UPI Duopoly’s Rise and Market Vulnerabilities

Source: This post on UPI Duopoly’s Rise and Market Vulnerabilities  has been created based on article  UPI duopoly’s rise and market vulnerabilities published in The Hindu on 31^st December 2024.

UPSC Syllabus Topic: GS 3-Indian Economy

Context: This article delves into India’s obligations and policies concerning Rohingya refugees, a marginalized and stateless population facing severe human rights violations in Myanmar. It critiques India’s approach to managing the Rohingya refugee crisis, juxtaposing it against international norms and conventions on refugee protection.

How successful has UPI been in India?

1. Since its launch eight years ago, UPI has seen meteoric growth, now accounting for nearly eight in every 10 digital transactions in India.
2. In August 2024 alone, UPI transactions were valued at over ₹20.60 lakh crore.
3. This success is notable in a country with low digital literacy and a history of cash dependency.

What is the current penetration of UPI in India?

1. UPI has reached 30% of the population, an impressive figure for a relatively new payment technology.
2. However, 70% of the population remains untapped, requiring innovations in service offerings, app design, and the overall product base.

What are the challenges posed by market concentration in the UPI ecosystem?

1. The market is highly concentrated, with two Third Party App Providers (TPAPs) — PhonePe (48.36%) and Google Pay (37.3%) — controlling 85% of the market share.
2. The third-largest player, Paytm, holds a mere 2% share.

What risks does this duopoly pose?

1. Systemic Vulnerability:
   • The dominance of two TPAPs creates single points of failure, where disruptions in either app can affect the entire UPI network.
   • Nearly 80% of transactions rely on these two apps, necessitating failsafes and backup mechanisms.
2. Reduced Competition and Innovation:
   • Dominance by two players creates high barriers to entry for smaller competitors.
   • The lack of competitive pressure discourages investment in innovation.
   • Providers primarily focus on achieving scale for cross-selling financial products, rather than improving UPI services.
3. Foreign Dominance:
   • Both PhonePe and Google Pay are foreign-owned (Walmart and Google, respectively).
   • This raises concerns about data protection and potential backdoor access to sensitive information.
   • Indian TPAPs lack the funding to compete with these players.

What steps have regulators taken to address these risks?

1. In 2020, the National Payments Corporation of India (NPCI) mandated that no TPAP should exceed 30% market share in transaction volume.
2. A two-year deadline was set for implementation, but it has been repeatedly extended.
3. By August 2024, the duopoly remains dominant, with PhonePe at 48.36% and Google Pay at 37.3%.

Are there plans to change the market share cap?

1. Reports suggest the NPCI might increase the cap from 30% to 40%, potentially allowing dominant TPAPs to further consolidate their market hold.
2. Such decisions could undermine efforts to create a level playing field for smaller players.

What can be done to address these vulnerabilities?

1. Implementation of the market cap is crucial to fostering a competitive and innovative UPI ecosystem.
2. Encouraging Indian TPAPs to grow and compete can provide a counterbalance to the current duopoly.
3. Under the right conditions, smaller market participants can bring in new innovations and strengthen the ecosystem.

Why is addressing these risks important for UPI’s future?

1. UPI’s success and continued growth depend on public trust, which relies on resilience, reliability, and openness to innovation.
2. Failing to address these risks could erode trust, stall UPI’s growth, and hinder its potential to transform India’s digital payment landscape.