Break the duopoly in the UPI payments ecosystem - Hindustan Times
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Break the duopoly in the UPI payments ecosystem

Apr 25, 2024 11:16 PM IST

India cannot allow the concentration of the country’s most important payments public utility to be controlled by two foreign-owned entities

An interesting talking point about the Unified Payments Interface (UPI) is how it bore down on the toffee business. Not too long ago, neighbourhood grocery stores dished out toffee to customers in place of the change owed. Chutta nahi hai (there’s no change) was the rationale. This, of course, is anecdotal but underscored a momentous transformation in India’s payment landscape. This shift is technological, financial, and, importantly, behavioural, involving hundreds of millions of people.

Two apps — Walmart-owned PhonePe and Google’s GPay — currently dominate the market of third-party UPI apps.(Bloomberg/For Representative Purposes Only) PREMIUM
Two apps — Walmart-owned PhonePe and Google’s GPay — currently dominate the market of third-party UPI apps.(Bloomberg/For Representative Purposes Only)

UPI has redefined the way people transact and has become the default instrument of first choice for small payments. Peer-to-peer transactions are also being done through UPI, which has made sending and receiving money a breeze. The edifice of this change has been infrastructure — Digital Public Infrastructure (DPI), the superstructure of public utility through which welfare schemes, payments and products are delivered seamlessly in real time. India Stack is the collective name of a set of commonly used DPIs in India; it consists of three different layers — unique identity (Aadhaar), complimentary payments systems (Unified Payments Interface, Aadhaar Payments Bridge, Aadhaar Enabled Payment Service), and data exchange (DigiLocker and Account Aggregator). Together, they enable online, cashless, and privacy-respecting access to public and private services.

While this is a remarkable success story of Digital India, there is a risk of concentration that is emerging. Two apps — Walmart-owned PhonePe and Google’s GPay — currently dominate the market of third-party UPI apps. Together, they account for 82% of UPI transactions by volume (PhonePe with 47% and GPay with a 35% market share) and 88% by the total value of transactions (PhonePe with 49% and GPay with 39%).

In the UPI ecosystem, third-party application providers (TPAPs) ride on the compliances of sponsor banks, threatening to erode UPI’s core purpose as a powerful public utility vehicle. There are a total of 25 TPAPs under UPI, of which two alone account for eight out of every 10 transactions, raising the prospects of concentration and systemic risks. For instance, the risk of a single point of failure remains elevated when two players dominate such high activity.

The widespread disruption of UPI-led financial transactions for PhonePe and other TPAPs dependent on Yes Bank when it came under moratorium in March 2020 is a case in point.

There are other concerns too. The Reserve Bank of India (RBI) in a policy paper in January 2019 had flagged the dangers of concentration risk in the retail payment system. “To foster innovation and competition, the Reserve Bank would encourage more players to participate in and promote pan-India payment platforms,” RBI said in the paper. “Possibility of single point of failure and also makes the entity too big to fail. Absence of redundancy and fallback arrangements may impact continued availability”, RBI said.

In an apparent move to minimise concentration and systemic risk, the National Payments Corporation of India (NPCI) came out with a detailed standard operating procedure (SOP) in March 2021, stating that the existing TPAPs, which command a market share of more than 30%, will be subject to the “volume cap” stipulations after December 2022. The deadline has since been extended again till December 2024, allowing the two largest players to further increase the market share.

It is puzzling to see that the NPCI has shown an overall indifferent attitude towards the implementation of the steering committee decision, which can have spiralling effects on the digital retail payment system of India due to rising systemic risk. In most countries, public utility enterprises that provide certain services to the masses are State-owned and State-operated, but in the United States they are mainly privately owned and are operated under close governmental regulation.

The classic explanation for the need to regulate public utilities is that they are enterprises in which the technology of production, transmission, and distribution almost inevitably leads to complete or partial monopoly. India’s DPI has powered its aspiration to transition into a developed economy. To become a developed economy, India needed momentum on multiple fronts. It entered the 21st century with a focus on inclusive and equitable growth. To this effect, the government’s and policy efforts needed to be focused on enabling access to basic human needs and supporting infrastructure for all its citizens.

India cannot allow the concentration of the country’s most important payments public utility to be controlled by two foreign-owned entities, exploiting slack rules as the regulator, rather bafflingly, continues to ignore the risks, jeopardising payments of hundreds of millions of individuals and merchants.

Bikash Narayan Mishra is a senior advisor, Indian Banks Association. The views expressed are personal

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