The National Payments Corporation of India (NPCI), the umbrella body responsible for the operation and management of the united payments interface (UPI), issued a circular dated 5 November 2020 on Guidelines on Volume Cap for Third Party App Providers (TPAPs) in UPI (volume cap circular). From 1 January 2021, payment service providers (PSPs) and TPAPs must ensure that the total volume of UPI transactions processed through a TPAP does not exceed 30% of the overall volume of transactions processed in the UPI network during the preceding three months on a rolling basis. Existing TPAPs will have a period of two years from 1 January 2021 to comply with the cap in a phased manner.
The volume cap circular is the latest in a series of measures taken by the Reserve Bank of India (RBI) and the NPCI to manage systemic risk linked to the concentration of transactions in the hands of a few operators. Earlier this year, on 2 March 2020, the NPCI issued a circular (March circular) that required large TPAPs, which it defines as TPAPs that process more than 5% of the total monthly volume and value of the UPI ecosystem, to operate on the multi-bank model, that is associating with a minimum of three banks and maximum of 10 banks when they offer their UPI payment solutions to customers. The volume cap circular was issued by the NPCI against the background of the moratorium that had been imposed on Yes Bank. The problems of that bank had impacted UPI transactions that were being processed by PhonePe, as Yes Bank was at that time the sole PSP bank partner for PhonePe.
The RBI has also designated the NPCI as a system-wide important payment system (SWIPS), given the concentration of retail payments under the NPCI and the critical significance of its operations. The RBI views any disruption to the operation of the NPCI as the cause of significant adverse impact to the processing and settlement of transactions that affect the larger public.
The RBI issued a notification dated 22 October 2020 on Digital Payment Transactions – Streamlining QR Code Infrastructure (October notification) prohibiting authorized payment system operators from issuing new proprietary QR codes, which are non-interoperable QR codes which can be used only by customers and merchants on-boarded by the relevant payment system operator for sending and receiving digital payments. Payment system operators are now only permitted to issue interoperable QR codes such as the UPI QR and Bharat QR. The March circular and the October notification show that the focus of the RBI and the NPCI is on the increasing interoperability of digital payments, with the added objective of preventing the concentration of transactions in the hands of a few entities.
Detailed procedural guidelines on operationalizing the volume cap circular will be issued shortly, but both the industry and the regulator will need to consider how these rules will be implemented. One of the principal reasons for the success and popularity of UPI-based transactions has been the ease with which end-to-end payment transactions can be completed. If the volume cap circular results in volume-based transaction blocking or restrictions on the number of customers that can be on-boarded, this will significantly reduce both customer choice and experience, taking away two of the key strengths of UPI-based payment transactions. To prevent any disruption to the customer experience, TPAPs may enter into back-end partnerships or collaborations in which excess traffic is routed through another partner operator in order to comply with the volume-based cap. However, the feasibility of the revenue sharing models behind such arrangements will need to be worked out.
While the RBI aims to address an important operational risk, it is to be hoped that these requirements do not affect the usability of the seamless customer experience, making it harder to complete UPI payment transactions. In an economy struggling with the challenge of covid-19, the ability to transact digitally has become a matter of need and not convenience. It is important that the detailed operational guidelines strike the right balance between addressing the systemic risk of the concentration of transactions among a few players and the need to encourage players to innovate and give customers a wide choice of simple and easy to use payment solutions.
Shilpa Mankar Ahluwalia is a partner and Himanshu Malhotra is an associate at Shardul Amarchand Mangaldas & Co.
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