The increasing dominance of two digital payment apps, which collectively manage over 80% of all transactions on the Unified Payments Interface (UPI), has alarmed the India Fintech Foundation (IFF). The foundation stated that this concentration could jeopardize innovation, competition, and even the robustness of India's digital payments system in a policy note titled "Policy Options for Mitigating Concentration Risk on UPI".

Key Highlights

• The India Fintech Foundation (IFF) warns that just two UPI-apps handle over 80% of transaction volumes, raising “systemic concentration risk”.
• RBI, NPCI and the government to restructure incentive schemes and enforce a market-share cap to boost competition.

In reference to third-party app providers (TPAPs), the report states that "more than 80% of the volume of transactions on UPI happen through only two of its ~30 TPAPs." The note cautioned that smaller Indian players, including state-run platforms like BHIM, are being driven out by this duopoly through predatory pricing (deep discounts, cashbacks).

According to IFF, a 30% market share cap was suggested by the Reserve Bank of India and the National Payments Corporation of India to lessen this dominance. But the implementation's effective date keeps getting pushed back.

According to the report, the major players' push to grow too big before NPCI can impose this cap is a calculated attempt to gain a sizable portion of the market and become "too big to fail."

IFF has recommended that the government rewire the UPI incentive system to guarantee a more equitable distribution of subsidies under the Incentive Scheme for Promotion of Rupay Debit Cards & Low Value BHIM-UPI Transactions in order to address this disparity. Big players receive a larger portion of the total subsidy flow because, according to the report, "the system of downstream sharing as implemented does not take into account the relative market share of payment volume."

IFF suggested a "10% incentive cap per TPAP," claiming that this would encourage banks to broaden their alliances and provide more space for smaller fintech companies to expand. According to the report, "TPAPs other than T2 will have access to a larger pool of incentive payments to share among themselves."

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IFF noted that ownership and control of popular UPI apps must also be seen "from a strategic or geopolitical lens," highlighting national security concerns. The foundation called on decision-makers to maintain India's digital payment system's resilience "against any risks, however remote."