Regulatory Paradox: Why Capping UPI Transactions Might Hurt The Ecosystem

(MENAFN- Live Mint) Mumbai: A plan by the National Payments Corp. of India (NPCI) to restrict an app to a little over a third of the overall transactions on fast payments platform UPI by the end of 2026 is a tough ask, regulators and financial sector experts said.

The idea first came to the fore in 2020 when the retail payments umbrella body, NPCI, announced it would impose a 30% cap on Unified Payments Interface (UPI) volumes. The plan was to counter concentration risk, given that the top two apps-PhonePe and Google Pay-already accounted for nearly eight of 10 transactions.

The deadline to implement the UPI volume cap has been postponed twice since, the latest being from January to December 2026.

Glacial shifts

NPCI data showed that 82% of UPI transactions were processed through PhonePe and Google Pay in October, compared to 86% in the same period last year. According to industry insiders, the 400 basis point (bps) gain in market share by other UPI apps shows that others are catching up, but at an extremely slow pace.

Experts said that at the heart of the issue is the fact that payments by themselves generate no revenue, as there is no merchant discount rate (MDR) on UPI payments since January 2020.

Key Takeaways

• Despite a 4% market share gain by smaller apps over the last year, PhonePe and Google Pay still dominate 82% of the UPI landscape.
• The absence of a Merchant Discount Rate is the primary barrier to entry, as payments currently generate no revenue for providers.
• The Reserve Bank of India has publicly questioned the feasibility of a 'hard cap,' noting that you cannot practically force a successful business to stop accepting customers.
• Domestic banks have largely retreated from the UPI app race, viewing it as a high-cost, zero-return venture given they already own customer data.
• Instead of a hard cap, experts suggest 'soft' measures like exclusive feature launches on smaller apps and multi-logo QR codes to improve brand recall for newcomers.

MDR is the charge paid by the merchant to the bank, card network, and point-of-sale provider for offline transactions, and to the payment gateways for online purchases.

“If you impose a cap on market share, even companies that are investing in UPI will stop putting in more money,” said a senior payments industry executive.“The problem now is that UPI players are not investing because they are not making any money, and the only way to kickstart the cycle is to bring back MDR, at least for the larger merchants.”

After reaching 20 billion in monthly volumes in August, it remained rangebound and stood at 20.5 billion in November, 1% lower than in October, according to NPCI data.

Emails sent to NPCI and Google Pay remained unanswered.

A spokesperson for PhonePe said that it is virtually impossible to implement market share caps in UPI or any other digital ecosystems, for that matter.“Companies spend time and capital trying to grow customer bases. Asking the same companies to later start denying millions of customers critical services like UPI payments just to stay under a market share cap will erode trust in the very same ecosystem that we are all trying to grow together,” the spokesperson said.

Also Read | NPCI extends deadline for compliance with UPI volume cap by 2 years

The regulator also sounded pessimistic about the market cap issue. In a recent conversation at Mint's BFSI Conclave, RBI deputy governor T. Rabi Sankar said that the“basic issue is it's difficult to implement”.

“How do you implement a cap? Can you ask an entity that is actively doing business to say that you stop acquiring customers? How do you tell someone that when your transaction is 30%, then you stop doing transactions? You can't really do that,” said Sankar.

Sankar believes that a workaround is to encourage others, and the regulator is taking steps to ensure that more and more people join the fray.

Interestingly, the Bharat Interface for Money (BHIM) app, developed by NPCI, has gained some amount of market share recently, increasing to 0.62% of overall transactions in October, from 0.2% in October 2024. The Economic Times reported in July that the growth in transaction volumes was a result of a user-interface revamp, increased marketing expenditure by NPCI, and targeted incentives.

Consumer habits

The industry is sceptical about the advent of a third player that can take sizable volumes away from the existing ones that dominate the market, especially due to the lack of financial incentives to invest.

The challenge is in changing consumer habits. Once users start using a UPI application, it typically becomes their default for payments, and there is little incentive to switch unless something goes wrong.

Another issue is how QR codes are displayed. An official at one of the top ten UPI applications explained that a majority of the QR codes carry the logo of the market leaders because they were the first to onboard these customers. While these codes have since been made interoperable, many people tend to only use the app corresponding to the logo on the QR code.

A solution would be using multi-logo QR codes to encourage consumers to use other apps and improve brand recall, they said.

“I am not sure if there is an easy mechanism to get another player in the UPI race unless there is a commercial angle,” said Parijat Garg, an independent fintech expert.

Also Read | How UPI's tie-up with the EU's TIPS system could boost cross-border payments

According to Garg, for a third or fourth player to come and compete, trying to capture more market share, it makes sense only when commercial value is involved.“There are existing apps that have both the reach and the capital to do it, but without any earnings from payments, why would someone do it?” said Garg.

There is also a school of thought that believes that domestic banks squandered the opportunity to push UPI on their apps.

In fact, private sector lender Axis Bank is the only commercial bank to feature in the top 10 UPI apps list, according to data from NPCI. Garg said that banks might have let go of the UPI opportunity because, without generating any revenue from it, it did not make business sense. Unlike UPI apps, which require transaction data, large banks already possess a significant amount of it, and there is not enough incentive to promote their own apps, he added.

Network effect barriers

While the government offers a 0.15% incentive for UPI payments of up to ₹2,000 at small merchants, the payouts are split between banks and these apps, with those with higher volumes and market share benefiting more. These economic incentives enable the top players to invest more in merchant onboarding, marketing and acquisitions, further hurting smaller players. In October 2025, the India Fintech Foundation (IFF) suggested a regulatory ceiling to cap the overall share of subsidies received by any single player.

This is also the reason why foreign payments firms have been reluctant to invest in domestic retail payments on a major scale or fund smaller third-party application providers (TPAPs).

Also Read | UPI AutoPay woes hit subscription market; businesses turn to card payments

Legal experts said that payment ecosystems are driven by strong network effects. Once users gravitate towards a platform for reliability and scale, it becomes neither practical nor consumer-friendly to restrict further onboarding.

“As an alternative to a blunt cap, regulators could consider softer interventions such as incentivising interoperability, differentiated pricing or settlement efficiencies, and calibrated regulatory support for smaller players to compete on service quality rather than scale alone,” said Siddartha Karnani, partner, King Stubb & Kasiva, Advocates and Attorneys.

Another industry suggestion has been to launch new UPI features exclusively with smaller TPAPs-something that NPCI has started doing lately with the BHIM app-to encourage users looking to avail those features to use different UPI applications.

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