The National Payments Corporation of India, NPCI, has imposed a cap on UPI; Unified Payment Interface (1) transactions share that a single payment application can process.
On Thursday, NPCI stated that third-party applications that offer UPI payments services could process a maximum of 30% of the transaction volumes starting from January 1, 2021. It would calculate the 30% cap based on the total transaction volume processed in UPI while the preceding 3- months on a rolling basis.
The cap starts from January 1, 2021, and any existing third-party application with a market share of more than 30% will have to meet it within two years if it exceeds the cap in a phased manner. NPCI maneuvered as the volume of transactions from UPI platforms continues to grow.
In October, 200 crore transactions worth 3.86 lakh crore INR were processed via UPI based applications (2). According to the NPCI statement, the decision would help address the UPI ecosystem’s protection and risks if it scales up further.
While there are no publicly available data on market share, reportedly, Google Pay, PhonePe, and Paytm are some of the largest UPI payment processors. PhonePe had posted on its webpage (3) that PhonePe has processed 83.5 crores UPI transactions in October. It would allude that it had a 41.7% share of total UPI payments in October.
According to a Techcrunch report (4), the Google Pay volumes were close to 41% of total volume or 82 crores. An anonymous source with direct knowledge of the subject stated that currently, Google Pay and PhonePe controls about 80% of the UPI transactions market.
“The announcement has come as a surprise and has implications for hundreds of millions of users who use UPI for their daily payments and could impact the further adoption of UPI and the end goal of financial inclusion.”
– Sajith Sivanandan, Google Pay Business Head (5)
As per Google Pay, the adoption of digital payments in India is still young, and any intervention at this point should be made to accelerate consumer choice and reform.
Third-party application partners with banks to help users send and receive funds via the UPI network. It also covers the merchant payment network by offering infrastructures like a quick response or QR codes (5).
These platforms soon became a popular transaction choice for millennials after the government decided to demonetize 500 and 1000 INR currency notes in November 2016. These platforms have observed a consistent scale in user adoption and transactions (6).
According to the NPCI website data (7), 21 third-party applications live on the UPI platform. Notably, global giants such as Amazon, Samsung, WhatsApp, and Google are active in the UPI framework.
According to the new policy, effective from January 1, 2021, existing app providers with more than 30% market share will have two years from the date of implication to comply with the latest maneuvers.
The movement came in days after PhonePe claimed a 40% market share in UPI transactions. Soon after the announcement, NPCI also waved a green flag for WhatsApp to launch UPI services in a phased manner (8).
The decision would impact Google Pay and PhonePe the most since they are both UPI-based and third-party transaction apps with a higher than 30% market share.
Notably, Google Pay has more than 40% market share, PhonePe with about 40% market share, and Paytm and Mobikwik together have about 20% market share in the UPI transactions.
The development would help NPCI to address the risks while protecting the UPI ecosystem as it scales up. A few days ago, Amitabh Kant, CEO of Niti Aayog (9), had announced the breach of the 2 billion marks in UPI based transactions in October 2020. He also added that the transaction value increased by 101% from 1,91,359.94 crore to 3,86,106.74 crore.
If you use UPI payment apps like PhonePe, Google Pay, Paytm, or any third-party payment app based on UPI, this news concerns you as well.
After the NPCI introduced a 30% cap on all payments made via the UPI app, it has limited all the transactions processed via a single company.
Those third party applications with a share of more than 30% of the transaction volumes would have 2-years to comply with the new rules. Hence, it would make it challenging for popular UPI payment service providers such as PhonePe and Google Pay since they now have to look for ways to reduce the number of transactions made on their portals to comply with the new law.
Simultaneously, it also gives other apps an excellent chance to ramp up their business, given that users of PhonePe and Google Pay now have to look for other providers to make payments.
For instance, Paytm and Mobikwik have a combined market share of 20% (10). The new scenario would allow them to increase their share. Meeting the 30% cap for these services would see massive growth in their transaction processing. It could also transfer more business for BHIM (11) and other bank apps as they barely hold any share at the moment.
If you rely mainly on Google Pay or Phone Pay for your UPI transactions, you will likely see transaction failures more frequently. On the other hand, you would have a better chance of making payments via unpopular services such as BHIM and banking apps.
However, on late Friday night, Walmart Owned PhonePe’s Co-founder and CEO, Sameer Nigam (12), stated that the company does not like the idea of limiting UPI market share, and also alleged that there is no risk of UPI transactions failing on its platform.
He added that according to the NPCI’s circular, the 30% market share cap does not apply to existing third-party ads such as PhonePe until January 2023. The firm is fully committed to ensuring that there would be no customer disruption because of this circular.
As per sources, NPCI is also considering publishing the market share data in light of the recent regulatory development. While it is still working on a timeline, new players such as WhatsApp Pay could hasten the change.
Notably, platforms like Google Pay and Phone Pay has spent tremendous capital to take UPI to the masses and get users to transact. For instance, Google Pay has reportedly spent 1028 crore INR incentives to users in cashback rewards in the previous fiscal year (13).
Since all the players would have a similar number of transactions, users would no longer see incentives by apps to attract new users and conduct more transactions; hence, there would be drop-in offers and cashback.
How Would it Change UPI Apps?
In a statement, NPCI stated that with UPI reaching two billion transactions a month and with potential for future growth, the regulatory authorities had issued a 30% cap of total transaction volume processed in UPI, applicable to all third-party app providers, TPAPs.
As per the new rule, these apps cannot exceed 30% of the overall transaction volume processed in UPI during the three months from January 1, 2021. However, existing TPAPS such as Google Pay, PhonePe, Paytm, Amazon Pay, exceeding the specified cap, would have two years from January 2021 to comply with the same in a phased manner.
The NPCI will calculate the 30% cap based on the total transaction volume processed in UPI transactions during the preceding 3-months on a rolling basis. While NPCI is claiming that the move would create a more competitive market and reduce risks and protect the UPI ecosystem as it scales up further, TPASPs are expressing their concerns and call the action a surprise.
Several media reports also suggested that the move can cause several restrictions for the customers. According to the Times of India report (14), with the action, users are forced to limit the transaction number. Hence, they may download multiple UPI apps to continue making their digital payments.
The Entry of WhatsApp Pay
The launch of WhatsApp Pay and the cap in market share on UPI is a double whammy for India’s digital payments entities.
WhatsApp’s entry in India’s digital payment space is likely to expand the UPI adoption by both individual users and small and medium businesses, SMBS, who leverage the WhatsApp Business App to have a digital footprint. It would now also allow companies to complete their digital transactions on the platform.
However, it would come at the cost of its rival UPI service providers losing their customers. At present, Google Pay and Phone Pe are the market leaders, with each holding more than 40% market share.
WhatsApp would enable its service in 10 regional languages and has partnered with ICICI Bank, Axis Bank, HDFC Bank, State Bank of India, and the Jio Payments Bank.
Notably, the market cap decision has left UPI payment firms confused with how they can curb their market share and stop the payments market effects.
“WhatsApp entering payments may tilt the market and help all other players get under the required market cap of 30%. With no cap on the transaction value, players might start focusing on larger ticket sizes of payments. But the transition will be seamless. The challenge, however, will remain on how players reduce market share now, without affecting the experience of UPI payments.”
– Bhavik Hathi, Managing Director of Alvarez and Marsal (15).
However, with WhatsApp’s entry, each payment app’s share is expected to reduce due to its scale and reach. Two executives at the firm stated that the market cap could edge Whatsapp, the default messaging app for more than 400 million Indian users.
They added that when a UPI payment fails for a user, it is because a particular service provider has reached its limit. Rather than downloading a new app, users would be keen to switch to WhatsApp installed on their phones. Over time, the app is likely to ask NPCI to increase its market cap.
On Friday, Mark Zuckerberg, the Chief of Facebook, stated in a video message that with UPI, India had built something unique that would open up a world of opportunities for micro and small businesses, India’s economic backbone.
Merchant Discount Rate
According to the reports in July 2020 (16), NPCI had asked to bring back MDR, Merchant Discount Rate on digital payments.
MDR, about 1% of the total transaction, was a levy that merchant needs to pay to the processing bank. The acquiring bank, fintech partner, and issuing bank would then share the amount with 10% of the amount paid as the switching fees to NCPI.
As the analysts suggest, a revenue model entirely based on UPI payments service is not sustainable in the long term because of no MDR. NPCI’s 30% cap on the total volume of transactions could further aggravate these concerns.
Concerns About UPI Cap
There are several concerns among fintech stakeholders about what would happen if a payment app exceeds the 30% cap on UPI transactions. However, there are no clarifications from the NPCI directive about what would happen if a platform exceeds its limit. Would it then control its user experience?
“The argument that any platform cannot be allowed to become dominant in this ecosystem does not hold because it is a space that has witnessed rapid innovation since it was launched. UPI existed on bank apps before the likes of Google Pay and PhonePe popularised it. Still, it was precisely their user experience innovation that made these apps relevant to the roadside stall as well.”
– Vikash Kothari, Co-founder of P10 Bank (17).
These platforms can enforce some methods to limit their transactions, including onboarding a few merchants, cutting back on incentives like cashback and coupons, and differentiating user experience based on their reported transaction values.
Implementation of 30% Cap On UPI Transactions
TPAPS may require to change its core architecture and bring new algorithms to implement transaction caps.
“They may have to take a strategic call between new users, which are integral to market penetration and existing high-value users who will drive profits. Even if they were to allow users to switch to different payment solutions, in case UPI limits are breached, the retailer on the other end should have compatible payment solutions. It will require a smooth in-app transfer of solution and user experience.”
– Hemant Vishnoi, Founder of Enkash (19).
Vishnoi further added that users stick to an app when they get a better user experience. In this case, conveying a transaction limit to users could be a tricky business.
With the new norm, Google Pay and PhonePe are on the losing side while Paytm and Mobikwik could benefit from it since it would allow them the room to grow. However, there is no clarity from NPCI about what would happen when the company hits a cap.
The industry had a feeling that WhatsApp Pay would drive the volumes up in the digital payment space. Notably, in China, Wechat alone has more than 1 billion active users for its payment services.
Notably, WhatsApp has more than 400 million users in India, while Google Pay has 75 million, and GooglePe has 60 million users as of May 2020.
The new caps are not appliable to Reliance’s Jio Payments Bank or Paytm, backed by Softbank since they have niche banking licenses and do not fall in the third-part apps category.
Graded Launch of WhatsApp Pay
WhatsApp received the nod to launch its digital payments platform WhatsApp Pay after two years in the beta version. Its full-scale launch was stuck since the RBI, the Reserve Bank of India, expressed concerns that the platform is not compliant with data localization norms.
A few months back in July, NPCI wrote to RBI and confirmed that WhatsApp Pay is compliant with data localization norms for payment services. The authorities allowed the Facebook-owned messaging platform to launch its payment services in a graded manner. At first, it can launch its services with a maximum registered userbase of 20 million. The move is restraining the platform from utilizing its full-scale operation in the country with more than 400 million users.
However, the industry experts stated that considering the platform’s massive user base, its payment service’s graded launch is mandatory to ensure that it does not create an unmanageable load on the digital payment infrastructure. Notably, NPCI uses similar logic to explain its 30% cap on UPI transactions for TPAPs.
Moreover, the increased rate of failed transactions in the UPI network, about 10 of the top 30 banks had recorded a failure rate of more than 3% in September 2020 compared to July, when it was less than 1% (19), confirms the requirement for the graded rollout of WhatsApp Pay in the country.
Several industry experts have also agreed that payment with a 20 million limit on users for the first phase of its launch is good enough.
“It will be ideal for gauging the comfort level of the people. The 30% cap on UPI transactions mandated by NPCI provides various digital payment options to consumers. Whether it will create a level playing field for new and emerging players in the space remains to be seen.”
– Mandar Agashe, Founder and Managing Director of Sarvatra Technologies (20).
Conclusion: Is Capping an Only Way to Prevent Monopolisation?
While the 30% cap on the UPI transaction is meant to ensure that the digital payment sector is not monopolized, several fintech advisors believe that there are better ways to achieve the same.
“Capping isn’t the way forward. New Umbrella Entity (NUE) can take care of risks of monopoly and the protection of the UPI ecosystem. The fact that the State Bank of India (SBI) and Tata Group have shown interest in applying for NUE is a good sign. A challenger to NPCI is very much needed to ensure stability and competitiveness for all payment entities .”
– Sharat Chandra, a Fintech Advisor and Tech Evangelist (21).
Notably, firms with an RBI license would set up and operate NUEs, umbrella firms for digital payments with the same powers as NPCI. Currently, NPCI is the only umbrella organization that owns and operates a pan India digital payment network.
The RBI, Reserve Bank of India, and the IBA, Indian Banks Association, founded and set up NPCI in 2008. They later developed and rolled out the UPI, unified Payments Interface, an instant real-time mobile payments system in India, which came out months before the government’s demonetization exercise in 2016.
Chandra further added that the cap on UPI transactions is likely to incentivize users to turn to offline based digital payments. Hence, in a way, NCPI’s move is to drive up the adoption of its another service, Rupay cards and wallets. At present, they offer contactless tap and go payments at the point of sale.
However, a troublesome user experience with the UPI payment app could spur merchants, especially the micro and small business owners, to turn to cash as a transaction mode.
Even if NCPI aims to cap the transactions of TPAPS on UPI with its decision to limit 30% with the long-term vision to curb the monopolization chances, there are several glitches in the short and medium-term that can build trouble if the regulators don’t address them.