UPI: A future or a future in threat?

With the launch of the Unified Payments Interface (“UPI”), India has witnessed a steady adoption of digital payments, indicating the need to support such innovation in the payments sector.

Unified Payments Interface (UPI) is a system that powers multiple banks accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood. It also caters to the "Peer to Peer" collection request which can be scheduled and paid as per requirement and convenience.

The companies entering into the UPI payments systems like PhonePe, Google Pay, Paytm etc. revolve mainly around the UPI itself. Not only this, but several banks like the State Bank of India, Axis Bank, Bank of Baroda, etc. have also joined the UPI bandwagon with their own UPI apps.

Interestingly, NPCI with its circular dated 5th November 2020, mandated a 30% volume cap for Third Party Application Providers (“TPAP”) with a view to provide a diverse opportunity to the UPI ecosystem. The Circular stated that the Payment Service Provider (“PSP”) and TPAP shall ensure that the total volume of the transactions initiated through the TPAP shall not exceed 30% of the overall volume of transactions processed in UPI, during a period of 3 months, on a rolling basis. What needs to be addressed is whether or not NPCI has the power to put a market cap on the TPAPs and whether the Competition Act, 2002 restricts this market cap and whether or not these compliances amount to restriction to trade.

When the NPCI issued the market cap, it was a time when WhatsApp was also starting its payment systems in the UPI ecosystem, but RBI limited its scope and allowed only 100 million customers in 2020. It must keep in mind this compliance is not forced as players have offered an initial extension of two years to reduce the market share which has been extended more. As expected, the two top players were against the cap arguing it limited the growth and will hinder the financial goals of the digital ecosystem. NPCI rejected the plea and continued with the market cap to prevent any players from gradually becoming dominant and putting dependency on a single player which can put the entire UPI ecosystem in danger of failure. The Covid pandemic also accelerated the digital market in India, especially in the rural region.

There is no doubt that the imposition of the ex-ante ban could dampen the competition, which could, in turn, reduce incentives and innovations of better products further reducing the competitive thrill and leading to the possibility of coordination among players. The main selling point of the UPI transaction system is its easy accessibility to the consumers, but the market cap might affect the provided usability also potentially hampering investments due to the need for readjusting the TRAP business model. Countries like the EU and the USA are also reluctant to implant any ex-ante regulation on digital markets as the efficiencies of the market depend on the expansion of its players. Furthermore, the European Commission provided factors to examine before any implementation of ex-ante regulation. It states that there must be a structural and legal entry barrier whereas competition law is not the only solution to address any market failure. In India, the presence of large players like Amazon Paytm, Walmart, Jio, Google, etc. makes it evident that there are no entry barriers in the digital payment ecosystem.

Though the main objective of NPCI notification was to prevent the market from the risk of failure, there was an absence of proper impact assessment by the Competition Commission of India (CCI). Its assessment would have effectively analyzed the ex-ante regulation on the basis of justification, suitability, adequacy, efficiency, etc. Sections 21 & 21-A of the Competition Act, 2002 also provide that CCI and regulators should coordinate on subjects which can come under each other’s expertise area. CCI has the right to investigate and pass interim measures of limitation in the case of damages incurred due to anti-competitive conduct, therefore the objective of NPCI notification can be achieved through enforcing ex-post competition.

NPCI is also a commercial entity with functions similar to NSE and BCCI, which make its practices under the scrutiny of CCI. The parliament has always refrained to put an arithmetic threshold to determine market share and power in Competition Act which also raises questions about the proposed 30 per cent volume cap on the market cap by NPCI.

Recently, RBI introduced another form of fiat currency - the ‘e-Rupee’ wherein individuals can use the retail version of e-Rupee for all cash-based transactions, including purchases, gifts to friends and family, debt repayment, etc. Neither the government nor the RBI has revealed any plans regarding a transaction limit in terms of value or volume. The launch of the e-Rupee has caused headaches for TPAPs, as it has the ability to compete with UPI as UPI operates on a premise of settlement between two banks i.e, money transfers being instantaneous on the front end, but inter-bank settlements take approximately one day to complete. There is a settlement risk in UPI due to the involvement of an intermediary. However, with e-Rupee, there is no settlement risk, given it is issued by the RBI, and it may also be considerably faster. Moreover, while UPI is a bank-to-bank payment method, it leaves a transaction or audit trace, but e-Rupee, which is a wallet-to-wallet transfer, does not. The RBI is expected to permit anonymity in e-Rupee transactions, at least for small-value transactions whereas e-Rupee is preferred by individuals who do not desire an audit trace. Customers are unlikely to be charged for using e-Rupee, given that the use of currency does not incur fees. UPI is currently free but may become a paid service in the future. Users could switch from UPI to e-Rupee if e-Rupee demonstrates efficiency, and trustworthiness, and is free of technological errors.

As discussed earlier, NPCI has ten promoter banks out of which five banks have rolled out e-Rupee facilities in its first phase. With the concerns of the e-Rupee cannibalizing UPI hanging over the TPAPs like Paytm and their stakeholders, it creates a conflict of interest for these five banks. These Banks are promoters of NPCI, which is imposing the 30% volume cap over the UPI companies, and are also rolling out the e-Rupee which has a proper potential to put a question mark on the existence of the UPI system as a whole. The developments around the e-Rupee and UPI would be interesting to watch as these would determine the future of monetary transactions in a country that accounts for more than 1/7th of the global population.

By - Prapti Allagh & Shorya Khuteta