Behind the scenes: Why NPCI reversed its flawed decision to curb the UPI growth
Original published by me at https://www.moneycontrol.com/news/opinion/why-npci-had-to-extend-upi-market-cap-deadline-by-two-years-9649961.html
January 2023 was suppose to bring in a bizarre regulation (if I can call it so) to restrict popular UPI Apps to stop growing. NPCI came up with a novel idea in March 2021 to save UPI from the concentration risk. Well the reasons were not entirely unfounded as UPI was suffering from large tech outages starting from a big bang issue that happened in 2020 when PhonePe went down due to moratorium on Yes Bank. That’s when we all realized our dependency on an app for our multiple daily payment use cases.
When NPCI came up this restriction policy in 2021 (to be implemented phase wise from January 2023), UPI was seeing close to 2.5bn monthly transactions with PhonePe with 45% share and Gpay at 36% share walking away with the bulk of it. In October 2022, UPI grew by 193% to 7.3bn transactions. In terms of App share, nothing changed, infact PhonePe cemented its leadership further by increasing their share a bit.
CEO of PhonePe, Sameer Nigam made it very clean in 2021 and reiterated few months back that they are not going to abide by this erratic regulation of imposing 30% cap. I had written about it back then on why this was never going to work:
So what led NPCI to extend the deadline (or if we can say they suspended it forever):
- NPCI believed way back in 2021 that WhatsApp Pay will take off and will naturally balance out the App share. Sadly that never happened and even after 1.5 years they are struggling to make any dent whatsoever. I am not going into the details of why as that requires a separate story.
- P2M (payments to merchants/shopkeepers) grew much faster vs P2P (money transfer between two people). P2M now has 55% share vs 40% back then. P2M is mostly a time sensitive transaction and a failure there would impact multiple stakeholders. If the rule had been strictly enforced, consumers would be juggling between UPI Apps to complete a transaction thus driving up failures. P2M assumes significance as it is now the most dominant way to pay in the offline & online place and helps drive the digital economy.
- PhonePe & Gpay formally submitted the request to NPCI on delaying the implementation because they were worried about the user experience in their app. Apparently MEITY and RBI were not in favour of this either which helped the cause.
- UPI is still onboarding lot of new users. The new users coming to UPI now are highly tech unsavvy hence putting them through this hoop of trying multiple apps would have dented the UPI image.
- Technology improvement at TPAP is leading to less large scale outages allaying the fear of systematic risk.
- NPCI doesn’t have enough teeth to rein in TPAPs. They aren’t a regulator but a mere service provider/switch or a facilitator.
- Credit Cards on UPI has been allowed recently (only RuPay for now) and next 12 months would be critical for its adoption hoping Visa & Mastercard join the bandwagon. Any disincentive for TPAP (Third party apps like PhonePe, Gpay) at this stage would make this offering dead on arrival. There are over 40mn active credit card users online and bringing it on UPI platform may bring in more savvier users to these Apps. If their first experience isn’t seamless then they are likely to switch back to using cards in its plastic form.
- UPI usage is still dominated by Top 30mn consumers and forcing them to look for alternate app mid-month once their favourite app has capped out was illogical
What next:
While this has been deferred by 2 years (revised deadline is Dec 2024) but in my opinion nothing much would change from the current scenario unless we see another dominating app like WhatsApp taking off in payments, the likelyhood of that at the current stage looks very dificult. PLus it’s a very long period in the fast changing fintech industry so we are not sure what future dynamics would be at play. NUE (New Umbrella Entity) which may be positioned as a UPI competitor has been delayed by RBI but it may take birth during these 3 years. NUE is an attempt by RBI to create a new retail payment system for India comprising of but not limited to ATMs, White Label PoS; Aadhaar based payments and remittance services.
I hope all players find ways to overcome the technology overhang risks and work on improving the infrastructure instead of finding consumer unfriendly ways like usage capping.
