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The parent company of India’s Paytm Payments Bank is seeking a new regulatory approval to ensure that customers can still use Unified Payments Interface (UPI) after the bank is shuttered later this month. 

Last week, the Reserve Bank of India (RBI)  that One97 Communications Ltd (OCL), parent company of Paytm, has submitted an application to serve as a third-party application provider (TPAP) to UPI.

The RBI said it has instructed the National Payments Corporation of India (NPCI), the operator of the UPI network, to examine the application.

If granted, a new TPAP permission would assist OCL in facilitating continued access to UPI for Paytm customers, who might otherwise face service disruption.

If the NPCI grants the application, the RBI said all customers who currently use the "@paytm" handle on UPI must be migrated to a new set of banks to avoid disruption.

“No new users are to be added by the said TPAP until all the existing users are migrated satisfactorily to a new handle,” the regulator said.

How would the TPAP work?

To allow for a “seamless migration”, the RBI suggested that the NPCI should certify four to five payment service provider (PSP) banks with a proven ability to process high volumes of UPI transactions.

These PSP banks could affix their own UPI handles to the 350m consumer accounts and 40m merchant accounts that currently use "@paytm".

Two sources who spoke with ������ϲʿ�����¼ confirmed the TPAP would not be a new app in itself.

Balakrishnan Mahadevan, former COO of NPCI and consultant to the World Bank, said the TPAP would simply give OCL the ability to add a new functionality to the Paytm app.

This new functionality would enable the migration of UPI handles to that of other banks, while ensuring that Paytm Bank is cut off from new deposits and credit transactions, as per the RBI’s directive.

Prakhar Tiwari, partner at New Delhi law firm Tatvika Legal, said the TPAP will ensure a “smooth” migration without service disruption or the need for a new app.

However, time is of the essence, given that the RBI had initially ordered Paytm Bank to stop accepting deposits and processing credit transactions by February 29.

This deadline has already been extended to March 16, and given the time it will take to complete the migration, Tiwari said it is likely to be extended again to March 31.

Tiwari added that the TPAP application will be approved, and its impact on Paytm, its customers and the broader UPI ecosystem will be “substantial”.

Due to the “considerable dependency” of UPI on the Paytm app, the New Delhi partner said it is “imperative” for the RBI to take steps to maintain order across the network.

In December 2023, as covered by ������ϲʿ�����¼, Paytm was the  in terms of value transacted, coming in behind PhonePe and Google Pay respectively.

UPI concentration risk a key regulatory concern

However, Paytm’s UPI market share pales in comparison to that of PhonePe and Google Pay — a concentration that is beginning to worry India’s regulators in light of Paytm’s instability.

Last week, an Indian Parliamentary Committee drew attention to the fact that if PhonePe and Google Pay were combined, they would account for 83 percent of UPI payments. In contrast, Paytm accounts for 13 percent.

Mahadevan has been warning about UPI concentration risk since 2023, when he published a  on challenges to the network.

One year later, his fears have materialised in the Paytm Bank shutdown and its knock-on effects on the ecosystem.

“Concentration risk in UPI payments and NPCI is real, and its potential consequences are concerning,” he said.

“The regulatory clampdown on Paytm Bank is already proving to be challenging, so if any one of the top two players with a much larger market share gets into these kinds of issues, the impact on the merchants and economy could be much higher.”

The NPCI is aware of these risks and has already taken some action to mitigate them. In 2022, for example, the NPCI announced plans to introduce a 30 percent cap on UPI market share per app.

The implementation date was set at December 31, 2024, but following trouble at Paytm, PhonePe and Google Pay are likely to gain market share.

Mahadevan is therefore confident that the deadline will be extended beyond 2024.

Other ways to reduce concentration risk

Mahadevan also suggested that the RBI could revisit its previous efforts to promote .

Launched in August 2020, NUEs were envisioned as non-profit fintech entities that would compete with the NPCI to manage payment systems and networks.

The RBI invited tech companies from both India and abroad to apply, as long as they could put down a minimum start-up capital of INR5bn ($60.3m).

Firms such as Google, Facebook, Amazon and Tata Group applied for an NUE licence, but in the end the RBI rejected all applications and closed the NUE scheme in April 2023, after finding that none of the applicants had offered the payment system innovation it was looking for.

Mahadevan said the RBI should revive the scheme, grant two to three NUE licences and mandate that the NUEs focus on providing “portability” within a designated payment network, such as UPI.