Growth restrictions

Limits on digital payments should be avoided

The National Payments Corporation of India (NPCI) did well last week to postpone the deadline for imposing a volume cap on third-party application providers (TPAPs) by two years. This would give the NPCI another opportunity to evaluate the basic idea of imposing it. Although entities engaged in the business were demanding a five-year extension, imposing arbitrary caps should be avoided. In November 2020, the NPCI came up with the idea of imposing a 30 per cent cap on volumes handled by a TPAP on the unified payments interface (UPI). The limit was to be calculated on volumes handled in the previous three months on a rolling basis, and TPAPs exceeding the 30 per cent limit were given until January 2023 to comply. Compliance with this would have meant that entities with more than a 30 per cent volume share would have had to decline transactions from existing customers.

The directive was said to be issued to avoid concentration risk. According to the latest numbers, PhonePe had about a 47.26 per cent share in transactions, followed by Google Pay at around 34 per cent. Clearly, the leading entity would have had to do a significant downscaling of operations. This is surely not the right approach. There must be reasons, including the ease of transaction, why some entities have gained a higher market share while others have lagged. Thus, it doesn’t make sense to penalise an entity for acquiring customers in a competitive space. Further, if there is a possibility of concentration or abuse of market power, which is not the case in this context, it is for the Competition Commission of India to handle the issue. The NPCI — incorporated as a not-for-profit company and an initiative of the Reserve Bank of India and the Indian Banks’ Association — has done outstanding work in terms of how the payment systems have evolved. However, it is not clear if it should also be regulating entities using its payment infrastructure.

Although payments through the UPI have grown at an impressive pace, they still have to pass a critical stage where the cost of a transaction is borne by those making it — either the end consumer or the merchant. The government, for instance, budgeted Rs 1,500 crore in 2021-22 to reimburse the charges for UPI transactions and RuPay debit cards. At some point, the budgetary support will have to be withdrawn and the payment system will need to become self-sustaining. In principle, there is no reason why the government should favour one method of payment over another through budgetary support. Opening the system to reasonable pricing would also be necessary because it will give TPAPs a stream of revenue and incentivise them to innovate. This would attract more entities into the business, which will also potentially address the issue of market share as the payment volume expands over time. Thus, even if a higher market share is seen as some kind of threat to the system, it is a bit early to explore restrictive policies. If some service providers are not able to provide quality services or comparable ease of transaction, it would restrict the market and affect the overall purpose of increasing digitisation.