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NPCI’s 30% cap on UPI transactions good for some companies bad for others

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On Thursday, the National Payments Corp of India (NPCI) made an announcement in context with the third-party payment apps. It said that these apps will not be permitted to process more than 30% of the total volume of transactions on the state-backed United Payments Interface (UPI) framework from the first of January. The UPI framework is responsible in facilitating seamless peer-to-peer money transfers.  

This move by India’s flagship payments processor is likely to become a big hindrance in the growth of payments services offered by huge multi-national corporations such as Alphabet’s Google, Facebook, and Walmart. However, on the other hand, it will be responsible for boosting the growth opportunities in the hands of SoftBank backed Paytm and Reliance’s Jio Payments Bank and.

Why does it not apply to Jio Payments Bank and Paytm?

This is because they are armed with bank permits and due to the scope of their banking licenses, Reliance’s Jio Payments Bank and Paytm do not fall into the “third-party apps” category. While payment applications such as PhonePe and Google Pay will get two years to comply with the new rules as they currently exceed NPCI’s stipulated cap.

Sajith Sivanandan, Business Head at Google Pay, India, said  that the announcement by NPCI has surprised the authority and it is likely to have implications for hundreds of millions of users who use the facility of UPI for their daily payments and could impact the further adoption of the service, ultimately leading to an end in the goal of financial inclusion.”

Why is the timing of this move by NPCI strategic?

The new rules come into the picture a few days after Mark Zuckerberg’s Facebook received approvals to launch WhatsApp Pay, WhatsApp’s UPI payment feature, in India with NPCI capping its entry at only 20 million as its maximum registered user base.

Even though Facebook finally receiving regulatory approvals is a reprieve for the company, the limitations imposed by the NPCI thwarted its prospects of expanding in the largest potential market with over 400 million users.

Ram Rastogi, a digital payments strategist, and former NPCI executive claimed that this move by the organization is aimed at fostering healthy competition and if only two technology service providers, namely Google Pay and PhonePe, will hold as much as 80% market share then it would pose systemic risks.

Google is already under intense cynicism in the eyes of Indian regulators as it faces at least four major antitrust challenges, and this new step is likely to further aggravate the issues.  

On the positive outlook, the restrictions are likely to limit any potential cybersecurity threat as Abizer Diwanji, EY’s India head for financial services says, “It is crucial to have more competition which makes the markets less vulnerable and leads to better controls and regulations.”

How did the other companies react?

A day after this announcement, market leader Google Pay said it may impact further adoption of UPI in the country as it hints at reconsideration of the decision saying that the Indian consumers shall be served with a ‘choice’ for making digital payments.

Sajith Sivanandan, Business Head, Google Pay, and Next Billion User initiatives, India, says that in India digital payments are still in its early stage at which any extra interventions should aim at accelerating consumer choice and innovation and not reduce. The only way to ensure this is to provide a choice-based and open model.

Sameer Nigam, the founder of PhonePe, had said in an interview that this NPCI market cap clearly goes against the principle of UPI being an ‘open and interoperable’ portal for the Indian customers. He also said that the company has reviewed the issued circular and said that the company wants all its customers and merchants to be tension-free of any UPI transactions on PhonePe failing as the company is committed to ensuring that no customer faces any disruptions in using the applications due to this circular. In fact, the circular says that the restrictions shall not be applied to existing TPAPs like PhonePe until Jan 2023.

How will the introduction of WhatsApp Pay make a difference to the UPI payment world?

The entry of Facebook’s WhatsApp is expected to encourage the adoption of UPI by small and medium businesses along with individual users. The businesses that already leverage the WhatsApp Business app to have a digital footprint will now be allowed to complete digital transactions.

However, this will be accomplished by slitting the throat of rival UPI service providers such as Flipkart owned PhonePe and Google’s Google Pay. These old apps, who hold over 40% stake each, are likely to lose their customers to the new entrant.

The entry of WhatsApp into the payment domain is likely to reduce the share of other rival apps further, owing to the massive reach and scale of the messaging app.

WhatsApp has partnered with HDFC Bank, Axis Bank, ICICI Bank, the State Bank of India, and Jio Payments Bank to provide this service in 10 regional languages.

Bhavik Hathi, managing director, Alvarez & Marsal, says “WhatsApp’s entry into this domain, may tilt the market and help all other players get under the required market cap of 30% and with no cap on the value of the transaction, players might start focussing on larger ticket sizes of payments, But the transition will be seamless; The challenge, however, will remain on how players reduce market share now, without affecting the experience of UPI payments.”

Experts believe that WhatsApp’s footstep into the money transfer domain would definitely alter the current scenario because of the massive reach the messaging application enjoys.

To understand this, consider a case when a UPI payment fails for any individual because of a certain service provider reaching its maximum transaction limit. Then, instead of downloading another app, the user will be keen to switch to WhatsApp, the regular and commonplace app, which is already installed on the phone of the majority of internet-friendly Indians. This gives an edge to WhatsApp.

 

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