Small UPI players show promise even as larger ones continue to dominate

Smaller fintechs gain traction as top UPI apps near 30% market cap limit

New players in India's real-time payments system, the Unified Payments Interface (UPI), are showing signs of growth on a year-on-year basis, even as top firms on the leaderboard continue to dominate the digital payments ecosystem.

This is significant as the year-end deadline approaches to limit the market share of UPI applications to about 30 percent, yet the top three apps—PhonePe, Google Pay, and Paytm—still dominate around 93 percent of the UPI market.

Companies with a minor share of monthly UPI volumes include names such as Navi, Groww, Slice, among others, including ones backed by major corporations like WhatsApp Pay, Samsung Pay, and Tata Neu.

Some of these smaller firms have processed more UPI transactions than they did a year ago.

Take Navi, for instance, a younger player in the UPI ecosystem. The Sachin Bansal-owned company launched UPI payment services about a year ago in August 2023. Today, the TPAP (Third Party Application Provider) is ranked seventh in terms of UPI volumes, processing 68.47 million transactions in July.

Fintech startup Groww has seen its transactions grow five times on a year-on-year (YoY) basis to 15.18 million in the same month. Similarly, FamPay’s volumes have tripled to 52.04 million.

Slice has grown its volumes to 9.41 million in July, up from 0.94 million in the same month last year, catapulting its rank to 18 on the UPI leaderboard from 31 during the same period.

IPO-bound MobiKwik has seen its volumes nearly triple to 9.11 million in the same month.

While the volumes look small in comparison to PhonePe’s and Google Pay’s 6.9 billion and 5.3 billion respectively, the growth in volumes at smaller TPAPs is encouraging.

Experts believe the challenge of limiting how much UPI volumes a particular company can process would depend on how smaller firms continue to grow.

The rest of the third-party application providers (TPAPs) and apps from payment service providers (PSPs) such as banks cumulatively own just 7 percent of the UPI market share.

The decision to cap transaction volumes comes amid concerns of concentration risks and dependency on fintech firms backed by foreign companies.

This challenge is bundled with another one; most UPI transactions are free for users with no merchant discount rate (MDR) or fees levied on these transactions, unlike a debit or credit card.

To corner a significant market share on the UPI leaderboard every month in a market dominated by PhonePe and Google Pay, smaller players would have to burn cash to acquire customers and incentivise users with cashbacks and rewards to use their apps.

However, players believe incentives cannot be the only benchmark to ensure success.

“Incentives alone cannot be the only reason you stay on the platform, and there’s a negative network effect as the user base increases over time. Rewards make it easy for people to try an app, and it should be a mix of rewards and convenience,” said Prakash Sikaria, founder and chief executive officer (CEO), super.money, a fintech startup.

But players are also of the opinion that there should not be any market cap.

“Creating the space for innovation and growth is probably the more urgent need of the hour, and that's not solved by capping volumes. We have to create space for new fintech firms. Rather than seeing this as a problem where there has to be a cap, the way we see it is to foster innovation, enable more players to come up,” Sharath Bulusu, Director, Product Management at Google Pay, told Business Standard in a previous interaction.

However, processing these transactions comes at a cost to fintechs and banks.

As a result, growth in a market that is not fuelled by a commercial model can be expensive, and only players with healthy cash reserves can afford it.

Navi has raised $427 million to date, and Groww about $393 million, according to data by market intelligence platform Tracxn. MobiKwik has raised $269 million to date, whereas Slice has raised $342 million in total.

Other players such as WhatsApp and Samsung, along with Flipkart and Tata Neu, are backed by major corporations.

A latest entrant in the space, fintech super.money, is backed by Flipkart again.

The debate around capping volumes circles back to how small companies can grow volumes on UPI. The debate comes at a time when a commercial model for these digital payments is undefined, and transactions continue to be free.