Banks Missed the Step; Allowed Non-banks To Dominate UPI Space: T Rabi Sankar, RBI
Moneylife Digital Team 05 December 2022
Pulling up banks for ceding the unified payment interface (UPI) space to an extent where most of the business is with non-banks, T Rabi Sankar, deputy governor of Reserve Bank of India (RBI), warned banks that disruption in a small area of their business could be quickly scaled.
Speaking at the 18th Banking Technology Conference organised by the Indian Banks' Association last week, Mr Sankar says, "How is it that a system of transactions between two bank accounts has evolved in a way where most of the business is owned by non-banks? Clearly, banks missed a step here."
According to the deputy governor, this was probably because banks viewed UPI as small-value transactions that were not worth investing resources and effort in for developing the necessary technology and internal ecosystem.
"When a revolutionary technology comes up, it might initially affect a small part of the business. Scaling that up, improvising and innovating on that to affect the rest of the business is just one small step away. You miss the first step; you miss the train," he added.
Commenting on the extension by the National Payments Corporation of India (NPCI) for market-cap for UPI players, the RBI deputy governor feels that implementing it (the market-cap) at this stage would have caused some friction in the UPI ecosystem.  
He says, "Competition takes time to evolve. We will have to wait for it to evolve. And at this time, probably implementing that would have cost some friction in UPI." 
Last week, in a relief for some third-party digital payments players, the NPCI extended the UPI volume cap rules deadline till 31 December 2024.
NPCI initially planned to enforce the UPI market-cap rules in January 2021 but delayed it several times.
"In view of the significant potential of digital payments and the need for multi-fold penetration from its current state, it is imperative that other existing and new players (banks and non-banks) shall scale up their consumer outreach for the growth of UPI and achieve overall market equilibrium," NPCI says in a circular.
Taking into account the present usage and future potential of UPI, and other relevant factors, it says, "the timelines for compliance of existing third-party app providers (TPAPs) who are exceeding the volume cap, is extended by two years till 31 December 2024 to comply with." 
Paytm, the single biggest beneficiary of demonetisation in November 2016, was also expected to be among the dominant payers but is not even among the market leaders in UPI. Instead, PhonePe, with a 48% market share and Google Pay, with 34%, lead the pack even after most players have tapered off the incentives and cash backs that may have helped consolidate their positions earlier. 
A top industry expert told Moneylife that both these players appear to have maintained their share by offering a seamless user experience to people. 
NPCI has not been forcing compliance. It initially offered a two-years extension for players to reduce their market share and realised that it would take a lot longer which means that several more extensions may be on the way.
Obviously, the top-2 UPI players are unhappy at the lack of uncertainty since it is bound to affect their growth plans and decisions. In a statement, PhonePe says, "We have formally requested NPCI for an extension on the market cap implementation as we believe that an artificial market cap implementation will severely limit the growth of the digital ecosystem and will impede the goals of financial inclusion."
At the same time, sources say, NPCI may be reluctant to cancel the cap on market share altogether just as a matter of abundant caution, just in case some players gradually consolidate holdings and put themselves in a dominant position. This could lead to an unhealthy dependency on a single player, endanger the entire UPI ecosystem in case of system failures at the player's end and have a systemic impact as well. Letting go of the power to cap market share will make it difficult for NPCI to step in quickly in case of such an eventuality. (Read: UPI Stakes: Can NPCI Scrap Its Market Share Circular and Let Competition Level the Field?)
During November, UPI transaction value was recorded at Rs11.90 lakh crore while the transaction count was 7.3bn (billion). According to NPCI, UPI processed 7.3bn transactions worth Rs12.11 lakh crore in October, riding on festive sales.
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