In the pandemic when social distancing is the most critical norm, the Unified Payments Interface (UPI) is like a godsend. The instant real-time payment system has turned out to be the best financial innovation post-Independence in India and has begun in earnest the process of replacing the cash economy altogether. It has contributed its might to make the country one of the fastest growing digital economies in the world.

According to the latest data compiled by the National Payments Corporation of India (NPCI), which manages UPI, it has reported a threefold increase during the last fiscal (2020-21) in both the number of transactions and the value. As of March 2021, the total volume has jumped to 2,732 million transactions, worth ₹5,04,886 crore. At the beginning of the fiscal, in April 2020, the total volume stood at 999.6 million with the total value of transactions at ₹1,51,141 crore.

The number of banks that are live on UPI has gone up to 216 from 153 in April 2020. When the platform began operations in April 2016, there were only 21 banks on board.

The two leading players—Walmart-owned PhonePe and Google Pay—have continued to dominate the UPI ecosystem. PhonePe has topped the chart with 43.9% of the total UPI transactions volume, accounting for 1,199.51 million transactions, with a value worth ₹2,31,412 crore. In contrast, Google Pay has mopped up a 35% market share in March, with 957.01 million transactions worth ₹2,01,185 crore. The third largest player, Paytm Payments Bank, posted 401.16 million transactions worth ₹43,221 crore.

A year ago, Google Pay was the top player, handling 440 million transactions with a value of ₹1,51,141 crore. PhonePe was the second largest with 374 million transactions carrying a total value of ₹66,554 crore. Paytm stood at third position with 128 million transactions with a value of ₹12,717 crore.

The government’s decision to abolish merchant discount rate (MDR) in December 2019 and bring the transaction fee to zero had worked in UPI’s favour immediately. Banks and payments companies were told not to levy any charge for UPI transactions. However, in July 2020, a committee set up by the Reserve Bank of India (RBI) said the move has impacted the survival of payment gateway entities and hampered innovation efforts, resulting in job losses and a slowdown in the expansion of the digital payments infrastructure in the country. While the industry is keenly awaiting a positive response, neither the central bank nor the finance ministry has taken a call on reintroducing MDR yet.

Industry officials point out that MDR acts as a financial incentive for banks and payment aggregators to acquire merchants. It supports the entire chain of stakeholders in the digital payments ecosystem. Many believe that the zero MDR policy will actually harm the digital payments industry more than promoting adoption of digital transactions.

Subsequently, in March 2020, some banks informed their customers that starting from April 1, peer-to-peer (P2P) transactions will no longer be free, barring the first 20 transactions in a month. They said their customers transacting ₹1,000 and below will be liable to pay ₹2.5 (plus 18% GST) per transaction, whilst customers who make a P2P transaction of over ₹1,000 will be liable to pay ₹5 (plus 18% tax). However, the Central Board of Direct Taxes (CBDT) issued a circular in August, 2020, directing all banks to stop applying any charge on UPI payments and refund the charges if they have collected any.

The last fiscal data captures the explosion in mobile-based instant inter-bank transactions facilitated by UPI. Across the country, merchants, service providers, small companies, and traders have already made UPI a part of their daily life. The instant transfer of funds between two bank accounts on a mobile platform, and the fact that it is regulated by the RBI, have made it a darling of the payments ecosystem.

“As the name suggested, UPI was considered to be a unifying force. When we started it, our target was to get an active customer base of 500 million. It is nearly 200 million as of now,” A.P. Hota, former managing director and CEO of NPCI, tells Fortune India.

Bharat Interface for Money (BHIM), an Indian mobile payments app based on UPI and developed by the NPCI, has seen a growth in transactions too. The app, which reported around 14 million transactions (at a value of ₹4,504 crore) in April 2020, has reported 24.4 million (₹7,653 crore) in March 2021. Another app, Cred, has also reported a substantial fivefold growth from 0.94 million transactions (672 crore) to 4.96 million (₹5,390 crore) in March 2021.

Indian banks, especially smaller banks, have also reported a jump in their number of transactions, though the base continues to be small. Axis Bank and YES Bank have reported the fastest growth to 72.9 million transactions (2 million a year ago) and 29.1 million (1.9 million a year ago), respectively. Large-sized banks have, however, reported a slower growth. ICICI Bank, which reported 10.6 million transactions in April 2020, has shown 13.95 million in March 2021. India’s largest commercial bank, State Bank of India, reported 4.6 million transactions vis-à-vis 2.7 million reported a year ago.

“Since all transactions are routed through banks, as a remitter or a beneficiary, their share of revenues is well taken care of. So, it doesn’t matter if their app attracts more customers or not. Of course, there is no MDR now. In the absence of revenues, banks and service providers are losing money because of their investment in IT backbone and tech support. Hopefully, MDR will return soon,” says a banker.

As the top players such as PhonePe and Google Pay cornered a substantial pie of the market, NPCI, in November 2020, placed a 30% cap on the number of UPI transactions for all third-party payment apps (TPAPs). The move was aimed at ensuring that a few players don’t monopolise the digital payments landscape, leading to an overload and a potential collapse.

“The idea is not to create a situation where third-party service levels do not create any disturbance. At present, two players are above the 30% level, while the third player’s share is coming down,” says Hota.

As the name suggested, UPI was considered to be a unifying force. When we started it, our target was to get an active customer base of 500 million. It is nearly 200 million as of now.
A.P. Hota, former managing director and CEO of NPCI.

According to the notification, the existing players will get two years to comply with the new norms, in a phased manner, till December 2022. The new entrants in the digital payments landscape, including WhatsApp Pay, have had to adhere to the 30% cap from January 2021.

The RBI has, meanwhile, decided to expand the market by allowing NPCI-like private companies with an aim to bring in enhanced competition. The central bank hopes to spruce up the growing digital payments in the country by inviting top corporates, private banks, and fintech firms. It is of the view that the new umbrella entities (NUEs) will help the central bank to achieve its stated objective of de-risking India’s retail payments ecosystem where NPCI currently holds a dominant position.

At a time when the country witnesses explosive growth, it can’t depend on just one payment ecosystem. According to a study by the Ministry of Electronics and Information Technology, India’s digital economy was valued at $200 billion in 2018, accounting for 8% of GDP. It is slated to grow to 18%-23% of the national GDP by 2025.

As the deadline for the bids expired on March 31, 2021, nearly a dozen companies/ joint ventures—led by the Tata group, Reliance Industries, ICICI Bank, Paytm, and several other banks—have approached the RBI seeking the new licence. Just like NPCI, which enables digital payments and settlement systems in the country via UPI and other payment modes, the proposed umbrella entity / entities will create a rival mechanism which will then be used by banks and fintech companies for retail transactions. Once licensed by the RBI, the new entities can own and operate a private payments network like UPI holding similar powers enjoyed by the NPCI.

The payments landscape is set for another explosive growth, for sure.

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