India Fintech Foundation seeks RBI, government action to curb UPI concentration risk

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New Delhi: The India Fintech Foundation (IFF) has urged the finance ministry and the RBI for immediate intervention for safeguarding concentration risk on UPI, saying over 80 per cent of its transaction volume is controlled by only two players.

India Fintech Foundation (IFF), the proposed self-regulatory organisation (SRO) for the fintech industry, was launched at the Startup Mahakumbh in April. It has submitted a policy recommendation note titled “Policy Options for Mitigating Concentration Risk on UPI” to the Ministry of Finance and the Reserve Bank of India (RBI).

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“This note has been prepared after extensive consultation with our member fintech institutions and draws on global precedents to propose balanced, market-friendly approaches to strengthen competition, inclusion, and systemic resilience within the UPI framework,” the note said.

It further said UPI currently faces a concentration risk issue in that more than 80 per cent of the volume of transactions on UPI happens through only 2 of its about 30 third-party application providers (TPAPs). “In other words, only 2 of the TPAPs (T2 TPAPs) control more than 80 per cent of the payment volume on UPI,” it said.

Highlighting the “real risks” caused by T2 TPAPs, IFF said the duopoly uses “predatory pricing (deep discounts, cashbacks) to crowd out” the relatively smaller, indigenous competitors.

Even State-led platforms like BHIM have seen their market share erode due to the duopoly’s capital and user engagement advantages, it added. According to IFF, the lack of monetisation opportunities (zero MDR) combined with the incumbents’ capital advantage creates significant entry barriers for new and smaller players, stifling competition, cost reductions, and service enhancements.

“The ongoing, delayed attempts by the NPCI to enforce a 30 per cent transaction volume market cap highlight the seriousness of the issue and the operational challenges of regulating the concentration risk.

“The push of the large players to become too big before NPCI can enforce this cap is a strategic move to capture large market share and become ‘too big to fail’,” it said. To address the concerns, IFF has suggested that the government, the RBI, and the NPCI can rewire the UPI incentive mechanism to ensure that TPAPs other than T2 TPAPs receive a greater share of UPI incentives that the government routes through acquiring banks.

The government has implemented a policy of promoting digital payments under the “Incentive Scheme for Promotion of Rupay Debit Cards & Low Value BHIM-UPI transactions” since 2020.

“However, the system of downstream sharing as implemented does not take into account the relative market share of payment volume of the TPAPs that receive the subsidy,” it said. The unintended consequence is that the T2 TPAPs end up receiving a larger fraction of the overall subsidy flow relative to their smaller counterparts, it added.

To correct this, the IFF proposes a cap inspired by the US Durbin Amendment, suggesting that “T2 TPAPs DO NOT receive incentive payment under the Scheme beyond a regulatory-prescribed ceiling. That ceiling can be defined in terms of volume of customer-initiated transactions”.

Specifically, it suggests a “10 per cent incentive cap per TPAP”, which would incentivise banks to diversify their partnerships and direct funds to smaller players for “growth and fraud mitigation”. It has also proposeda  “Data Portability Solution”, modelled on India’s account aggregator framework.

IFF has urged the government to view policy interventions to correct the skew in payment volumes and more equitable growth of UPI.