The one thing that threatens India’s booming UPI market

Given these inherent attributes, it would have been safe to assume that there would be a vibrant ecosystem of competing apps on the UPI network. Instead, what we find is the deeply entrenched market positions of two foreign-owned entities — PhonePe and Google Pay — who together control nearly 85 per cent of the UPI market share in terms of volume. While PhonePe accounts for 48.36 per cent, and Google Pay accounts for 37.3 per cent, Paytm — the next biggest player — accounts for a mere 7.2 per cent. BHIM, the government’s own UPI app, accounts for less than 1 per cent. Not only does such acute market concentration risk creating single points of failure for digital payments, but also stands to adversely impact competition and innovation at such an early stage in UPI’s growth trajectory. Such risks will ultimately harm consumers the most.

Entities like PhonePe, Google Pay, and the like are Third Party App Providers (TPAPs) who participate in the UPI ecosystem as service providers to banks who are part of the UPI network. Given that service providers are barred from charging a transaction fee for UPI, TPAPs compete with each other for scale, making the user base one of the biggest driving factors for market players, which could also be leveraged to cross-sell adjacent payment solutions such as loans. Google Pay (which was launched in India in 2017) and PhonePe (which was acquired by US conglomerate Walmart in 2018) significantly benefited from a big first-mover advantage and a capital advantage of being financially backed by mega corporations which allowed the two apps to aggressively push their UPI apps even with no revenue model to sustain them. Players like Amazon and Meta’s WhatsApp missed the bus due to a variety of reasons, including late entry and regulatory hold up. Further, despite aggressive cashback campaign efforts by WhatsApp, it failed to grow a substantial user base.

The situation is even worse for smaller and newer players who are constrained by the high barriers to entry posed by the deeply entrenched market and the inability to allocate capital towards a marketing budget that could compete with the likes of Google Pay and PhonePe. Further, we are currently in the midst of a tightening investment climate where such smaller players and start ups are, in fact, looking to reduce expenditure and are increasingly prioritising profitability over growth. Given such constraints, smaller and newer players do not have the incentive to invest in the space, which in turn risks insulating the two TPAPs from the pressures of the competitive process.

These concerns have rightly raised alarm bells within the National Payments Corporation of India (NPCI), the Parliamentary Standing Committee on Communications and Information Technology, and various government departments. NPCI in fact sought to address these very concerns four years ago, when it issued a circular mandating all UPI TPAPs to abide by a 30 per cent cap on their market share by volume of all UPI transactions during the preceding three months. The 30 per cent number was chosen by NPCI as it provides enough scale to be commercially viable, particularly as the UPI market as a whole grows, while maintaining the structural integrity of the UPI ecosystem without it being overly dependent on a couple of platforms. TPAPs found to have market share exceeding the cap were to stop onboarding of new customers and users until their overall share of the UPI market by volume fell to 30 per cent or below. Such TPAPs were also given a deadline of two years, expiring on December 31, 2022, to adhere to the circular’s requirements. However, the deadline was subsequently extended by another two years, that is, till December 31, 2024. Now, as we inch closer to the newest deadline, news reports seem to suggest that the deadline will be extended once again, and that the NPCI might even be considering easing the cap to 40 per cent from 30 per cent, due to purported challenges with enforcement.

Such repeated delays, and any potential relaxation, will further entrench the dominance of the two TPAPs in question. In the past, the NPCI has cited ambiguous reasons such as the “present usage” and “future potential of UPI” for the delay in implementation of volume cap. Moreover, it has gone on to recommend other players to scale up their consumer outreach (presumably through marketing strategies including cashbacks, vouchers, and discounts) in order to help the UPI ecosystem achieve more inclusive growth. However, for reasons already explained, the players in question lack strong incentives to make the necessary investments.

Moreover, each time such a deadline has been extended, there has been an expectation that the two dominant TPAPs would undertake gradual measures to meet the required cap. Instead, during this period, it appears that the two players have existed in a silo of sorts, competing only with each other. Neither of their market shares has witnessed a pattern of decline that could even remotely affirm that the dominant players have made any bona-fide attempts to reduce their dominance. Their customer acquisition and onboarding has been as it was before the NPCI circular. This is quite likely driven by other commercial considerations, including a potential IPO in the case of PhonePe.

It is therefore clear that in the absence of a strong regulatory intervention that balances growth and risk, such as the originally proposed 30 per cent volume cap, the UPI ecosystem will remain vulnerable to concentration risks, and is unlikely to experience the sort of rebalancing required to become a more open, innovative, and inclusive market as envisaged by the NPCI.

Reddy is Managing Partner, Evam Law & Policy and Mittal is a Research Associate