Flawed regulation can undermine the digital payment ecosystem

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Flawed regulation can undermine the digital payment ecosystem

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• You are limited now: The NPCI has suddenly put artificial upper limits on the no. of UPI transactions that any third-party App can process. So, GPay or PhonePe cannot go beyond 30% of total transactions on UPI. Since the total scale of UPI is now humongous, this decision has attracted criticism. [NPCI - National Payments Corporation of India; UPI - Unified Payments Interface]
• Why do this: NPCI feels that there are serious risks with any one player getting too big, and the UPI ecosystem needs to be protected as it grows rapidly. But some experts claim this is completely wrong.
• No failure so far: Till date, there has been no major system failure in UPI at all. Only the YES bank episode happened, which wasn't a UPI failure. So if NPCI is truly worried about the future, a technical solution would've been better rather than crude policy instruments (upper limits).
• Multi-homing: In any system, risks reduce when consumers, merchants and third party app developers do multi-homing, risks go down. It means they use more than one app for same purpose. UPI system is not unique, and can be easily substituted. Consumers can switch over to others in a second. Today, there are 52 UPI service providers, 189 issuers, and 21 third-party apps (although PhonePe and GPay dominate 80%). At the same time, third party App developers can tie-up with many banks at the same time (so the Phone-Pe - YES Bank crisis won't recur).
• Other problems: If NPCI wanted to control risks arising from one big player's failure, this new rule applies to ALL apps providing UPI, not just third-party apps. What happens if the app of a SCB fails? (Scheduled Commercial Bank)
• What if UPI itself fails: The architecture of UPI itself may collapse some day, and consumers will then have no choice at all (UPI is monopoly of NPCI). They have to then move to cash and cheques. RBI must think about this.
• NPCI is a private firm: How can a private firm (consortium of banks) decide on rules of the market? Either the RBI or the CCI must decide.
• On the ground level: How will companies reduce their volume of transactions actually? They will put limits on what consumers can do, and restrit UPI use by them for specific purposes, and use amount-based filters. All of these will scare existing customers.
• A better way: Introduce more competition, and lower the entry barriers. The right combination will be to have third-party apps, domestic banks and niche playment platforms.

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