UPI Concentration Risk – Why India Must Act Now to Protect Competition and Innovation

India’s rapidly expanding digital payments ecosystem has reached a defining moment, and the conversation around UPI concentration risk has never been more relevant. With just two major third-party application providers (TPAPs) handling over 80% of UPI transaction volumes, concerns are growing about market imbalance, reduced innovation, and systemic vulnerabilities. Recently, the India Fintech Foundation (IFF) has called upon the Ministry of Finance and the Reserve Bank of India (RBI) to address these risks before they escalate further.

In this detailed analysis, we examine the issue of UPI concentration risk, explore the India Fintech Foundation’s policy recommendations, evaluate the systemic and regulatory implications, and present a nuanced expert view suitable for Indian fintech professionals, compliance teams, and policy observers.

Understanding the UPI Concentration Risk

The UPI framework is recognised globally as one of India’s most successful financial innovations. However, the ecosystem is currently grappling with a significant structural imbalance — the UPI concentration risk arising from excessive control by two TPAPs.

What exactly is the concentration risk on UPI?

• Only 2 out of nearly 30 TPAPs dominate over 80% of UPI transaction volumes.
• This duopoly controls users, merchants, incentives, and visibility.
• Smaller, indigenous fintech players find it increasingly difficult to stay competitive.

This skewed distribution raises concerns around systemic resilience, competitive fairness, entry barriers, and long-term innovation across India’s digital payments sector.

The India Fintech Foundation’s Warning on UPI Concentration Risk

The India Fintech Foundation, the proposed Self-Regulatory Organisation (SRO) for the fintech sector, has submitted a comprehensive policy note titled “Policy Options for Mitigating Concentration Risk on UPI.” This note has been drafted after extensive consultation with fintech stakeholders and assessment of global precedents.

Key concerns highlighted by the IFF

The Foundation has spotlighted several risks associated with T2 TPAP dominance:

• Predatory pricing practices such as deep discounts and heavy cashback campaigns.
• Crowding out of smaller competitors, including indigenous and state-led platforms like BHIM.
• Capital advantage enjoyed by large players leading to scale-driven monopoly.
• Lack of monetisation (zero MDR) which makes survival complex for new entrants.
• Strategic race to scale before regulatory caps are enforced.

According to IFF, these interconnected issues create a cycle where dominance leads to more dominance, limiting both market diversification and technological experimentation.

Why UPI Concentration Risk is Becoming a Systemic Threat

India’s policy architecture for digital payments has always prioritised inclusion, affordability, and innovation. However, unchecked concentration threatens these foundational goals.

Major systemic challenges created by UPI concentration

1. Too Big to Fail Risk
   Two platforms processing over 80% of transactions represent a systemic chokepoint.
   Any disruption (technical, regulatory, or security-related) could create nationwide impact.
2. Reduced Competitive Incentives
   Smaller players struggle to attract capital, talent, and users when a duopoly controls the ecosystem.
3. Barriers to Innovation
   Lack of market diversity reduces experimentation, product variety, and user-centric innovations.
4. Regulatory Enforcement Challenges
   NPCI’s attempt to introduce a 30% volume cap has been delayed for years because ecosystem readiness is low.
5. Misaligned Incentive Distribution
   The current subsidy flow inadvertently strengthens dominant players instead of encouraging competition.

Government Incentive Scheme and its Role in UPI Concentration Risk

Since 2020, the Government of India has been supporting digital payments through the “Incentive Scheme for Promotion of Rupay Debit Cards & Low Value BHIM-UPI Transactions.”

However, the IFF notes a crucial flaw:

• Incentives are routed through acquiring banks.
• Banks pass on these incentives to TPAPs.
• Distribution does not consider TPAP market share, resulting in a disproportionate subsidy flowing to dominant players.

This creates an unintended cycle:

• More incentives → more marketing capacity → more users → more volume dominance.

Without corrective measures, this may harden the duopoly structure in the long run.

IFF’s Recommendations to Mitigate UPI Concentration Risk

The India Fintech Foundation has proposed several market-friendly, globally inspired policy solutions. These aim to create an equitable business environment and ensure healthy competition across the UPI ecosystem.

1. Cap on Incentives for Large TPAPs (Durbin-Inspired Model)

The Foundation recommends:

• A regulatory cap on incentives large TPAPs (T2 TPAPs) can receive.
• Suggested ceiling: 10% incentive limit per TPAP.
• Beyond this ceiling, subsidies should not be allocated to dominant platforms.

Objective: Encourage banks to diversify partnerships with smaller TPAPs, enabling equitable growth and better fraud prevention practices.

2. Data Portability Framework

Modelled on India’s Account Aggregator ecosystem, this solution will:

• Allow users to seamlessly move their data between apps.
• Reduce lock-in effects.
• Encourage greater competition through technological transparency.

3. Promote Multi-Stakeholder Ecosystem Development

IFF emphasises:

• Policy interventions must encourage players across varied sizes.
• UPI should not become a winner-takes-all market.
• Smaller players must have a fair share of volume, incentives, and visibility.

Implications for the Digital Payments Landscape

Correcting UPI concentration risk is not merely about market fairness—it is a structural necessity for India’s financial stability.

Regulatory Implications

• RBI and NPCI may be required to revisit incentive frameworks.
• A well-defined cap system may soon emerge, similar to global payment reforms.
• SRO involvement (IFF) could formalise industry-level governance standards.

Impact on Fintech Startups

• Improved access to capital and partnerships.
• More opportunities for innovation-based differentiation.
• Levelling the playing field against heavily funded incumbents.

Consumer and Merchant Benefits

• Wider choice of apps.
• Better personalised features.
• Enhanced cybersecurity and fraud mitigation innovations due to competitive pressure.

Expert View – Why India Must Act Now

From a regulatory and systemic risk perspective, a duopoly structure on a national payments infrastructure as crucial as UPI presents genuine long-term risks.

India’s fintech ecosystem thrives on competition-driven innovation, and enabling smaller TPAPs to grow is essential for:

• Market resilience
• Cybersecurity improvements
• Innovation in credit-on-UPI, cross-border remittances, and merchant solutions
• Maintaining India’s global leadership in digital payments

If not addressed promptly, UPI concentration risk may inadvertently create a market structure that is hard to reverse.

Conclusion: UPI Concentration Risk is a Policy Priority India Cannot Ignore

The India Fintech Foundation’s recommendations arrive at the right time, highlighting clear concerns backed by thoughtful, globally benchmarked solutions. Addressing UPI concentration risk is vital to ensure that India’s most celebrated digital payments innovation remains inclusive, competitive, and resilient.

A balanced, diverse UPI ecosystem will encourage innovation, protect systemic stability, and uphold India’s global stature in digital finance. As the ecosystem matures, regulatory action—particularly on incentives, market caps, and portability—will be essential to shaping the next phase of UPI’s growth.

Based on recent developments reported by Economic Times.

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