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The rise of Unified Payments Interface (UPI) in the eight years since its launch has been meteoric, with the UPI ecosystem now accounting for nearly eight in every 10 digital transactions in India, with a value of over ₹20.60 lakh crore in August of this year alone.
This success, however, is no small feat for a country like India, which is characterised by low digital literacy and a historic reliance on cash, and is deeply reflective of the critical role UPI has played in fostering public trust in digital payments.
UPI’s continued success will heavily depend on whether its ecosystem can maintain and build upon such public trust, which will, in turn, depend on the ecosystem’s performance on metrics such as resilience, reliability, and openness to innovation. This is particularly important as UPI’s penetration remains at 30% of the population, which is impressive for a new payments technology, but shows how much of India remains to be brought into the digital payments fold. Achieving this will require substantially new innovations in everything from service offerings to app design and the overall product base of the UPI ecosystem to make it relevant for the remaining 70% of the country.
A major hindrance is the extreme market concentration of two Third Party App Providers (TPAPs) in the UPI network — Phone Pe and Google Pay. Together, they control over 85% of the total market share, whereas the next biggest player, Paytm, controls merely 7.2%.
Major risks
The emergence of a duopoly, especially a foreign-owned one, at a relatively early stage in the UPI ecosystem creates three major risks. The first is the increased systemic vulnerability. High market concentration in the payments space can lead to single points of failure, where any sudden stoppage or break in services can have ripple effects across the entire financial structure. Given that nearly eight out of 10 transactions carried out via UPI in a month take place on either PhonePe or GooglePay, these two apps have effectively become such single points of failure. For a system as critical as UPI to remain robust, it is essential to develop failsafes and backup mechanisms to ensure the system continues to function smoothly.
Second, there is the risk of decreased competition and innovation in the payments and financial ecosystem. By consolidating a disproportionately large share of the market and user base, the two dominant TPAPs benefit from a scale that creates high barriers to entry for smaller and newer market participants. Given that all service providers in the UPI network are subject to a zero-charge framework for users, they primarily compete to achieve user scale, which they then leverage for commercial purposes by cross-selling other financial products.
The widespread scale of operations and user base that the two foreign-owned TPAPs have consolidated creates an inherently uncompetitive market. The lack of competition also disincentivises investment in new innovations, as the existing dominant players need not do anything more to maintain their current positions.
Third is the risk of foreign dominance. Both TPAPs in the duopoly are foreign-owned — PhonePe by Walmart and GPay by Google. No Indian TPAP or service provider can realistically hope to compete against the dominant TPAPs without billions of dollars in funding. Further, this foreign ownership creates multiple potentially new lines of failure, including data protection and backdoor access to sensitive information of Indian citizens, many of which Indian regulators might not even be aware of. It is therefore prudent policy to encourage the development of Indian TPAPs, which can strengthen the UPI ecosystem by providing a counterbalance to the current dominant platforms. This is not an argument against having foreign-owned UPI players or service providers, but rather a call to create a more level playing field for Indian apps and developers.
While the existing duopoly has been repeatedly flagged for its associated risks by regulators and parliamentarians alike, it remains to be substantially addressed. In 2020, the National Payments Corporation of India (NPCI) issued a circular instructing all TPAPs to cap their market share at 30% of the total volume of transactions processed via UPI during the previous quarter and imposed an upper limit of two years for implementation. However, the NPCI subsequently extended this deadline. Four years later, the two TPAPs in question are no worse for the wear, with PhonePe alone accounting for 48.36% and Google Pay for 37.3% of market share in volume, as of August 2024. It is now being reported that such delays could continue beyond this year.
To further add to the troubles of Indian developers, recent reports suggest that the NPCI may potentially increase the market share cap from 30% to 40%. However, every subsequent extension given by the NPCI, with any potential increase in the market share cap, will only allow the dominant TPAPs to consolidate their hold.
Under the right conditions and with the right incentives, however, the UPI ecosystem has every potential to offer smaller market participants a level playing field where they can innovate and compete with larger established players. As UPI enters its next phase of growth in both reach and innovation, the implementation of a market cap is a key step in insulating the ecosystem from such risks that stand to substantially erode public trust and derail UPI’s success and future transformational capabilities.
Shashank Reddy is Managing Partner at Evam Law & Policy
Shruti Mittal is Research Associate at Evam Law & Policy
Published – December 31, 2024 12:15 am IST
