NPCI's volume cap circular: Will limits on UPI transaction volumes impact India's fintech sector?

UPI transactions, NPCI, reserve bank of india, bank of india, UPI Transactions Impact, CCI, tpap, national payments corporation of india, upi

The National Payments Corporation of India (NPCI) released the “Guidelines on volume cap for Third Party App Providers (TPAP)” (Circular). As per the Circular, effective January 1, 2021, TPAPs are required to ensure that the total volume of transactions initiated through their respective Unified Payment Interface (UPI) applications do not exceed 30% of the total volume of transactions in the country during the preceding three months.

Further, existing TPAPs that cross the 30% cap have been given two years to comply with this new directive. On March 25, 2021, NPCI also released the Standard Operating Procedure (SOP), which provides the guidelines for TPAPs to fulfil the norms for staying within the stipulated volume cap.

Notably, NPCI’s justification for the volume cap is to

  • Encourage new players to increase their market share, thereby evening out the distribution of market share among all participants and preventing monopoly
  • Address risks and protect the UPI ecosystem. However, the Circular and SOP fail to elucidate these ‘risks’, raising several questions on both legal and business issues.

Regulatory Concerns

From a regulatory point of view, the Circular could be a violation of the Competition Act, 2002 (Competition Act). As per Section 4 of the Competition Act:

No enterprise or group shall abuse its dominant position.

There shall be an abuse of dominant position under sub-section (1), if an enterprise or group:

  • Limits or restrictions: Production of goods or provision of services or market.

By limiting the volume of transactions handled by individual TPAPs to 30%, NPCI has imposed a restriction on the provision of services, which amounts to an abuse of dominant position under the Competition Act. Notably, the Circular would not impact the payment app BHIM (Bharat Interface for Money), as its market share is negligible compared to other leading TPAPs. In fact, the Circular could potentially result in the volume of transactions increasing on the BHIM platform.

In this context, the essential facilities doctrine would also be relevant. The Competition Commission of India (

CCI

) has indirectly embraced this doctrine in several cases. In simple terms, the essential facilities doctrine is a concept where, if a dominant undertaking controls certain facilities and refuses, without justification, to make such facilities available to its competitors, or does so in a discriminatory manner, such an act is an abuse of dominant position.

Being the sole umbrella organization for retail payments in India, NPCI is in a dominant position. Given the current regulatory framework, UPI would be considered to be an essential facility which cannot be recreated by NPCI’s competitors.

Furthermore, CCI has held that, in the absence of a reasonable regulatory rationale or necessity, certain cases will unquestionably be impacted by an anti-competitive effect. While NPCI has sought to justify the volume, cap being introduced due to perceived risks, the nagging question is whether these risks are real.

Business Concerns

From a business perspective, the anti-competitive environment created by the volume cap would have negative consequences on the entire UPI ecosystem by impacting quality, growth, and innovation. Upon reaching 30% volume, TPAPs will have no reason to compete with each other. Inadequate competition will result in complacency, which, in turn, may also lead to a decline in the quality of customer service.

The Circular may also disincentivize TPAPs from investing in the UPI ecosystem. While NPCI is currently the sole umbrella entity for retail payments, the Reserve Bank of India is in the process of authorizing new umbrella entities (NUEs) for retail payments. These NUEs would be allowed to set up, manage, and operate new payment systems in the retail space, and develop new payment methods. Consequently, upon reaching 30% volume, TPAPs will have no option but to engage with other entities to sustain their growth in the retail payments space.

Perhaps NPCI should take heed of the impending possibility that it may lose its premier position as a systemically important payment system once other umbrella entities enter the digital payments market. A more prudent approach would be for NPCI to collaborate with TPAPs in finding practical solutions to the ‘perceived risks’.

And finally, the implementation of the volume cap is a serious concern. The SOP issued by NPCI attempts to control a TPAP’s market share by moderating the number of new customers it on-boards without affecting existing customers. It is yet to be ascertained what obligation will be imposed on TPAPs whose market shares, based on the transactions of existing customers, exceed the volume cap, without on-boarding new customers.

The need of the hour is a consultative solution-based approach to address the many uncertainties in respect of NPCI’s new thrust for digital payment apps. The question remains, who will bell the cat?

(Probir Roy Chowdhury, Partner and Kavya Katherine Thayil, Senior Associate at J Sagar Associates)

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