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Home / Opinion / Views /  Opinion | Let there be no cap on the market share of a UPI app

This newspaper reported on 10 September that the National Payments Corp. of India (NPCI) is contemplating limits to the market share of UPI apps to 33%. For the purpose of this discussion, I assume the proposed limit may be applied on the volume, rather than value, of transactions. While there is no official statement from the NPCI, such a move is flawed on many counts.

First, it would be against consumer interest. Assume that a user uses the services of provider P. Assume that the NPCI has a mechanism to prevent transactions based on the threshold. When this user does the <limit+1th> transaction, she will be declined the exercise of her choice—which is to use whatever provider she prefers. On what basis can NPCI dictate consumer choice? Second, it is practically unenforceable. In order to determine 33% of X, one needs to know X. How will the NPCI pre-determine the volume of transactions in a given period? Will it preset total volume and allot quotas to each player? Will the volume be restricted per bank or per app? Regardless, quotas will be anti-competitive and amount to “fixing" the market, rather than encouraging providers to grow it. Finally, how will the NPCI enforce its decisions? UPI crossed 900 million transactions last month. Assume 10 peak hours per day. This is 900,000,000/(30*10*60*60*1000) = 0.83 transactions per peak hour millisecond. How will banks determine which transaction to stop? Will the NPCI set up a technological bean counter to do this? After all of the NPCI’s less-cash advocacy, blocking digital transactions can have negative consequences and push us back from the remarkable digital gains made in the last three years.

Third, the NPCI must not set rules for market competition, since it is neither the competition authority nor the regulator. The NPCI’s locus standi to impose such a restriction on providers is unclear. Committees constituted of member bank representatives govern NPCI rules. Pure UPI app providers are not allowed to be members. On the other hand, nothing prevents member banks from building their own apps. In fact, BHIM is an exceptionally good app, available free to all member banks, and in no way functionally inferior to the leading UPI apps. At launch, BHIM was the sole UPI app available across member banks. In 2017, there was a government-funded scheme to promote BHIM. But since no bank seized the moment to build on that initial momentum, BHIM now trails more recent non-bank entrants. There are at least three other UPI apps with competitive market shares in terms of transactions, namely Google Pay, Paytm and PhonePe. Just last week, Google Pay claimed 67 million monthly active users. Even if one assumes that represents 40% market share (of users), in a country that has 836 million debit card users and growing, the total uptake of UPI barely scratches the surface of the overall potential. Meanwhile, WhatsApp, with an estimated 400 million monthly active users, is waiting to launch. That will change the market share spreads anyway. Besides, wanting to impose such a cap invites the counter question: If it is UPI today, will there be a cap on debit cards and other payment instruments tomorrow? That is a rabbit hole not worth diving down into. It would be better if member banks found ways to out-compete non-bank providers rather than arbitrarily change the rules of the game. Fourth, the rules of competition are already satisfied to the extent that freedom of entry and exit is low and the same for all players. The entry barrier for a non-bank app is to get one of over 140 member banks to integrate. Conversely, by backing a non-bank or BHIM app rather than build its own UPI app, the bank exits the market for the UPI app transaction share game. Fifth, there is no basis or precedent for declaring a service, provided free of cost by all players, to be anti-competitive. UPI is free for consumers. This is a perplexing case of trying to redistribute a zero revenue service so that no player gets more than 33% of zero. Sixth, some security concerns find mention. If these are indeed worries, they must apply from the very first transaction that an app puts through the system. It is likely that the chief information security officers of banks that have integrated non-bank UPI apps to provide pipes to NPCI infrastructure have put in place strong, appropriate and periodic checks to ensure that transaction security is not compromised. If not, the solution is to enforce mandatory security guidelines, institute audits to ensure compliance, and impose such penalties as disbarment from access to UPI infrastructure for compliance failure.

Will the Reserve Bank of India (RBI) allow this cap to be imposed? The NPCI is a unique institution that has demonstrated world-class innovation and high standards of corporate governance. Given the nature of its constitution as a member-governed body, the NPCI has occasionally needed RBI to nudge it to be more inclusive. Admittedly, there are legitimate prudential and operational risk-based reasons to restrict membership. However, a cap would not fit either criterion and could harm the NPCI’s stature. It would be best if the matter were laid to rest, failing which it should become incumbent on RBI to act against the idea. We must prevent an unprecedented Indian success story from becoming a victim of bureaucratic excess.

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