Answer

The rise of Unified Payments Interface (UPI) in India has been transformative, with UPI transactions exceeding 11.5 billion in value of ₹26.9 lakh crore in FY 2023-24, according to the National Payments Corporation of India (NPCI). However, the market concentration among two Third Party App Providers (TPAPs) — PhonePe and Google Pay controls over 80% of UPI transactions raises concerns.

Enroll now for UPSC Online Course

Rise of UPI has revolutionized digital payments in India

• Widespread Adoption: UPI has rapidly gained mass adoption, accounting for nearly 80% of all digital transactions in India, transforming the payments landscape.
  For example: In August 2024, UPI processed over ₹20.60 lakh crore in transactions, showing its widespread use and adoption across both urban and rural areas of India.
• Low Cost and Accessibility: UPI offers zero charges for users, making digital transactions both affordable and highly accessible to the economically diverse population of India.
  For example: UPI’s cost-free model allows individuals in rural areas to freely access and use digital payment systems without worrying.
• Empowerment of Small Businesses: UPI has significantly empowered small vendors, businesses, and entrepreneurs by providing an easy, cost-effective, and scalable method for accepting digital payments.
  For example: Street vendors, small merchants, and kirana stores across India now use UPI to accept digital payments.
• Enhancing Financial Inclusion: UPI has played a pivotal role in increasing financial inclusion by effectively bringing previously unbanked populations into the formal financial ecosystem.
  For example: Millions of rural and underprivileged Indians have been able to access critical digital financial services through UPI, fostering greater economic participation in regions with historically low banking penetration.
• Trust in Digital Payments: UPI has developed significant public trust in digital payments by offering a secure, reliable, and convenient platform, integrated with government services.

Market concentration among two Third Party App Providers (TPAPs) poses significant risk

• Systemic Vulnerability: The high market concentration of a few players creates significant systemic risks, where any disruption in services can have widespread, cascading effects across the entire ecosystem.
  For example: If PhonePe or Google Pay were to experience a sudden outage or technical malfunction, it could disrupt up to 80% of UPI transactions, causing national-scale disruptions and panic.
• Decreased Competition: A market dominated by only two major players hinders healthy competition, discouraging innovation and development of new features or payment services by emerging market entrants.
  For example: The overwhelming market presence of PhonePe and Google Pay has made it difficult for smaller competitors, like Paytm, to grow and bring innovative solutions to market, stagnating potential progress.
• Foreign Ownership Risks: The dominance of foreign-owned TPAPs introduces risks related to data security, user privacy, and potential backdoor access to sensitive financial information of Indian citizens.
  For example: The foreign ownership of PhonePe by Walmart and Google Pay by Google raises concerns over the security of personal financial data and the potential for unauthorized access by foreign entities.
• Regulatory Inaction: Prolonged delays in enforcing market share caps have allowed the two dominant TPAPs to solidify their control, preventing a more competitive and dynamic UPI ecosystem from emerging.
• Limited Regional Representation: The dominance of PhonePe and Google Pay may overlook regional needs or preferences, making it difficult for localized solutions to gain traction.
  For example: UPI apps tailored for regional languages or local business needs often struggle to compete against the established market leaders like Google Pay and PhonePe.

Measures to Address Risks

• Imposing Market Share Caps: Setting a limit on market share for dominant TPAPs can ensure better competition and reduce systemic risks.
  For example: The NPCI’s earlier attempts to limit PhonePe and Google Pay’s market share to 30% could balance market dominance.
• Encouraging Indian Players: Supporting Indian-owned TPAPs could reduce reliance on foreign players and improve regulatory oversight.
  For example: Initiatives such as funding for local apps or public-private partnerships can help Indian TPAPs compete more effectively.
• Strengthening Backup Systems: Developing failsafe mechanisms and ensuring redundancy can reduce the impact of system failures.
  For example: Creating backup servers for UPI apps can prevent service interruptions during outages or technical difficulties.
• Incentivizing Innovation: Providing grants or subsidies to smaller players can stimulate new ideas and increase the range of services offered.
  For example: Government-led innovation challenges can encourage smaller developers to introduce new payment solutions that cater to specific markets.
• Strict Data Protection Regulations: Enforcing stronger data privacy laws will safeguard users’ personal and financial information from potential misuse.
  For example: Implementing stringent data protection rules for UPI-based apps can ensure that sensitive financial data is protected from unauthorized access.

Check Out UPSC CSE Books From PW Store

To ensure the continued success of UPI while mitigating risks from market concentration, India must promote greater competition by encouraging innovation among smaller TPAPs, enhancing regulatory frameworks to ensure fair practices, and focusing on cybersecurity improvements. Furthermore, fostering financial inclusion through collaborative models and incentivizing the adoption of diverse payment platforms will create a more resilient and equitable digital payment ecosystem.

DOWNLOAD PDF