Why in the News?

In just eight years, UPI now handles nearly 80% of India’s digital transactions which valued at ₹20.60 lakh crore in August, despite challenges like PhonePe and Google Pay’s market dominance.

What are the implications of market concentration in the UPI ecosystem?

• Systemic Vulnerability: The dominance of two Third Party App Providers (TPAPs) for online transactions like UPI PhonePe and Google Pay, which together control over 85% of the market share, creates a risk of systemic failure.
  • Any disruption in their services could significantly impact the entire UPI ecosystem, given that nearly 80% of transactions occur through these platforms.
• Reduced Competition and Innovation: The high market concentration discourages competition, leading to fewer incentives for innovation among existing players. Smaller or new entrants face significant barriers to entry due to the scale and resources of the dominant TPAPs, stifling diversity in service offerings.
• Foreign Dominance Risks: Both leading TPAPs are foreign-owned, raising concerns about data security and sovereignty. This foreign dominance can lead to potential vulnerabilities in terms of data protection and access to sensitive information about Indian users.

How effective are regulatory measures in addressing duopoly issues?

• Regulatory Challenges: The National Payments Corporation of India (NPCI) has attempted to address market concentration by capping TPAP market shares at 30%. However, this measure has not been effectively enforced, with extensions granted that allow dominant players to maintain their substantial market positions.
• Limited Impact of Existing Regulations: Despite regulatory intentions, the continued growth of PhonePe and Google Pay indicates that existing measures have not sufficiently mitigated the risks associated with a duopoly. The potential increase in market share cap from 30% to 40% may further entrench the dominance of these platforms rather than promote a competitive landscape.

What strategies can smaller players adopt to compete in this landscape?

• Innovation and Niche Services: Smaller players can focus on niche markets or specialized services that cater to specific user needs, differentiating themselves from larger competitors. This could include unique features or localised services that appeal to underserved populations.
• Collaboration and Partnerships: Forming alliances with banks, fintech companies, or other service providers can help smaller players leverage resources and technology to enhance their offerings and reach a broader audience.
• User Education and Trust Building: Investing in user education about digital payments and building trust through transparent practices can attract users who may be hesitant to switch from established platforms. Emphasizing security features and customer support can also enhance user confidence.

What should the Indian Government do to reduce the dependency? (Way forward)

• Enforce and Strengthen Regulatory Caps: Mandate strict enforcement of market share caps for TPAPs and ensure timely compliance to prevent excessive concentration. Introduce penalties for non-compliance and avoid extensions to foster a competitive ecosystem.
• Promote Indigenous Development: Provide financial incentives, subsidies, and grants to Indian TPAPs to enhance their competitiveness. Encourage innovation through dedicated programs and regulatory frameworks that support startups in the payments space.

Mains PYQ:

Q Is inclusive growth possible under market economy? State the significance of financial inclusion in achieving economic growth in India. (UPSC IAS/2021)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now