UPI duopoly’s rise and market vulnerabilities

/ Editorials, English /

UPI duopoly’s rise and market vulnerabilities

(Source – The Hindu, International Edition – Page No. – 9)

Topic – GS3 – Indian Economy

Context

  • Market Concentration: There is a growing concern about a few dominant players in India’s UPI ecosystem.
  • Impact on Competition: High concentration may reduce competition among payment service providers, making it harder for emerging companies to enter the market.
  • Innovation Stifling: With fewer players in the market, there’s a risk that innovation could slow down, limiting advancements in payment solutions and technologies.
  • Consumer Choices: A concentrated market can lead to fewer options for consumers, potentially leading to higher costs or diminished service quality.
  • Diverse Solutions: Encouraging a diverse range of participants in the UPI space is vital for fostering a competitive environment that benefits users.

Rise of Unified Payments Interface (UPI) in India

  • Rapid Growth: Since its launch, UPI has experienced explosive growth, now making up nearly 80% of all digital transactions in India.
  • Transaction Volume: In August 2024, the UPI ecosystem processed transactions exceeding ₹20.60 lakh crore, showcasing its immense scale.
  • Cultural Shift: This growth is particularly impressive in a country that has traditionally relied on cash and has had low digital literacy, highlighting UPI’s role in building trust in digital payments.

Challenges to UPI’s Continued Success

  • Current Penetration: UPI currently reaches only 30% of the population, indicating significant progress but also a large untapped market.
  • Need for Innovation: To engage the remaining 70% of the population, innovations in app design, service offerings, and overall product development are essential.

Market Concentration and Risks

  • Dominance of Major Players: Two Third Party App Providers (TPAPs), PhonePe and Google Pay, dominate the market, controlling over 85% of UPI transactions.
  • Limited Competition: Paytm, the third-largest player, holds only a 7.2% market share, indicating a highly concentrated market.

Risks of Market Concentration

  • Systemic Vulnerability: The dominance of PhonePe and Google Pay creates potential single points of failure. A disruption in their services could have widespread effects on India’s financial ecosystem.
  • Decreased Competition and Innovation: The large scale and user base of these dominant TPAPs create barriers for smaller players. The zero-charge framework encourages a focus on scale over innovation, which can stifle creativity and new ideas.
  • Foreign Ownership Concerns: Both dominant TPAPs are foreign-owned (PhonePe under Walmart and Google Pay under Google), raising issues around data security and foreign influence in a critical financial sector.
  • Need for Local Players: Encouraging the growth of Indian TPAPs can help balance the market and mitigate these risks.

Path to a Robust and Inclusive UPI Ecosystem

  • Level Playing Field: It’s crucial to create a fair environment for Indian developers and smaller players to foster UPI’s next phase of growth.
  • Regulatory Measures: Implementing market share caps and offering appropriate incentives can promote competition, innovation, and resilience in the ecosystem.
  • Safeguarding Trust: Ensuring fairness and addressing existing risks will help maintain public trust and allow UPI to reach its full transformational potential.

Conclusion

  • Trust and Innovation: UPI’s success hinges on maintaining public trust through ongoing innovation, reliability, and resilience.
  • Addressing Market Concentration: The risks posed by market concentration, particularly from foreign-owned players, must be managed to protect competition and security.
  • Balanced Ecosystem: A balanced ecosystem that provides opportunities for Indian players is essential for sustained growth, necessitating regulatory measures to prevent monopolistic practices.