A cap on UPI transactions could hold digital India back

While India entered a technical economic recession in the first half of 2020-21, some sections of the bureaucracy seem unaware of the situation on the ground and continue to announce policies without due consideration of their potentially adverse impact on businesses and the Indian economy. The National Payments Corp of India (NPCI), in its ‘Guidelines on Volume Cap for Third Party App Providers (TPAPs) in UPI’, imposed a 30% volume-based cap on the share of transactions by TPAPs and payment service providers (PSPs), effective from January 2021. The NPCI guidelines merely state that this cap is required to address the risks analysed by it, without elaborating the nature of risks or explaining how a cap would effectively address them. In my view, there are five big reasons that this decision is not only ill thought out and ill-timed, but runs the risk of creating a significant disruption in a burgeoning industry that can act as a foundation for Digital India’s growth.

Volume-based caps undermine the goal of establishing a cashless economy: In October 2020, our Unified Payments Interface (UPI) ecosystem had nearly 2 billion transactions. The growth and recognition of UPI would not have been possible had a cap been in place. Typically, customers limit themselves to one or two TPAPs of their choice. A transaction cap that forces users to use multiple apps may result in more transaction failures and dilute UPI’s popularity and impact. Lack of accessibility and user-friendliness would push users away from UPI towards other payment methods, or even cash. Clearly, this must not have been intended by this policy, but is a likely outcome of the imposition.

It’s an anti-consumer decision: Open markets and user choice have been crucial factors in the exponential increase seen in UPI adoption and its transactions. A volume-based cap would compel TPAPs to either limit the number of transactions on their platforms or stop enrolling new users, which in turn would restrict the customer’s use of UPI. TPAPs will likely be forced to redact customer incentives like cashbacks, coupons and the like. This could go against consumer interests by reducing choice.

It will also make the Indian market less attractive for investors: The cap would raise compliance and regulatory costs for players in the sector, which could deter new investors from entering. It would also adversely affect the growth potential of existing UPI players. As a country in the early stages of digital payments growth, India must not dampen investor interest in this sector. Indian fintech markets need to stay globally attractive.

It would take a thorough regulatory impact assessment (RIA) to justify such a policy: Unfortunately, the idea of a volume-based cap does not appear to have undergone an assessment of its impact on the sector. As a general principle, before any such rule is imposed, an RIA needs to be undertaken. Systemic risks are not restricted to UPI and are common in all financial systems; yet, a similar cap has not been suggested for, say, retail bank transactions. Further, the risk of a system failure that the cap could partly be aiming to resolve is adequately addressed through the NPCI’s multi-bank PSP model, which requires all TPAPs to contribute to more than 5% of UPI transaction volumes and partner with at least five banks to reduce the risk of one bank’s failure affecting the entire UPI ecosystem. Other risks can be mitigated through measures such as NPCI-led audits and monitoring. In fact, such monitoring will be a welcome move for this fast-growing sector.

The cap could affect the achievement of an Atmanirbhar Bharat: In order for Indian businesses, including tech-enabled financial services, to grow and compete at the global level, we need to integrate business processes with the global economy. Indian start-ups, in particular, need tools and infrastructure that lets them gain an international edge. This is part of the vision of Prime Minister Narendra Modi, as articulated by him on 7 November at the 51st Convocation of the Indian Institute of Technology, Delhi: “More than 50,000 start-ups have been launched since the Start-up India campaign. It is the result of the efforts of the government that patents in the country have increased four times. There has been a five time increase in trademark registration. Along with fintech, start-ups associated with agro, defence and medical sectors are now growing rapidly. Over the years, more than 20 unicorns have been formed by Indians…” Modi envisions a self-reliant India that thrives on innovation, technology and entrepreneurship. But this vision cannot be fulfilled if our policies restrain the growth of a cashless economy.

The way forward: India’s UPI ecosystem is nascent, but has demonstrated significant growth and has had a positive impact on the economy by providing the backbone needed to move towards cashless commerce. Any policy decision by regulators at this point should aim at catalysing innovation in this space. Stifling it would serve India badly.

There are also concerns over the possible monopolization of the sector, but these can be addressed by the Competition Commission of India (CCI). Any alleged abuse of dominance in the tech industry is quickly brought to the notice of the CCI, which has been taking prompt action on complaints. Instead of spotting ghosts in the shadows, the NPCI should focus on how to keep up the growth trajectory this sector has attained. Over time, it could lead to a competitive advantage for the Indian economy.

Pratibha Jain is a partner & head of the Delhi office of Nishith Desai Associates