• The implementation of market share caps for the Unified Payments Interface (UPI) in India has been postponed by two years.
• This decision benefits major players like Google Pay and PhonePe, who currently hold more than 30% of the UPI transactions.
• The delay aims to not hinder the growth of the UPI ecosystem and gives time for other players to grow.
• This significant development will shape the future growth of the UPI ecosystem and the digital economy in India.

In a significant development for the digital payments landscape in India, the implementation of market share caps for the Unified Payments Interface (UPI) has been postponed by two years. This decision, announced on Tuesday, is set to benefit major players in the market, including Google Pay and Walmart-backed PhonePe. The proposal, initially introduced in November 2020, stipulated that digital payment firms would not be allowed to hold more than 30% share of the volume of transactions processed via UPI.

This mandate, originally slated to take effect at the end of 2024, will now be implemented at the end of December 2026, according to a statement from the National Payments Corporation of India (NPCI), the quasi-regulator for the sector. Google Pay and PhonePe are the two most widely used apps for UPI payments in India, with other players including fintech companies such as Paytm, Navi, Cred, and Amazon Pay.

Impact on Market Players and Stock Market

As per regulatory data, PhonePe's share of UPI payments stood at 47.8% in November 2024, while Google Pay's share was at 37%. Together, these two firms processed a combined 13.1 billion transactions in November. The decision to delay the market share cap is aimed at not hindering the growth of the UPI ecosystem while also giving other players the time to grow, according to a person familiar with the discussions.

The NPCI did not immediately respond to an email seeking comment. In a related development, the NPCI also lifted a cap on WhatsApp Pay's UPI product onboarding users, according to a separate statement on Tuesday. The delay in the implementation of the UPI market share cap had a noticeable impact on the stock market. Paytm shares fell over 3% on January 1 as the NPCI extended the cap on volumes processed by UPI applications by two more years to December 2026.

The UPI System and the Digital Economy

At 10:15 am on January 1, Paytm shares were trading 3.5% lower at Rs 983 apiece. The market capitalisation of the stock is Rs 62,626 crore. Its 52-week low is Rs 310 and 52-week high is Rs 1,063. The stock was among top losers on BSE Midcap index on January 1. The UPI system has been a game-changer for India's digital economy. It has not only formalised the economy but also improved tax collections by keeping track of the smallest of transactions.

A State Bank of India report published in October 2021 stated that the government's efforts to formalise the Indian economy has resulted in the shrinking of the informal economy from about 52% to just 15% to 20%. The digital economy has also been a topic of global debate, particularly around the issue of taxation. There is a geographic mismatch between the location of individuals who use digital platforms and the location where those products are developed.