For representative purposes.
The story so far: In its report presented to Parliament on February 8, the Standing Committee on Communications and Information Technology has raised concerns about the dominance of fintech apps owned by foreign entities in the Indian ecosystem and recommended that local players be promoted. It mentioned that the Unified Payments Interface (UPI) commanded a 73.5% share of the total digital payments in terms of volume in FY 2022-23. However, its share in terms of value was only 6.67% in the same period.
What does the report infer about the existing ecosystem?
The Committee in its report emphasised that digital payment apps must be effectively regulated as the use of digital platforms to make payments in India is on the rise. It noted that it will be more ‘feasible’ for regulatory bodies such as the Reserve Bank of India (RBI) and the National Payments Corporation of India (NPCI) to control local apps, as compared with foreign apps, which operate in multiple jurisdictions.
The Committee observed that fintech companies, apps and platforms that are owned by foreign entities, such as Walmart-backed PhonePe and Google Pay, dominate the Indian fintech sector. PhonePe commands the leading market share in volume terms, followed by Google Pay, at 46.91% and 36.39% respectively. This is for the period between October to November 2023. On the other hand, NCPI’s BHIM UPI’s market share (in terms of volume) stood at a mere 0.22%. NPCI’s data for December last year show that a total of 5,642.66 million transactions were initiated by customers using PhonePe, while another 4,375 million used Google Pay and only about 24.30 million used BHIM.
The Committee’s recommendations are also largely in tune with the NPCI issuing a 30% volume cap on transactions facilitated using UPI, back in November 2020. That is, the total number of transactions initiated by any third-party app (like PhonePe and Amazon Pay) individually, could not exceed 30% of the overall transactions made using the interfaces cumulatively over three proceeding months. Apps exceeding the specified cap were given two years to comply with the directive in a phased manner. The regulator had stated that it would help “address the risks and protect the UPI ecosystem as it further scales up.” However, the timeline for compliance was extended in December 2022 to December 31, 2024. Elaborating on the rationale, the NCPI said, “In view of the significant potential of digital payments and the need for multi-fold penetration from its current state, it is imperative that other existing and new players (banks and non-banks) scale-up their consumer outreach for the growth of UPI and achieve overall market equilibrium.”
What are the concerns about fraud?
While examining the different modes used by scamsters to dupe people and park illegal money, the Committee observed that fintech companies were also being used for money laundering. It was apprised of one such example — an Abu Dhabi-based app called Pyppl. The app was being administered by Chinese investment scamsters, it noted. This made it difficult for Indian law enforcement agencies to track the trail of money collected through scams on the platform.
The fraud to sales ratio, which represents the total number of fraudulent transactions in comparison to the total number of transactions in a financial year, has largely remained around 0.0015%. The trend is notwithstanding the rise in volume of the payment mode in the last five years. In the ongoing financial year (till September 2023) the figure stood at 0.0016%. The percentage of users affected by UPI frauds stood at 0.0189%.
What does it mean for the ecosystem?
Vijay Mani and Munjal Kamdar, Partners at Deloitte India, pointed to local fintech players having a “natural advantage” when it comes to understanding the customer, various ecosystem participants, the digital public infrastructure and broader market infrastructure. While foreign fin-techs enjoy the same advantage with respect to new technologies, techniques and global connectivity. “A suitably balanced mix to serve the Indian ecosystem needs to be allowed to evolve, and this mix may well vary across different areas such as payments, lending, wealth management, insurance, etc,” the partners stated, adding, “In relation to this balance, we also note that the regulator is stressing on the criticality of accountability and compliance with local laws.”
Mckinsey’s Global Payments Report (September 2023) observed that instant payments in India were only expected to contribute less than 10% of future revenue growth because no fees are charged for the interface (UPI). It however, noted that “although UPI generates minimal transaction fees, these revenues still represent an uplift from no-fee cash events, and the paperless process eliminates the hidden costs of managing cash transactions,” adding, “the associated change in consumer behaviour has enhanced security and increased access to digital commerce channels”. For perspective, printing and ensuring availability of cash too entails certain costs for the exchequer, thus, the analogous comparison with transaction costs for digital payments.