NPCI’s Payment Apps Protectionism Only Inhibits ‘Invisible Hand’

NPCI will limit third party app’s ability to process more than 30% of the total volume of UPI transactions

(image: Shruti Mathur/The Quint)

There’s the well-meaning patriot whose core concern is the welfare and defence of his or her country. And then then there’s the nationalist who, unable to distinguish between inclusive business growth and exclusive business interests, makes choices that often place the concerns of local businesses beyond the realm of common sense. In so doing, the fell hand rebuffs the invisible one.

The history of independent India is strewn with examples of well-meaning protectionist policies that were meant to result in faster indigenous development, greater choice for consumers, and a more equitable distribution of national wealth. It was understood that the government had finally disabused itself of these delusions.

So, it came as a bit of a shock when National Payments Corporation of India (NPCI) announced that it would limit any third party app’s ability to process more than 30 percent of the total volume of transactions on the United Payments Interface (UPI) framework.

There is no doubt that the two companies, which will be affected most by this arbitrary decision, are Google Pay and PhonePe. They currently process about 80 percent of all transactions on the government-backed payment utility.

Both critics and partisans agree that such a move will likely benefit homegrown players like Jio Payments Bank and Paytm, who are not technically viewed as third-party apps, because they have payment bank licences. But what the nationalist fringe forgets is that both these companies are either backed or owned by foreign funds.

Even if we put these jingoistic concerns aside, the voiced concerns by NPCI that this move will “address the risks and protect the UPI ecosystem as it further scales up” while containing the emergence of a monopoly or duopoly that would create “their own closed-loop solutions, such as in China” warrants examination.

This is because, a willing suspension of disbelief is hardly likely to result in any incremental gains for the real users of UPI – merchants and consumers.

How Will These Rules Work?

First, NPCI has ruled that while the new rules go into effect in January, 2021, the third party apps (read Google Pay and PhonePe) have up to two years to conform to it.

How will this work? Since UPI currently cannot moderate transactions in real time, the onus will shift to the payment apps.

In order to restrict share of volume, Google Pay and PhonePe will have to do one of three things.

They will need to stop acquiring new customers, they will have to self-impose caps on the number of transactions that a customer may execute, or they may have to forcibly decline customer transactions once a limit is reached. Given that these two companies dominate the market, they may need to do all of the above. This is absurd.

After driving the government’s agenda of payments digitisation (and for free, after the government imposed a zero MDR regulation for all payments processed on UPI), successful players are being asked to change course.

Secondly, having a large number of players in a payments ecosystem may limit the concentration risk, but it does not automatically solve for systemic risk, as is being insisted upon by a number of Indian payments industry veterans and consultants.

In the absence of a clear set of standards that govern and enforce such critical dimensions to the seamless working of a payments network as chargebacks, disputes, fraud and payment authorisation, a concentration of players, who guarantee fewer declined transactions, invest in systems that limit identity theft and fraud, and provide merchants and consumers an acceptable level of security and service, is welcome.

Need for a Level Playing Field

Thirdly, it may be no coincidence that this ruling comes at a time when other cash-rich players are planning to develop their own New Umbrella Entity (NUE) frameworks. Even WhatsApp Pay has been told that its pilot can be offered to no more than 20 million users – 5 percent of WhatsApp’s current customer base.

The Reserve Bank of India (RBI) insists, above all things, on interoperability between entities, network schemes and payment apps, to curtail disruption. Neither Google Pay nor PhonePe have volunteered interest in bidding for the same, because in a truly interoperable framework players with large market shares do not need to.

But for smaller players who have ambitions in the payments, neo-banking and retail space, setting up a payment network of their own, without being able to own the customer relationship – to whom they may cross-sell, from whose transactions they may earn and whose rich data they may manipulate for advertising – would make no sense.

If concentration risk is indeed a concern for the GOI, much better to create a level-playing field for Visa, MasterCard and Rupay. In a zero-MDR regime (which implies zero interchange), banks are less inclined to adopt the Rupay badge than the US networks. If the US were ever to sanction India, the country would not like to find itself in the invidious position of Russia in 2014, when payments processing came to a standstill.

In the end, GOI’s patriotic duty is to ensure the welfare of its consumers. It must allow the invisible hand to do the rest.

(The writer is currently an IOT services professional and was the erstwhile Head of Citi Merchant Services, North America. The Quint neither endorses nor is responsible for them.)