Explained: The UPI cap, who it affects and why it is needed

The Thursday announcement by the National Payments Corporation of India (NPCI), capping third-party UPI transactions at 30%, did not come as a surprise for fintech players. According to a person privy to the development, payments apps have been discussing the move with the retail payments regulator since 2019, with media reports in July making it public.

A digital payments player confirmed to TechCircle that NPCI, the architect of the payments interface, held a stakeholder meeting earlier today to discuss the SOP to implement the order.

What is it?

The regulator has capped the total volume of UPI-based transactions processed by all third party app providers (TPAP) to 30% of the total volume of transactions processed by UPI in the preceding three months, on a rolling basis. For example, if the average number of UPI transactions for January, February and March is 300, every TPAP can only process up to 90 transactions in April.

What happens if the cap is breached?

No specific guidelines have been established yet.

Whom does it affect?

All the 21 TPAPs listed on the NPCI website, including Google Pay, Amazon Pay, PhonePe and the recently-launched WhatsApp Pay. 

What is the timeline for implementation?

For now, NPCI has said that the order will come into effect from January 1, 2021, for new players. Incumbent TPAPs will get two years from January 2021 to comply in a phased manner.

Why now?

Last month, UPI clocked 2 billion transactions, a more than two-fold increase from October 2019. Assuming that the number is set to grow, 30% is a sizable number for the years to come. 

According to Mihir Gandhi, partner and leader for payment transformation at PwC India, fintech companies have had a major role to play in making UPI interface easy and creating multiple touch-points for ease of adoption. “After the pandemic, touchless transactions grew, as customers preferred paying by scanning QR codes at the merchants rather than using their cards or cash,” he said.

Flipkart-backed PhonePe recently claimed to have processed 835 million of the 2 billion UPI transactions for October. Google Pay is a strong contender, and between the two, they command around 80% of the total UPI transaction volumes. 

If just two players handle over 50% of UPI transactions, failure of even one will hit the total number of transactions significantly. This leads to customers suffering from transaction failures and a potential shift back to cash.

According to Gandhi, the move may have come on the back of NPCI’s intention to de-risk the transactions on UPI and ensure no loss of reputation to the payments interface architect, the NPCI.

Will banks be affected?

All TPAPs are required to partner with multiple banks at the backend for payment processing. Banks leverage their partnership with the TPAPs to cross-sell financial products, such as short-term loans. The return-on-investment for banking players is on customer acquisition and cross-selling opportunities rather than a direct benefit. 

While banks can also directly provide UPI payments through their apps, users need to log in to the app each time to transact, making it a clunky experience. 

How will consumers be affected?

It is yet to play out, although increased transaction failures may be on the cards.