Fintech – UPI

• Context (TH): The Parliamentary Standing Committee on Communications and Information Technology is worried about foreign-owned fintech apps (Walmart-backed PhonePe and Google Pay) dominating India.
• They suggest promoting local players to address this concern.

PhonePe holds the leading market share in volume terms, followed by Google Pay, with 46.91% and 36.39% (Oct and Nov 2023). In the same period, NPCI’s BHIM UPI had a market share of only 0.22%. Fintech companies were also being used for money laundering. For example, an Abu Dhabi-based app named Pyppl, administered by Chinese investment scammers, posed challenges for Indian law enforcement agencies in tracking the money trail from scams conducted on the platform.

Significance of UPI

• Minimal Impact of Fraud
  • The fraud-to-sales ratio (representing fraudulent transactions compared to the total) has remained at around 0.0015% over the years despite the increased volume of transactions in the last five years.
• According to McKinsey’s Global Payments Report (September 2023), the advantages of instant payments are,
  • Helps in eliminating the hidden costs associated with managing cash transactions.
  • Has induced a shift in consumer behaviour, enhancing security and digital commerce access.

Committee’s recommendations

• Need for effective regulation of digital payment apps due to the increasing use of digital platforms for payments in India.
• Promoting local players because regulatory bodies like the RBI and the NPCI would find it more feasible to control local apps compared to foreign apps operating in multiple jurisdictions.

The committee’s recommendations align with NPCI’s 30% volume cap on UPI transactions issued in November 2020. This cap limits the total transactions initiated by third-party apps (like PhonePe and Amazon Pay) to 30% of the overall transactions made using UPI interfaces cumulatively over the three preceding months. The rationale was to promote the growth of UPI and achieve market equilibrium by encouraging both existing and new players to scale up consumer outreach. Apps exceeding this cap were initially given two years to comply with the directive, and the compliance timeline was extended to December 31, 2024.

Way forward

• A balanced mix (Local fintech players + Foreign fintechs) should be allowed to evolve, varying across areas like payments, lending, wealth management, and insurance.
  • Local fintech players have a natural advantage in understanding the Indian customer, ecosystem, and market infrastructure.
  • Foreign fintechs excel in new technologies and global connectivity.

To know more about the parliamentary standing committee, visit > parliamentary committee