Why India must act now to prevent PhonePe and Google Pay's UPI Duopoly from becoming a national liability

India's UPI is a world-class innovation. However, beneath the shine lies a serious vulnerability in the form of an outsized dominance. Two third-party app providers (TPAPs) - PhonePe and Google Pay - account for more than 80% of all transactions, turning a competition concern into a broader systemic risk for India's financial stability and strategic resilience.

The dominant players, armed with massive capital, use deep discounts and cashbacks to aggressively crowd out smaller, indigenous competitors. Combined with the zero merchant-discount-rate (MDR) policy, this creates nearly insurmountable barriers for new entrants. With no competitive pressure, the incentive for tier-2 third-party application providers to innovate, especially for underserved segments like those living in rural India, is drastically reduced, thereby directly hindering the goal of financial inclusion.

Repeated and ongoing delays in enforcing NPCI's 30% volume cap are alarming. PhonePe and Google Pay appear to be racing to become 'too big to fail' before the cap can be implemented, effectively daring the regulator to disrupt the system.


Also Read: Why India must rethink UPI’s zero-fee model


To mitigate this systemic risk, concrete, market-friendly solutions that complement the efforts of RBI and NPCI are the need of the hour.

Overhaul the UPI incentive mechanism
The current incentive scheme for low-value UPI transactions, while well-intentioned, has an unintended consequence. As the payout is volume-based, PhonePe and Google Pay receive a disproportionately larger share of the overall subsidy, further cementing their vice-like grip. The solution is to implement a specific '10% incentive cap per TPAP' on payments a bank can disburse.

The solution to implement a specific '10% incentive cap per TPAP' on payments a bank can disburse, as proposed by some self-regulatory organisations (SROs) from the fintech sector, is worth considering and should be examined by the concerned authorities.

This simple reform would encourage banks to diversify their partnerships, diverting a larger pool of funds to smaller TPAPs, which can then reinvest the funds in growth and fraud mitigation, thus creating a level playing field.

Implement data portability
Currently, user transaction history and autopay mandates are 'locked in' within the dominant apps, creating a high switching cost and discouraging users from trying other providers. The solution is to mandate data portability, like the account aggregator framework. Consumers must be empowered to port their last 24 mths of transaction history and autopay mandates to any other TPAP. This data, leveraged with consumer consent, would allow smaller TPAPs to offer value-added services, creating user 'stickiness' and driving their volume share.

Apply strategic and geopolitical lens
This is not just a competition issue; it poses a greater strategic national risk. There have been global precedents where payment and banking systems have been weaponised by states, emphasising that the ownership and control of critical payment infrastructure are matters of financial stability and sovereignty.

A diversified TPAP market structure is essential for resilience during periods of geopolitical stress. GoI must act now to correct this market skew before the concentration risk compromises the systemic resilience of UPI.

The phenomenal success of UPI should not allow us to ignore its inherent fragility. The dangers presented by the two dominant players are real and immediate, encompassing stifled competition, slowed innovation and alarming systemic vulnerability. To ensure the UPI ecosystem remains competitive, inclusive and resilient for the decades ahead, GoI must adopt balanced and market-friendly reforms on incentive capping and data portability. This is a crucial moment for national financial security - swift action is necessary to correct this critical market skew before the concentration risk escalates into a full-blown national crisis.

We must look beyond immediate convenience to prioritise the longevity and interests of UPI. This is a crucial moment for national financial security, and swift action is necessary to correct this critical market skew before concentration risk escalates into a full-blown national crisis.

Failure to act swiftly will convert a manageable market imbalance into an unmanageable national liability, one that India cannot afford to inherit.