Last week, several newspapers reported that the National Payments Corporation of India (NPCI) was reviving a proposal that it had first mooted a year agoto impose transaction limits on the Unified Payments Interface, or UPI, ecosystem. Once fully implemented, no single UPI payment entity will be allowed to process more than a third of the total transactions on the payment network.
At present, though there are dozens of apps you can use to make UPI payments, the ecosystem is dominated by just three players. Of these, two account for as much as 77% of the entire market. Given that there were nearly 1.5 billion UPI transactions in July alone, the NPCI is justifiably concerned about the systemic risk of letting two playersor worse, just onecontrol the entire UPI ecosystem.
This fear, I believe, is well founded. Everyone knows that digital platforms are susceptible to winner-takes-all effects. In sector after sector, companies with the first-mover advantage have consolidated their early lead into absolute market dominance. In search, social media and e-commerce, the companies that dominate the market today started out small but went on to build moats around their platforms till it became virtually impossible for anyone to mount a challenge to their dominance. And while all these sectors are important, none of them is as systemically significant as payments. The NPCI would be wise to take precautions in order to prevent Indias UPI ecosystem from being dominated by a few.
That said, I believe that instead of imposing restrictions as crude as an absolute limit on the total the number of transactions that an individual player can carry out, there are other more elegant measures that the NPCI should consider in order to make the market more naturally competitive.
In the first place, the NPCI should even out the playing field to make it easy for players without significant financial resources to also participate. The UPI market is, at present, rife with discounts and cashbacks, as UPI players look to buy customer loyalty through whatever means they have at their disposal. While this is great for the consumer, it requires deep pockets to be able to sustain these financial subsidies over an extended period of time. If UPI players are allowed to take this to the next level and enter exclusive arrangements with merchants who end up locking themselves into one platform or another, certain products and services might in the future only be available through a single UPI app. Unless such practices are regulated, the market will end up being dominated by companies that have the financial resources to be able to stick it out till the bitter end.
Of similar concern is the data advantage that UPI players will inevitably be able to build. As transaction volumes rise month on month, the UPI applications through which this flood of financial data is funnelled will become more and more valuable. UPI platforms will start to leverage their unique position to derive unprecedented market insights from the data that passes through their systems.
In its report, the Non-Personal Data Committee highlighted the value inherent in aggregate data like this. It would be wise to ensure that no one player gains exclusive control over this data. One possible way of achieving this, which has been alluded to in the committees report, would be to create a marketplace for data where UPI players can offer the datasets that they alone are in a unique position to generate.
But, by far the most effective mechanism to ensure greater competition is to let more participants enter the ecosystem. The UPI ecosystem is, by design, radically substitutable. Any UPI app can be used to transfer money from any bank account to any other.
Unlike every other payment system in existence on the planet, there is absolutely no friction in switching from one UPI service provider to another. That being the case, I cant understand why the NPCI has been dragging its feet in allowing other big players to enter the ecosystem.
The immediate effect of letting other powerful players operate in this ecosystem will be that these new players will serve as an effective antidote to the evident risk that the two companies that currently dominate the market would run away with their early advantage.
Apart from acting as a brake on the ambition of such entrenched players, this move would also encourage greater diversity in the ecosystem, allowing for the establishment of niche payment platforms designed to cater to the unique needs of specific market segments. For instance, I can see how players with special expertise in the legal and healthcare sectors could develop UPI applications designed especially for cases as specific as the payment of court fees or recurring medical bills. There could be many other niche applications as well.
Finally, it is critically important to ensure that UPI spreads into the rural hinterland. As impressive as the current numbers are, UPI transactions are almost entirely taking place in urban parts of the country. If it is to reach its full potential, NPCI will have to go out of its way to encourage UPI platforms that show a commitment to expanding in the rural market.
It is only when all these measures to boost competition fail and expand the systems reach that the NPCI should impose curbs on the total volume of transactions.
Rahul Matthan is a partner at Trilegal and also has a podcast by the name Ex Machina. His Twitter handle is @matthan
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