India’s digital payments landscape has experienced a remarkable transformation in recent years, largely due to the advent of the Unified Payments Interface (UPI) Platform. This has revolutionized the way individuals and businesses transact, offering ease of use, real-time processing, and broad interoperability across financial institutions.
In September 2024, UPI had processed over 15 billion transactions worth ₹20.64 lakh crore, claiming about 80% of India’s digital payments underscoring its pivotal role in the nation’s economy.
The UPI ecosystem is increasingly dominated by a few key players, with Google Pay and PhonePe controlling over 85% of all UPI transactions. This overwhelming market share in a few players raises concerns about competition, innovation, financial inclusion, and cybersecurity.
Challenges of Market Concentration
Market concentration within a few entities creates mono/duopolistic conditions and presents several risks. Limited competition may reduce incentives for dominant players to invest in new technologies or innovative services, leading to potential stagnation.
Without competitive pressure, companies could raise transaction fees, adversely affecting consumers and small businesses that rely on low-cost digital payments. Additionally, a concentrated market increases systemic vulnerabilities; a technical glitch causing disruption or security breach involving one of these dominant platforms could cripple the entire digital payments ecosystem affecting millions of users.
Dominance of a few players throttle the growth of new startups and innovations as they can afford to curb the growth of new ventures by way of heavy discounts, publicity or predatory practices.
Financial inclusion is another critical concern. Despite UPI’s potential to democratize financial services, its usage remains largely confined to urban areas, with less than 30% of India’s population actively using the platform. Rural regions, which could benefit significantly from digital payments are overlooked by these companies in favour of more profitable urban markets.
Cybersecurity risks are amplified in a concentrated market. Dominant platforms handling vast amounts of user data become attractive targets for cybercriminals. A breach on any of these platforms could compromise sensitive user information and erode trust in the whole UPI ecosystem. Reduced diversity in security architectures weakens the system’s ability to withstand emerging cyber threats.
Implementation of Market Caps
To address these challenges, the National Payments Corporation of India (NPCI) had issued notification in 2020 imposing a cap on UPI transactions by a company. This has been extended till December 2024 considering that there were a few players.
However, NPCI is now considering the implementation of market share caps which would significantly impact players like Google Pay and PhonePe in the market. This strategic move aims to limit the dominance of any single player, fostering a more competitive, innovative and diversified ecosystem.
By preventing monopolistic practices, market share caps would encourage new entrants and smaller companies to enter the market, stimulating innovation and driving companies to improve their products and services.
The evolution of regulatory frameworks to balance innovation, competition with consumer protection and security is not new to India’s policy makers. There have been regulations and restrictions on foreign investments, import of components etc in the interest of consumers and national security.
Similar evolution of regulatory frameworks in the payments sector should keep pace with technological advancements, particularly in sectors like fintech.
Traditionally, regulations were predominantly rule-based, emphasizing strict compliance. However, the rise of innovative technologies has prompted a shift toward principle-based regulations. Policymakers now recognize the importance of tailoring regulatory approaches to suit specific sectors at different stages of development.
Evolving Regulatory Frameworks in Fintech
In the fintech space, regulations aim to balance innovation and competition ensuring consumer protection. Over the past decade, as fintech has matured, regulators have worked to create frameworks that support growth while mitigating risks. This dual focus has fostered an environment where both compliance and innovation can thrive together.
A prime example of this approach is the framework of Self-Regulatory Organizations (SROs), which enable businesses to innovate within a controlled ecosystem while safeguarding consumer interests. The introduction of UPI has further transformed the payments landscape by empowering companies to develop innovative solutions, creating a secure and convenient payment infrastructure.
However, as the UPI ecosystem matures, it now finds itself at a regulatory crossroads. While the flexibility granted to UPI and digital payments has spurred remarkable growth, the sector’s maturity calls for a more structured, principle-based approach moving forward. Balancing innovation and regulation will be crucial in navigating this next phase of development.
The Regulatory Crossroads for UPI
NPCI’s market share caps aim to level the playing field, fostering competition and encouraging innovation. Increased competition would spur companies to differentiate themselves and improve their services.
A more diversified market would also reduce systemic risks, as the failure of one platform would be less likely to disrupt the entire ecosystem. Furthermore, these caps could enhance financial inclusion by pushing companies to focus on underserved markets, particularly in rural areas.
The benefits of implementing market share caps extend across various dimensions. They would promote innovation, improve cybersecurity, and enhance financial inclusion by creating a more competitive and diversified ecosystem. By distributing market power, NPCI’s initiative would reduce the risks associated with market concentration while encouraging companies to explore new opportunities in previously overlooked segments.
International precedents further highlight the effectiveness of such regulatory measures. The European Union’s Interchange Fee Regulation limited fees to foster competition, while the United States’ Durbin Amendment capped interchange fees to benefit consumers and businesses. Similarly, NPCI’s proposed caps would ensure that India’s digital payments ecosystem remains competitive, innovative, resilient, and inclusive.
As India’s digital payments ecosystem continues to grow, NPCI’s proposed market share caps represent a forward-thinking approach to safeguarding its long-term health. By fostering competition, encouraging innovation, and improving cybersecurity, these caps will ensure that the benefits of digital payments are accessible to all, while maintaining a secure, competitive, and robust financial infrastructure.
(The author is an IAS officer (retd) and Former Secretary, MeitY; Views are personal)
