From UPSC perspective, the following things are important :
Prelims level : UPI
Mains level : Paper 3- Cap on UPI transactions by TPAPs and issues with it
The article deals with the recent NPCI decision to cap the number of transactions by third party application providers (TPAPs).
- The National Payments Corp of India (NPCI), in its recent guidelines imposed a 30% volume-based cap on the share of transactions by TPAPs and payment service providers (PSPs), effective from January 2021.
5 issues with the volume-based cap
1) It undermines cashless economy
- The growth and recognition of UPI would not have been possible had a cap been in place.
- Typically, customers limit themselves to one or two TPAPs of their choice.
- A transaction cap that forces users to use multiple apps may result in more transaction failures and dilute UPI’s popularity and impact.
- Lack of accessibility and user-friendliness would push users away from UPI towards other payment methods, or even cash.
2) It’s an anti-consumer decision
- Open markets and user choice have been crucial factors in the exponential increase seen in UPI adoption and its transactions.
- A volume-based cap would compel TPAPs to either limit the number of transactions on their platforms or stop enrolling new users, which in turn would restrict the customer’s use of UPI.
- TPAPs will likely be forced to redact customer incentives like cashbacks, coupons and the like.
- This could go against consumer interests by reducing choice.
3) It will also make the Indian market less attractive for investors:
- The cap would raise compliance and regulatory costs for players in the sector, which could deter new investors from entering.
- It would also adversely affect the growth potential of existing UPI players.
4) No regulatory impact assessment
- The idea of a volume-based cap does not appear to have undergone an assessment of its impact on the sector.
- As a general principle, before any such rule is imposed, an RIA (Regulatory Impact Assessment) needs to be undertaken.
- Systemic risks are not restricted to UPI and are common in all financial systems; yet, a similar cap has not been suggested for, say, retail bank transactions.
5) Impact on Atmanirbhar Bharat
- In order for Indian businesses to grow and compete at the global level, we need to integrate business processes with the global economy.
- Indian start-ups, in particular, need tools and infrastructure that lets them gain an international edge.
- Atmanirbhar Bharat envisions a self-reliant India that thrives on innovation, technology and entrepreneurship.
- But this vision cannot be fulfilled if our policies restrain the growth of a cashless economy.
India’s UPI ecosystem is nascent, but has demonstrated significant growth and has had a positive impact on the economy by providing the backbone needed to move towards cashless commerce. Any policy decision by regulators at this point should aim at catalysing innovation in this space. Stifling it would serve India badly.