Did NPCI Offer UPI Players A Loophole With The Market Cap Deadline Expansion?

On Dec 7 (Wednesday), the National Payments Corporation of India (NPCI) extended the deadline for capping the volume market share of a single player to 30 per cent. The move, which was quite likely, has shown the difficulty in implementing the market share cap guideline. 

The guidelines were first introduced in Nov 2020, and the deadline for the 30% market share cap was set for Dec 31 2022. New third-party application providers (TPAP) had to abide by the regulations from Jan 1 2021, while existing TPAPs could be eligible for the Dec 31 2022, deadline.

Why did NPCI Want to Control the Market Dominance of Players?

Currently, PhonePe, Google Pay and Paytm dominate the UPI space with a 96 per cent market share among themselves. PhonePe has a market share of 47 per cent, and Google Pay has a market share of 34 per cent, with Paytm controlling 15 per cent. 

Earlier, Paytm dominated the online payment space, but with the advent of UPI, its wallet ecosystem lost significance quickly. It was unable to grow as quickly as other players and fell behind. Clearly, the move would have harmed players like Google Pay and PhonePe but helped smaller players like Paytm. 

Paytm is not a third-party application provider, which would allow it to continue onboarding users even if it breached the cap.

The 30 per cent market share limit was introduced on the same day that WhatsApp was allowed to offer UPI payments. The move seemed to be a way of keeping WhatsApp from dominating the payments ecosystem. However, WhatsApp’s payment product has been disappointing so far, with a very tiny market share. 

Over the last two years, cash-backs and discounts have been cut by most payment companies, and despite new players coming in, market shares of the largest players haven’t changed much. Since the guidelines were introduced, the market has remained relatively stable. PhonePe’s market share has actually increased from 45 per cent to 47 per cent, while GPay’s has reduced from 36 per cent to 34 per cent.

What are the Barriers to Implementing a Market Cap?

There are several barriers to implementing a restriction on market share. Popular TPAPs would have to deny services to potential users over a significant period to comply with the guidelines. 

PhonePe’s CEO Sameer Nigam had even rhetorically asked whether he should run advertisements asking users not to use PhonePe. 

Denying usage is detrimental to companies that utilise user data to cross-sell other financial products and users who would have to use multiple apps to make payments. 

Players had also hinted that since it was a “guideline” and not a law, they wouldn’t take it too seriously. In addition, NPCI’s circular accepts that reducing the market share of dominant players would also mean that new players would have to scale quickly in order to gain market share. Further, the end-user is free to use any app they wish. Usually, when the preferred app doesn’t function properly, users use another app to make the payment.

Has NPCI’s Extension Given Players a Leeway?

NPCI’s methodology gave players a bit of leeway in reducing their market share. The compliance doesn’t affect existing users, allowing TPAPs to continue with a market share of more than 30 per cent of users. 

Currently, it is estimated that 26 crore Indians already use UPI, and that number is likely to grow over the next two years before growth becomes lower. 

A majority of all possible users would have joined the UPI network before Dec 31 2024. 

The extension of the guideline could be highly beneficial for dominant players who can continue gathering new transacting users through the new deadline date. This would allow existing players to breach the market share criteria without raising any legal issues – since all customers would be treated as existing customers by the new deadline. 

NPCI itself might’ve effectively offered a new loophole for existing players to exploit by extending the timelines.