or two-man show. Hence, the responsibility of controlling market risks should be with the government-backed sector regulator.
Raman Aggarwal is director of Finance Industry Development Council (FIDC)
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