The row between Flipkart-owned mobile payments app PhonePe and ICICI Bank Ltd threatens to hamper the expansion of the unified payments interface (UPI) platform, which hasn’t taken off in the way many experts predicted it would last year.

UPI was expected to hit digital wallets when it was launched last August, but the latter have grabbed a lion’s share of digital payments traffic after India’s demonetization move in November.

Now, if the PhonePe-ICICI Bank row isn’t resolved quickly, it may discourage people from using UPI, curbing the network effect that needs to play out for the platform to grow fast.

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The vacillation by National Payments Corporation of India (NPCI), which created the UPI platform, on the row also threatens to erode the credibility of the platform in the short term, said analysts and people working with NPCI.

Earlier this month, ICICI Bank blocked transactions on PhonePe. Then, on Thursday, NPCI directed ICICI to allow transactions on PhonePe. A day later, NPCI reversed its stance and said PhonePe violated UPI guidelines of interoperability.

“The PhonePe-ICICI issue reflects badly on UPI. One of them needs to blink but both are standing their ground," said Amrish Rau, chief executive of payments firm PayU India.

According to Rau, for UPI to realize its full potential, the government will, at some point, have to change the framework in which UPI operates.

“As such, the NPCI needs to be congratulated for the scale at which they have launched UPI. UPI has done really well in such a short span of time and a lot of it is because of NPCI. But because NPCI is controlled by the big banks, it is up to the government to step in and reduce the fees banks earn on payment transactions. Additionally, they need to allow fintech players to become part of the UPI system, which isn’t happening now," said Rau.

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NPCI was set up in December 2008 and has 10 promoter banks, one of which is ICICI Bank. PhonePe’s partner, Yes Bank Ltd, is not one of the promoters. PhonePe has partnered with Yes Bank because of restrictions around which companies can launch on UPI.

“(The PhonePe-ICICI issue) is a temporary speed bump and it should get sorted out soon—but it was an unnecessary roadblock and is the kind of thing that UPI does not need right now. Every extra day that this issue plays out is a day lost, and customers will automatically shift to other platforms where they get better customer experience," an NPCI executive said on condition of anonymity.

A.P. Hota, chief executive officer of NPCI, declined to comment for this story.

The PhonePe-ICICI row has highlighted the risk of arbitrary action by one player that may end up harming the whole UPI ecosystem.

But some analysts said that unless other banks take their cue from ICICI Bank, UPI will continue to increase its popularity with consumers because of its ease of usage.

Unlike a digital wallet that needs to be refilled with money frequently, UPI does away with this step by connecting payments directly with the bank accounts of a user.

“It boils down to a simple fight for the customer that is going online. The fight between ICICI and PhonePe is a manifestation of that and the competition it signifies," said Harish H.V., partner at cosultancy Grant Thornton.

“If you look at the bigger picture, the inter-operability of the UPI platform ensures that even if one bank is not on the platform, the customer can route it through the platform of other banks. As long as inter-operability exists, it won’t cause significant disruption to overall UPI adoption, unless other banks also start blocking payments."

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