The rise of the Unified Payments Interface in India has been transformative, with UPI transactions expected to exceed 11.5 billion in the financial year 2023-24, worth ₹26.9 lakh crore, according to the National Payments Corporation of India. However, market concentration between two third-party app providers, PhonePe and GooglePe, which control over 80% of UPI transactions, is a matter of concern. The rise of UPI has revolutionized digital payments through its widespread adoption in India, with UPI accounting for nearly 80% of digital transactions in India, transforming the landscape.
In August 2024, UPI processed transactions worth over ₹20.60 lakh crore, reflecting its widespread use and adoption across urban and rural areas of India. UPI offers zero fees for users, making digital transactions affordable and highly accessible to India’s economically diverse population. UPI’s cost-free model allows people in rural areas to freely access and use the digital payment system without any worries. UPI has significantly empowered small vendors, businesses, and entrepreneurs by providing an easy, cost-effective, and scalable way to accept digital payments.
Street vendors, small traders, and grocery stores across India now use UPI to accept digital payments. UPI has played a significant role in increasing financial inclusion by effectively bringing the previously unbanked population into the formal financial ecosystem. Millions of rural and underserved Indians have been able to access important digital financial services through UPI, leading to increased economic participation in areas with historically low banking access. UPI has developed significant public trust in digital payments by providing a secure, reliable, and convenient platform integrated with government services. Market concentration between two third-party app providers creates significant risk.
High market concentration of a few players creates significant systemic risk, where any disruption in services can have a cascading effect on the entire ecosystem. For example, if there is a sudden technical glitch in PhonePe or Google Pay, it can disrupt up to 80% of UPI transactions, causing disruption and panic at the national level. The dominance of only two major players in a market hinders healthy competition, discourages innovation, and discourages the development of new features or payment services by emerging market entrants. The excessive market presence of PhonePe and Google Pay has made it difficult for smaller competitors like Paytm to bring and develop innovative solutions in the market while stifling potential growth. The dominance of foreign-owned TPAPs presents risks related to data security, user privacy, and potential backdoor access to sensitive financial information of Indian citizens. The foreign ownership of PhonePe by Walmart and Google Pay by Google raises concerns about the security of personal financial data and the possibility of unauthorized access by foreign entities. The long delay in implementing market share caps has allowed the two major players to consolidate their control, preventing the emergence of a more competitive and dynamic UPI ecosystem. The dominance of PhonePe and Google Pay may ignore regional needs or preferences, making it difficult for local solutions to gain momentum.
UPI apps designed for regional languages or local business needs often struggle to compete with established market leaders like Google Pay and PhonePe. Setting a cap on market share for third-party application providers, such as Paytm and Axis Bank, could ensure better competition and reduce systemic risks. The National Payments Corporation of India’s earlier efforts to limit the market share of PhonePe and Google Pay to 30% could balance market dominance. Indian-owned Paytm and Axis Bank support third-party application providers that can reduce dependence on foreign players and improve regulatory oversight. Initiatives such as funding for local apps or public-private partnerships could help Indian Paytm and Axis Bank’s third-party application providers compete more effectively.
Developing fail-safe mechanisms and ensuring redundancy can reduce the impact of system failures. Creating backup servers for UPI apps can prevent service disruptions during outages or technical difficulties. Providing grants or subsidies to smaller players can encourage new ideas and expand the range of services offered. Government-led innovation challenges can encourage smaller developers to introduce new payment solutions that cater to specific markets. Enforcing strong data privacy laws will protect users’ personal and financial information from potential misuse. Enforcing strict data protection regulations for UPI-based apps can ensure that sensitive financial data is protected from unauthorized access.
To ensure the continued success of UPI and mitigate the risks arising from market concentration, India should foster more competition by encouraging innovation in small TPAPs, enhancing the regulatory framework to ensure fair play, and focusing on cybersecurity improvements. In addition, promoting financial inclusion through collaborative models and encouraging the adoption of diverse payment platforms will create a more resilient and equitable digital payments ecosystem.

Email:-------------------------satywansaurabh333@gmail.com