Are there any network effects in UPI? I can't see any? The heavy concentration of market shares in the hands of the top two players seems odd. How do you explain it?
I'd say there are network effects because of the quantum of customers & merchants accepting and paying through UPI, so joining the ecosystem suddenly allows you to send money to almost everyone who has a bank account in India.
The problem with the UPI model is that NPCI has insisted that it needs to be free: i.e. free to the customers and the merchants. So you can't charge both P2P & P2M payments. As a result there is very little incentive for new companies to come in and challenge Gpay & PhonePe. The free model makes it very hard to make a profit making business, and even from a usage perspective people already have their primary and secondary UPI App options, so using UPI to acquire customers & then cross-selling is not a very realistic strategy. As a customer, I don't have incentives to download yet another UPI app, so the brand spends required to take that "share of mind" of the customer would be massive.
There are players such as GoKiwi, Kreditpe, Rio Money who are going the CC on UPI route --> they have B2C apps which allow customers to request for credit cards on Rupay through partnered banks, and then eventually they will scale up to a full stack payments app, but they have very little share in the market. (Kiwi for example, 6M ago had ~30k registered customers, even if they would have scaled, this would be a very small % of the 300 - 400M UPI market)
And now it has become tough to charge on other innovations on UPI (such as CC on UPI) because merchants are used to getting it for free, so a lot of them disable that payment option. Thats why CC on UPI hasn't taken off as hoped --> because there is a 2% MDR charge on it. A model like Pix - which is the UPI equivalent in Brazil charges 0.2 - 0.3% per transaction to retailers, which is much lower than credit card fees (1-3%), would have driven innovation more.
If NPCI solves pricing, that incentivizes more businesses to come in and actually compete for the top position, but right getting there doesn't really mean anything, because monetization on UPI is a huge question mark.
Are there any network effects in UPI? I can't see any? The heavy concentration of market shares in the hands of the top two players seems odd. How do you explain it?
I'd say there are network effects because of the quantum of customers & merchants accepting and paying through UPI, so joining the ecosystem suddenly allows you to send money to almost everyone who has a bank account in India.
The problem with the UPI model is that NPCI has insisted that it needs to be free: i.e. free to the customers and the merchants. So you can't charge both P2P & P2M payments. As a result there is very little incentive for new companies to come in and challenge Gpay & PhonePe. The free model makes it very hard to make a profit making business, and even from a usage perspective people already have their primary and secondary UPI App options, so using UPI to acquire customers & then cross-selling is not a very realistic strategy. As a customer, I don't have incentives to download yet another UPI app, so the brand spends required to take that "share of mind" of the customer would be massive.
There are players such as GoKiwi, Kreditpe, Rio Money who are going the CC on UPI route --> they have B2C apps which allow customers to request for credit cards on Rupay through partnered banks, and then eventually they will scale up to a full stack payments app, but they have very little share in the market. (Kiwi for example, 6M ago had ~30k registered customers, even if they would have scaled, this would be a very small % of the 300 - 400M UPI market)
And now it has become tough to charge on other innovations on UPI (such as CC on UPI) because merchants are used to getting it for free, so a lot of them disable that payment option. Thats why CC on UPI hasn't taken off as hoped --> because there is a 2% MDR charge on it. A model like Pix - which is the UPI equivalent in Brazil charges 0.2 - 0.3% per transaction to retailers, which is much lower than credit card fees (1-3%), would have driven innovation more.
If NPCI solves pricing, that incentivizes more businesses to come in and actually compete for the top position, but right getting there doesn't really mean anything, because monetization on UPI is a huge question mark.