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As the January 1, 2023 deadline for implementing the 30% market share cap rule approaches, giant third-party Unified Payments Interface (UPI) app providers — PhonePe and Google Pay, owned of Walmart, control more than 80% market share by volume — fear huge disruptions to their business operations.

Consumers also fear being locked out or removed from the platforms if the regulator, RBI/National Payments Corporation of India (NPCI), does not relent and extend the implementation of this rule.

In November 2020, the NPCI issued a circular to all participating members of UPI on Volume Cap for Third Party Application Providers (TPAP). The circular mentioned that given the growth in UPI transaction volumes, NPCI analyzed the risks in the UPI ecosystem.

To address risks and protect the UPI ecosystem, the circular required payment service providers (PSPs) and TPAPs to ensure that the total volume of transactions initiated through TPAPs does not exceed 30% of the total volume of transactions processed in UPI for the previous three months (on a rolling basis).

The cap was to come into effect on January 1, 2021. Existing TPAPs (i.e. those in force on the date of the circular) that exceed the cap will have a period of two years from the said date. date to comply. with the same in a progressive way.

A detailed standard operating procedure (SOP) in this regard by the NPCI was to follow. If the deadline is not extended and the volume caps go into effect, they will have just over three months to remove users from the platforms and reduce trading volumes. Such actions are likely to cause great inconvenience to consumers as they would be forced to migrate to other platforms.

This would be a highly undesirable outcome, as UPI only started growing exponentially after third-party service providers (fintech start-ups) started providing UPI services through their innovative apps and features, unlike the initial phase where bank-owned UPI applications provided the services.

Although concentration in digital markets, unlike the physical economy, is greatly amplified due to network effects, the use of such a heavy-handed policy instrument to curb concentration runs counter to economic reforms.

The Competition Act 2002 itself is an example of this paradigm shift in public policy from the old Monopolies and Restrictive Business Practices Act 1969, which shifted its focus away from against monopolies but on the promotion of competition.

Blunt political instruments

In this shift in approach to economic policy, the return to the era of capping market share through blunt policy instruments undermines consumer choice and consumer-led competition and innovation. fintech start-ups. This decision should simultaneously slow the growth of the UPI. Even the concentration risk seems misplaced as the market is characterized by the presence of other players who rely on equally important digital behemoths such as Paytm, Amazon Pay, WhatsApp Pay, Mobikwik et al.

The competition watchdog should promptly raise the issue as part of its advocacy role with the NPCI and encourage it to revise the circular to promote competition in the markets.

Published on

September 22, 2022