NPCI caught between managing UPI growth, curbing dominance of few players

Walmart-backed PhonePe is seeing its market share increase each month in terms of the volumes of transactions on the Unified Payments Interface (UPI) platform.

This comes at a time when National Payments Corporation of India (NPCI) is working to reduce the concentration risk in the ecosystem owing to the dominance of few large players.

On the contrary, PhonePe’s biggest competitor — Google Pay — has seen a decline in its market share since August last year.

According to the latest data released by NPCI, PhonePe processed 46 per cent of the transactions on the platform in June. On the other hand, Google Pay processed 34.63 per cent. Together, these two players controlled more than 80 per cent of the transactions processed on the UPI platform in June.

This trend has been continuing for a long time although before December 2020 Google Pay was the dominant player.

Experts say the dominance of certain players is a factor of the overall preference of consumers as to which app they are using for making different transactions. It is unlikely that PhonePe is doing something different, or aggressively acquiring new transactions.

In November last year, NPCI, the umbrella entity for digital payments in the country, came up with a directive saying the share of transactions that a third-party application provider (TPAP) could process would be capped at 30 per cent of the volume of transactions processed on UPI, effective January 1, 2021. NPCI had said the cap of 30 per cent would be calculated on the basis of the volume of transactions processed during the preceding three months (on a rolling basis).

However, more importantly, it gave the existing TPAPs, such as PhonePe and Google Pay, which exceed the desired market cap, two additional years starting from January 2021 to comply with the directive. Following that announcement, NPCI came up with a standard operating procedure (SOP) on how it planned to implement the cap on market share. NPCI will review the progress every six months starting January 2022 and the first review of the SOPs and the market players should happen in June 2022.

NPCI is caught in a conflicting situation. On the one hand, it does not want to hamper the growth of UPI by restricting any player from processing transactions because eventually, it is the consumers who decide which platform they want to use, and, on the other hand, it has to think of the concentration risk when one player corners a lion’s share of the market.

“The objective of the cap on the market share is to ensure that the concentration risk is reduced while also ensuring that the growth of UPI is not hampered. Digital payments in the country are in such a nascent stage that nobody would want them not to grow. We are hoping that the desired goal of reducing the concentration risk will be achieved,” said a source aware of the developments on this issue.

“The emergence of new players is critical. There are two-three players who can take 10-20 per cent of the UPI market. There are Paytm, Amazon Pay, and Whatsapp. And, now, bank apps are also offering the UPI payment feature. So the bank apps can expand and get a sizeable market share and there is a huge opportunity for apps like iMobile and YONO,” the source added.

Mihir Gandhi, partner, leader, payments transformation, PwC India, said: “Closer to the timeline set by NPCI, they (PhonePe) may start reviewing and work with NPCI to get new players. Once the cap is breached, even if they acquire new transactions beyond the threshold, they have to route the transactions through some other players or through NPCI, which can then route to other players in the ecosystem. There is a concentration risk but this is just the market forces playing out and they may have to work back with NPCI on how the market share can be brought under the permissible limit.”

Whatsapp, with an active user base of 400 million, was supposed to disrupt the UPI market. However, in the past seven months, since NPCI gave its go-ahead to the Facebook-backed messaging service giant to launch its payment service on UPI, it has neither disrupted the market nor created a place for itself in the market.

“Whatsapp has underperformed as far as its payments business is concerned. It has a huge base of 400 million active users. If Whatsapp decides to expand its payments business, then the market will balance out,” the source said.

Among other players in the ecosystem, Paytm Payments Bank, which is not a TPAP and hence will not be affected by the volume cap, has an 11-12 per cent market share in the UPI space. Bhim, NPCI’s own app for processing UPI transactions, has less than 1 per cent market share while e-commerce giant Amazon payment feature —  Amazon Pay — has approximately 2 per cent.

ICICI Bank’s apps processed 12.94 million UPI transactions in June, and YES Bank’s apps 24.72 million during the same period. State Bank of India’s apps processed 3.43 million transactions.