Fintech Foundation Urges RBI and Finance Ministry to Address UPI Transaction Concentration Risk

The India Fintech Foundation (IFF), a newly formed self-regulatory organization for the fintech industry, has submitted a policy recommendation to India's Ministry of Finance and the Reserve Bank of India (RBI). The note, titled "Policy Options for Mitigating Concentration Risk on UPI," highlights a critical issue: more than 80% of transaction volume on the UPI platform is handled by only two out of approximately 30 third-party application providers (TPAPs). This dominance by two major players, referred to as T2 TPAPs, raises concerns about fair competition and systemic resilience. The IFF points out that these dominant TPAPs use strategies like deep discounts and cashbacks to push out smaller, indigenous competitors, even impacting state-led platforms like BHIM. The foundation argues that the lack of monetization opportunities (zero Merchant Discount Rate - MDR) combined with the financial strength of the larger players creates high entry barriers, hindering innovation and cost reductions. Attempts by the National Payments Corporation of India (NPCI) to enforce a 30% market share cap are reportedly facing operational challenges, with large players strategically increasing their volume. To address this, the IFF proposes several solutions: rewiring the UPI incentive mechanism to favor smaller TPAPs, capping incentive payments to T2 TPAPs similar to the US Durbin Amendment, and introducing a 'Data Portability Solution' modeled on India's account aggregator framework. The IFF urges policymakers to intervene to ensure more equitable growth and a balanced UPI ecosystem.

Impact: This news can significantly impact the Indian fintech sector, potentially leading to regulatory changes that could alter the competitive landscape for digital payment providers. It may also influence investor sentiment towards companies operating in this space. Rating: 7/10

Difficult terms: UPI: Unified Payments Interface, a real-time payment system developed by the National Payments Corporation of India (NPCI). TPAP: Third-Party Application Provider. These are apps like Google Pay, PhonePe, Paytm that allow users to make payments via UPI. SRO: Self-Regulatory Organisation. An organization that sets and enforces industry standards and regulations. Concentration Risk: The risk that a large portion of transactions or market share is controlled by a small number of entities, making the system vulnerable. Predatory Pricing: Setting prices very low (e.g., deep discounts, cashbacks) to drive out competitors. MDR: Merchant Discount Rate. A fee charged by banks on card transactions, which is currently zero for UPI. NPCI: National Payments Corporation of India. The organization that operates UPI and other payment systems. Durbin Amendment: A US federal regulation that limits the fees (interchange fees) that banks can charge retailers for debit card transactions. Account Aggregator framework: A system in India that allows individuals to securely share their financial data with third parties with their consent.