The Economic Times daily newspaper is available online now.

    Free-riding UPI apps eating rivals' lunch

    Synopsis

    Transaction fees are now being absorbed by banks, fintech firms and the government. But for the UPI, or some variant of it, to operate in markets where transaction costs are covered by customers, it will have to compete with other technological advances like cryptocurrency that are cheaper. Once the digital rupee gains critical mass in retail transactions, UPI will lose some of its current pre-eminence among digital payment mechanisms.

    UPIiStock
    PhonePe's staggering rise in valuation - from $5.5 billion to $12 billion in just over two years - is a market testimonial to the Unified Payments Interface (UPI) that it dominates. Digital payments in India are on a tear even as valuations of other remote-working technologies have collapsed. Google, the other large player in this space, is championing UPI as an innovation the rest of the world should follow. Separately, other countries developing digital payments infrastructure are incorporating learnings from UPI as India explores opportunities of making it available to its migrant workers as a means to send money home at a fraction of the cost they now bear. UPI has hit the sweet spot for inclusion and businesses built on it, like PhonePe and Google Pay, can expect strong dividends from digital empowerment.

    Yet, the business is built on state funding. UPI transactions are growing exponentially because they are free. This cuts through charges imposed by other forms of online payments such as the merchant discount rate (MDR) credit card companies impose on sellers of goods and services. Transaction fees are now being absorbed by banks, fintech firms and the government. But for the UPI, or some variant of it, to operate in markets where transaction costs are covered by customers, it will have to compete with other technological advances like cryptocurrency that are cheaper. Once the digital rupee gains critical mass in retail transactions, UPI will lose some of its current pre-eminence among digital payment mechanisms.

    For now, though, the valuations of PhonePe and, by extrapolation, that of Google Pay - between them, they control over 80% of UPI transactions - are benefiting from successive rollovers of deadlines for them to reduce market share. Network effects and deep discounting involved in keeping UPI free are restricting market share gains for both local and global competitors to PhonePe and Google Pay. Eventually, however, UPI will have to conform to market rules over pricing and access.

    (Catch all the Business News, Breaking News, Budget 2024 Events and Latest News Updates on The Economic Times.)

    Subscribe to The Economic Times Prime and read the ET ePaper online.

    ...more

    (Catch all the Business News, Breaking News, Budget 2024 Events and Latest News Updates on The Economic Times.)

    Subscribe to The Economic Times Prime and read the ET ePaper online.

    ...more
    The Economic Times

    Stories you might be interested in