On 5 November 2020, the NPCI issued Guidelines that disallow Third Party Application Providers (TPAPs) from serving more than 30 percent volume of all UPI transactions, calculated on a quarterly basis. This blog post examines the merit of these Guidelines and the foundational questions it raises for competition and consumer protection in digital payments.
Recently, the NPCI announced the Guidelines on volume cap for Third Party App Providers (TPAPs) in UPI (referred to as “Guidelines”, hereafter). These Guidelines limit the market share of TPAPs to 30 percent of the overall volume of transactions conducted over UPI. As per the circular, these Guidelines come into force on 1 January 2021. In the interim, the NPCI is likely to issue a standard operating procedure setting out the compliance plan. TPAPs that currently account for more than 30 percent of the overall volume must comply with these prescriptions over two years, in a gradual manner.
The circular states that the Guidelines are being issued “to address the risks and protect the UPI ecosystem”. It does not discuss the policy issues that have motivated the Guidelines or the policy objectives that the Guidelines seek to achieve. Media reports suggest that systemic concerns arising from the growing concentration of UPI payments among TPAPs and the fear of abuse of dominance could have encouraged the NPCI to consider this move (The Economic Times, 2020). Curiously, these prescriptions do not apply to UPI-based apps operated by banks or payments banks. This begets the obvious question- if the concerns raised by TPAPs’ participation in the payments system are different from those raised by banks and payment banks. However, the circular does not justify this differential treatment of UPI providers either.
In this blog post, we examine the distribution of market share among UPI providers. Next, we discuss if the concentration of transactions among TPAPs raises systemic or competition concerns. We find that it is not the market share that should worry the regulator, but the manoeuvres adopted to achieve it. Riding on the back of rewards and other cash-burn models, TPAPs are incurring significant losses to increase their market share. This could explain why other providers are unable to compete with the current leaders. Economic viability of UPI and not artificial ceilings may, therefore, offer a better pathway to ensuring competitiveness in UPI. But designing for economic viability requires regulators to understand the unit economics of UPI- a subject they seem to have steered clear of, for long. We conclude that without discussing the cost structures and unit economics of UPI, regulators will be hard-pressed to assess the fiscal support and regulatory framework needed to make UPI a continuous, secure, and affordable digital payment option at the last mile.
Distribution of market share in UPI
Since its launch in 2016, the market share in UPI has been fiercely contested by four entities: Google Pay, Amazon Pay, Phonepe, and Paytm (Ramanathan & KJ, 2018). The first three are TPAPs, owned by BigTechs .i.e., Google, Amazon, and American retail behemoth, Walmart, respectively, and subject to these Guidelines. Paytm is a payments bank and does not fall in the ambit of these new Guidelines.
For the month ending October 2020, UPI recorded over 2 billion transactions (National Payments Corporation of India, accessed in November 2020). This is the highest number of transactions ever served by the infrastructure (The Economic Times, 2020). Two TPAPs— Phonepe and Google Pay accounted for a little more than 82 percent of the overall transaction volume. Per estimates, Phonepe overtook Google Pay for the first time by enabling close to 830 million transactions, an estimated 5 million more transactions than Google Pay (Tech Crunch, 2020). Paytm recorded 245 million transactions and another 125 million were claimed by Amazon Pay. Together these four providers claimed close to 98 percent of the total volumes transacted on UPI (Tech Crunch, 2020). The remaining 2 percent of transactions were served by nearly 200 service providers, including banks, payments banks, and 18 other TPAPs.
This niche market contestation in UPI has been a cause of discussion for two reasons. First, it ostensibly raises the fear of systemic failures in digital payments. Second, it raises fear of abuse of dominance, with one player becoming too big for market competition to discipline it (Matthan, 2020). It is unclear how capping transactions to 30 percent will resolve for these.
Effect of market caps on systemic or competition risks
First, it is unlikely that capping transaction limits will allay systemic concerns. In the scope of payments, systemic failures stem from financial or operational risks (Bank for International Settlements, 2005). Financial risks include settlement risks, i.e., the inability of a system participant to meet their payment obligations. Settlement risks, in this case, are negligible because TPAPs only provide technological infrastructure to route money between bank accounts, and settlements are made over IMPS (National Payments Corporation of India, 2016). Additionally, the NPCI has a Settlement Guarantee Mechanism, which requires banks to make contributions to a settlement guarantee fund to cover settlement risks (National Payments Corporation of India, 2017). Moreover, settlement risks, when they exist, require prudential regulations. Operational risks in digital payment constitute cyber risks, inability to respond to surge in activities or protect users’ data (Bank for International Settlements, 2018). These concerns are best addressed by technological interventions. Regulations can benchmark technological standards and audit participants for them. Artificially capping the number of transactions does not address the underlying causes of operational risks. Thus, the effectiveness and even the appropriateness of these Guidelines in addressing systemic concerns in payments is unclear.
Second, we submit that some amount of market concentration in payments is inevitable and even desirable for economic efficiency. Payment systems are characterised by network effects that exhibit economies of scale, i.e., as the number of transactions served by an entity increases, the marginal costs it incurs to serve them falls (European Central Bank, 2005). Thus, it is efficient for just a few big entities to serve large volumes of transactions, and concentration per se should not alarm the regulator. Even when the NPCI may have authorised nearly 200 participants to provide UPI based payments, market efficiency may limit the market to just a few players. This need for entities to operate at scale also appears implicit in the market share thresholds prescribed by the NPCI. The current Guidelines cap the market shares at 30 percent by volume- allowing four to five players to serve the market. This outcome is not very different from the status quo. This, of course, raises the question of why prescribe a ceiling that resembles the existing market structure? In the absence of public consultations, it is hard to guess if the ceiling of 30 percent is a strategically calculated threshold that balances both network effects and competition concerns. Further, because banks and payments banks are not subject to these Guidelines, in theory, they could capture a market share greater than 30 percent. The Guidelines, therefore, do not completely address the winner-takes-all concerns quite often raised in digital payments. To conclude, the attempt to limit market shares through these Guidelines may both be unwarranted and ineffective.
What is the market failure in UPI?
In the context of UPI, it is the nature of the concentration and not concentration per se that should worry regulators. We submit that there already exist nearly 200 authorised UPI providers that are highly substitutable. Why is it that the other competitors are unable to mount a challenge to the dominant players?
An examination of the costs borne, and revenues generated by these entities alludes to a possible explanation. UPI transactions have been growing steadily since 2016. This growth in transaction volumes has occurred with a concomitant rise in losses for most UPI providers ((Economic Times, 2019), (INC 42, 2018)). In cases, where TPAPs did post profits, they were negligible (Financial Express, 2019). The gain in market share for most providers has come through expensive promotional schemes, end-user rewards, and cashback offers (K.J, 2019). For the financial year ending 2019, Google Pay, Phonepe, Paytm, and Amazon Pay together spent close to 7,000 crores INR in advertisement and promotional schemes while posting cumulative losses of a comparable quantum (Bloomberg Quint, 2019). This profit-eroding expansion in market share hints at the lack of adequate economic incentives needed to activate vigorous competition in the space. The recent policy announcements may make it even harder for providers to break even or for the space to invite more active participation from providers. As a response to the COVID-19 induced pandemic, the NPCI abolished all transaction fees on UPI transactions. Effectively, TPAPs must now forego the transaction fee of .30-.35 INR they earned on each transaction and internalise the entire cost of enabling payment transactions (Livemint, 2020). It is unclear, how entities that seek to only provide UPI payments can survive this.
Policies that focus on artificially reducing costs of digital payments by suppressing incentives are not just a feature of the pandemic. The slew of policy recommendations in the past, across committees such as the Committee on Deepening of Digital Payments, RBI’s Vision Documents for payments space, and announcements from the Ministry of Finance have advocated for subsidising the cost of digital payments by abolishing incentives for intermediaries (Reserve Bank of India, 2019) (Reserve Bank of India, 2019(b)). The Committee on Deepening of Digital Payments, for instance, recommended that the government subsidise MDR. Subsequently, the Government of India abolished MDR on UPI and Rupay interfaces (Bloomberg Quint, 2019). The move was intended to increase the uptake of digital payments. Instead, the move has come to threaten the business model for intermediaries, such as payment gateways (Livemint, 2020). It is then unsurprising that only those providers with capital to spare are waging wars for market share, on the back of cashbacks, rewards, and economic losses. This may well explain the reduced contestability of the space, despite the presence of hundreds of other providers.
It seems that making UPI profitable is imperative for making UPI competitive.
How to make UPI economically viable?
Designing for long term economic viability requires an objective understanding of the costs associated with digital payments and maintaining the economic incentives for various intermediaries. However, the topic of unit economics of UPI has been conspicuous by its absence across the range of policy documents and committee reports dedicated to devising measures for expanding digital payments in India. Instead, there seems to be a concerted effort to artificially subsidise digital payments and make them as affordable as cash on the last mile. With a view to increasing the uptake of digital payments, the costs of digital payments are being externalised either on the exchequer or on the system participants (Business Standard, 2020). As consumer advocates, we worry about the prices that consumers may have to pay for digital transactions once the subsidies have been withdrawn, the rewards have run out, and the acceptance of cash has been minimised by regulation. To create an affordable and secure digital payments ecosystem, it is imperative that regulators assess costs of digital payments, admit to the fiscal support it will need to make digital payments as affordable as cash for the consumer at the last mile, and invest energies in finding ways to finance the fiscal gap.
 The author would like to thank Dr Indradeep Ghosh for his initiative and peer review. Any errors and omissions are of the author’s.
 The NPCI defines TPAP as [an entity that], “is a service provider and participates in UPI through PSP Bank” (National Payments Corporation of India, accessed in 2020).
 The UPI infrastructure lists 189 live members. These include banks and payments providers that both enable UPI transactions directly and partner with TPAPs to serve transactions being routed through them. In addition to the live members, UPI infrastructure also authorises 21 TPAPs including Google Pay, Phonepe and Amazon Pay. For a list of live members and TPAPs see here and here.
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