Decoding UPI growth story via the eyes of a duopoly

The growing popularity of Unified Payments Interface (UPI) has brought focus back on a critical aspect of this payment mechanism: concentration risk and a highly lopsided market share situation.

The slowdown seen by Paytm, run by listed fintech entity One 97 Communications (OCL), has further stoked these fears. If the third largest UPI payment app further loses market share, there is a high chance that the likes of PhonePe and Google Pay will benefit, skewing the market share dynamics even more, industry insiders said.


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In February 2024, UPI processed 12 billion transactions. Out of this, PhonePe processed 6.1 billion payments (50%), Google Pay settled 4.7 billion (39%) transactions and Paytm processed 1.3 billion (10.8%). The fourth largest UPI payment app Cred just processed 118 million UPI payments.

“The deadline for implementation of the 30% market cap is at the end of this year, but as of now there is no clarity on how this can be implemented,” said a senior banker in the know. “Instead of focusing on a cap only, we may also look at encouraging more players to build meaningful participation in the ecosystem.”

The newer entrants are waiting for clarity on NPCI’s stance regarding the 30% market cap before they invest in growing the network.

Also read | NPCI allows Paytm to become third-party application on UPI with four banks

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“There is no doubt that the incumbents invested huge money to build this network; now they will try to get the benefits of this too. it is a chicken and egg situation,” said a senior executive at a third-party payments app on UPI.

National Payments Corporation of India, which runs UPI, has already pushed the deadline for the 30% market cap by two years from January 2023 initially to the end of 2024. But beyond some basic discussions nothing much has moved on that front yet. Rather than slowing down, the two large players have pushed on with customer acquisition.

NPCI print gfxETtech

ET reported on March 5 that NPCI met smaller UPI apps like Groww and Cred to scout for ways to promote UPI payments through these platforms, but no concrete decisions were taken at the first meeting.

Emailed queries to PhonePe and NPCI went unanswered.

Also read | Paytm crisis brings 30% market share cap plan back in focus

Lack of incentives

Multiple industry insiders ET spoke to said that UPI is a low-cost customer acquisition tool, and given its an open architecture, it is relatively easy to build on top of the protocol. So ideally there should not be any duopoly or monopoly on such a platform.

But the challenges around monetisation are causing fintechs to stay away, they said.

Amrish Rau, chief executive officer of Pine Labs, took to social media platform Linkedin recently to point out that fintechs want to stay away from UPI because of ‘zero monetisation.’

“There are very few such companies (just two investing in UPI). And even these companies are investing because they see other opportunities to monetise like on advertising or lending. Zero fees on UPI is killing competition and leading to strong duopoly,” he wrote.

Also, with the overall investment climate tightening up, startups are focusing on reducing burn. So, most of these companies do not have a massive marketing budget to drive incentives on UPI payments these days.

On the sidelines of the recently held meeting of startups with the finance minister in New Delhi, the dominance of American firms or companies backed by them was put forth.

Another section of the industry believes that the market in UPI is already taken, there are opportunities in credit on UPI and cross border UPI payments, but the thesis there is still not fully formed.

“There are startups trying to build credit products on UPI, but the question is will small merchants be ready to pay for credit transactions through a mode which is otherwise free for them,” said Harsh Gupta, principal, Flourish Ventures, which has invested in Indian startups like M2P Fintech, Indifi, Kaleidofin.

Also read | Paytm, PhonePe, Google Pay divided on UPI market share cap; government won’t intervene

Regulator’s stand

The Reserve Bank of India is concerned about concentration risk building up on UPI, especially with American giants like Walmart and Google dominating the sector.

While NPCI has the mandate to impose a 30% market share, the execution of the cap has not fructified.

“If these commercial players are not ready to slow down then perhaps the regulator can think of some form of penalty,” said R Gandhi, retired deputy governor with the RBI. “There can be a mechanism through which platforms can be charged higher for transactions beyond the 30% threshold, this might slowly change the market dynamics.”

Another proposition can be to build a payment aggregator type system which can route transactions to multiple payment apps depending on individual volumes, said a senior banker quoted earlier. But the problem there is that it adds another hop for each transaction.

Instead of taking the route of penalties, Rohan Lakhaiyar, partner at consultancy firm Grant Thornton Bharat, believes they can create scale based regulations for systemically important payment players.

“Those above 30% market share can be put under higher scrutiny or regulatory standards to ensure resilience and system integrity in the UPI ecosystem. Increased compliance standards may require them to rationalise growth to a pace that justifies the incremental cost of compliance” Lakhaiyar said.

Also read | Google Pay India signs pact with NPCI for global expansion of UPI

However, some aver that concentration risk is a misplaced concern.

“I think we use one app out of habit, unlike a bank account, there aren’t any linkages of typical UPI apps to the other parts of a consumer’s financial world, such as investments, remittances etc, if the need arises consumers will make that shift to another platform afterall everyone uses their bank’s mobile banking application which allows UPI payments,” said Rajeev Agrawal, chief executive officer, Innoviti Payments.

To chart the way forward one needs to understand how the ecosystem landed here. There is no doubt that both PhonePe and Google Pay invested heavily to grow the UPI ecosystem.

While Google Pay made P2P payments fun through gamification and scratch cards, PhonePe invested in an army of people who onboarded merchants through interoperable UPI QR codes.

Through 2018, 2020 and 2021, the leaderboard on UPI changed. Back in 2018, Paytm was the most used UPI app. In 2020, Google Pay took the mantle. In 2021, PhonePe started racing ahead of competition and the gap has only grown wider over time.

From around 55 lakh merchant payments in the March quarter of 2018, the Bengaluru based firm processed 1,110 crore such payments in the December quarter of 2023.

“Paytm had a very popular wallet product which was revenue generating per transaction and built a sticky customer base, so they missed pushing UPI as much in the initial years,” said the founder quoted anonymously earlier. “This cost Paytm dearly and the market gap with Google Pay and PhonePe became too big to bridge eventually.”

It was only in August 2019, that Paytm opened its QR code network for interoperable payments.

Concentration risk or not, the debates around only two players dominating the most important digital payment mechanism in the country is gaining steam. And looking at the early trends, if the sector regulator does not stem the growth trends now, the current timeline for the cap seems untenable.

Roy Walsh

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