Indian digital pay arena gets more convoluted with opaque 30% cap on transactions

The firms that will get hit are market leaders Google Pay, Walmart's PhonePe, and new entrant and potential goliath, WhatsApp Pay. The ones that stand to gain? Paytm and Reliance Jio.

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Image: Google

For a country and a government that has strained mightily to be viewed as pro-business, its imposition of a limit on how many customers a company can acquire in one of the hottest areas of the technology and investment landscape -- one into which billions of dollars have been pumped -- is very bizarre behaviour.

That's what the Indian government did very recently when it decided to impose a 30% cap on all UPI transactions per player. UPI, or United Payments Interface, is an instant, real-time, payments system first piloted by the government in 2016.

Money can be transferred between two bank accounts thanks to an India specific stack, or a collection of software utilities available as an API and targeted at entrepreneurs.

First, a little context and an explanation to this: Digital payments in India have exploded over the past 10 years. The technology is used by 160 million people today thanks to the penetration of around 500 million smartphones, which are predicted to mushroom to 800 million by 2025.

Around 65-70% of Indians live in rural areas, and since the cost of servicing them hasn't been as profitable as their urban cousins, the banking sector has simply ignored them since independence.

Therefore, a migrant labourer who had historically been unable to wire his or her wages to their families back home could now do so easily thanks to the fintech revolution in the country. Consequently, the market for digital payments is expected to blast off from less than $200 billion today, of which mobile payments account for just $10 billion, to $1 trillion in 2023 thanks to mobile payments, according to a Credit Suisse study.

To give you an idea of the scope of this market in India over the next few decades, take a look at one of India's neighbours. China is currently witnessing transactions valued at over $17 trillion just from mobile transactions. There is a lot of money to be made here, and the stakes are high.

Digital pay encompasses a wide variety of payment types -- UPI transactions, eWallets in which you need to pre-load money, bank cards, credit cards, and so on. Where wallets once reigned supreme, UPI transactions are now clearly king and will continue to do so. According to statistics compiled by the country's Reserve Bank, UPI transactions easily outstripped net banking, card payments, and dwarfed mobile wallets in 2019-20.

Within the UPI realm, India has seen the stunning rise of Google Pay which, in just a year, has grabbed 40% market share, servicing 67 million Indians. Another 40% chunk belongs to the Walmart-Flipkart combine. And now, mega messenger, WhatsApp, has waded in after being given permission to launch its payment system, WhatsApp Pay, and with its 400 million users, it promised to create further disruption.

The loser? Paytm, which had its own moment of glory in 2016, when Prime Minister Narendra Modi decided to abolish all of India's cash notes due to the alleged hoarding of black money, which forced Indians towards digital adoption and thereby ignited the tremendous rise of digital payments literally overnight. The company's user base catapulted from 140 million in October 2016 to 270 million in November 2017. Its share, however, has tanked to just 14% or thereabouts as of July despite previously being the leader in market share.

Paytm says that it is still the clear leader when you add offline merchants of which it has onboarded millions. But the future is with UPI and it hasn't been looking so good for Paytm.

So when the rule came -- it applies only to "third party apps" like Google Pay or Whatsapp, another point of criticism -- it shocked everyone in the industry.

The official explanation, however, is that the 30% cap seeks to "address the risks and protect the UP ecosystem as it further scales up," and to stay away from "closed-loop solutions, such as in China". In other words, if the market is dominated by one or two players, the adverse effects of one of those two failing would be catastrophic on the entire sector.

However, the move was widely seen in the industry as benefitting both Paytm and Reliance Jio,
who have been seen to be close to Modi in the past. The two have payment bank licences which allow them to escape the "third-party app" category altogether.

The decision to impose the cap -- volumetrically for the past three months on a rolling basis -- just doesn't make sense to industry observers. For one, it will force these players to self-impose caps on the number of transactions undertaken by a customer, a death knell for anyone offering a financial service.

Worse, they may have to decline customer transactions once an overall limit is reached, which is the easiest way to lose a customer. In other words, Google Pay and PhonePe, which is owned by Walmart Flipkart, will have to actually shed customers after striving so hard to gain them.

It boggles the mind. WhatsApp Pay has already been limited to 20 million customers.

While this isn't playing by free market rules, neither is cornering every business you can by leveraging your monopolistic position. Google owns the biggest app store and mobile OS share in India, as well as the biggest search engine. It can dominate pretty much anything it wants.

By taking a closer look at new rules then, the 30% fee suddenly becomes more aligned with how the intercontinental tit-for-tat world of quotas, limits, and bans works. That is, of course, except for the fact that Paytm is hardly an indigenous firm. Its investors include Japan's Softbank, Ant financial that is owned by Alibaba, Berkshire Hathaway, T. Rowe Price, and others.

Helping Paytm is like putting money in the hands of the Americans, the Japanese, and the Chinese -- so it can't be nationalism that's driving this move.

Additionally, regarding the "risk" argument, critics have pointed out that Indians download more than one app so you're never going to realistically run into the dire scenario that's been used as an explanation. If at all there is a risk, it lies in the UPI itself they say, which is just one of its kind with no competitors.

And therein lies the rub.

Apparently, the government has announced that it will allow bids for the development of New Umbrella Entity frameworks, which will be a competitor platform to the UPI. Which players are thinking of applying for licences? Reliance Jio and Paytm of course.

Winning in fintech is no longer going to be quite so straightforward in India.

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