UPI cap ‘won’t hurt’ incumbents

A 30% cap on the total volume of transactions made using the Unified Payments Interface (UPI) of the National Payments Corporation of India (NPCI) will not impact incumbents as it is aimed more at arresting a potential runaway dominance of WhatsApp in the domestic payments industry, said two executives at leading payments companies.

They said the market will normalize on its own over the next two years—the timeframe set by NPCI for incumbents to comply with the new rule.

Ashneer Grover, chief executive and co-founder of BharatPe, said the cap is a “balancing act” that the NPCI had to do while allowing WhatsApp to introduce payments service in India. He said if the American messaging giant had been allowed to enter without a cap, it would have grabbed a more than 75% share of the domestic market in two months.

Grover and another executive from a top payments firm said that the overall “genuine UPI users” in India are roughly 100 million. He said NPCI is essentially allowing about 20% of this market to go to WhatsApp Pay, which means existing leaders, who have 40% of the market in terms of transactions, would automatically see their market share diluted to around 30%.

“If NPCI had not done this, PhonePe and Google Pay would have been crushed. They did this to soften the blow for these guys,” he added.

A day prior to WhatsApp commencing its payments service in India on 6 November, NPCI said the 30% cap on the transaction volume of a company would be calculated based on the total volume of transactions processed in UPI in the preceding three months. The existing player or third-party app providers exceeding the limit will have two years from January 2021 to comply with it.

While it is unclear how the NPCI plans to enforce the cap, the executive quoted above agreed that it changes nothing for incumbents.

“One, it’s giving you two years. Second, there are more players in the market, which will balance out the overall cap. WhatsApp is also in the picture, and Amazon Pay is picking up too,” the executive said, requesting anonymity. “The timing was a surprise, but it could actually be favourable for us.”

According to the executive, a steering committee of NPCI had in February considered placing a 50% market cap on UPI transactions from April. While this was never announced, it was part of the minutes of the committee meeting.

Companies are puzzled about how NPCI will enforce its decision on market cap. “If you ask for a mechanism today, even NPCI can’t tell you because it doesn’t exist,” said Grover. He said that it is more likely that the NPCI is looking to control the rollout of WhatsApp for the next six months and expects the other side of the equation to be solved automatically. If not, then it has two years to solve this issue.

Industry executives said the issue of market cap ranks low on the list of concerns for UPI platforms. The government’s removal of merchant discount rates (MDR) from UPI transactions has led banks to stop investing in infrastructure, and with billions of transactions happening every month, failure rates are emerging as a major worry for both the NPCI and payments platforms.