NPCI pushes the deadline to impose market cap on UPI players by 2 years

In a big win for Google Pay and Walmart-backed PhonePe, the National Payments Corporation of India (NPCI) has extended the deadline for implementation of a 30 per cent cap on the market share of each Unified Payments Interface (UPI) player for another two years till December 31, 2026. NPCI also lifted the UPI user onboarding limit for WhatsApp Pay, allowing it to extend UPI services to its entire user base in India. Previously, NPCI had permitted WhatsApp Pay to expand its UPI user base in a phased manner.

Third deadline extension

This is the third time the NPCI had pushed deadline for imposing market cap. The NPCI had first proposed a 30 per cent market cap for third-party UPI app providers in November 2020 in a bid to allow competition in this space. Two top players — PhonePe and Google Pay — continued to account for 85 per cent of overall UPI transaction volumes in the month of November, while Paytm accounted for another 7 per cent volume share.

Lack of MDR key challenge for market cap

According to people familiar with the matter, imposing a market cap at this stage is difficult due to lack of merchant discount rate (MDR) on UPI transactions. MDR is a fee that businesses pay to a payments processing company for each transaction made using a debit or credit card.

“Smaller players are not able to raise money. To acquire market share you need funds. Till there is a decision on MDR, imposing market cap may not benefit smaller players,” a source said. Enabling MDR on UPI transactions will give significant advantage to fintech companies as currently there is no MDR on UPI transactions, and the move will enable them to raise higher funds.

“We cannot hinder the growth of UPI if it has the potential to grow 10x more. Hopefully, removal of restrictions on Whatsapp can create some dent on top players market share,” they said, adding that industry players are in talks with the government to enable MDR on UPI at least for larger players.

Smaller players cry foul

Players with smaller UPI market share, however, say the NPCI should have taken the decision to impose market cap as there are enough options to the end consumers, and as the deadline for imposition of market cap has already been pushed twice earlier.

A total of 20 new UPI apps have hit the market in the current calendar year, a record number of new entrants since the launch of UPI.

“The NPCI’s decision gives a significant advantage for established players like PhonePe and Google Pay, while creating challenges for new entrants in the UPI payments space,” said Sharat Chandra, Founder, EmpowerEdge Ventures.

“The status quo on market cap does little to create equitable conditions for new entrants, as they are likely to reduce their investments and growth strategies,” he said, adding that the move is likely to bolster PhonePe’s IPO plans. The RBI, too, Chandra says, has recently expressed concerns about the dominance of two major players in the payments sector.

Industry players say concentration of market share towards two large players can cause disruption to users, if there is a technical glitch in the IT system of large players.

They say the top players are backed by Walmart and Google with deep pockets and can burn money to continue providing financial incentives to users, a practise that small players cannot.

“Everybody should be given a proper chance by institutions to grow. UPI is a public good. When NPCI was created, it was under act of Parliament, it was mandated with developing payment infrastructure in country,” a fintech association executive said, adding that while banks are bleeding money in the process, the move is also detrimental towards end consumers.