How banks lost to BigTechs and FinTechs in the UPI race

Unified Payments Interface (UPI) has become a force to reckon with in the Indian payments space. It started a couple of years back and over Rs 10 lakh crore payments are made through the mode.

While UPI achieved such a huge spread in such a relatively short time, on the forefront have been BigTech and fintech firms. The revolution has completely bypassed banks, which still do the major function of providing bank accounts for the UPI transaction to complete.

This question was also asked by RBI deputy governor T Rabi Shankar a few days back.

“How's it that a system of transactions between two bank accounts has evolved in a way where most of the business is owned by non-banks?,” he asked.

Banks failed to latch on to UPI in its early days, leading to non-banks and fintech startups taking a major chunk of the digital payments space.

The major business is cornered by PhonePe, a unit of Flipkart, Google Pay and Paytm.

Why banks stayed out

Experts say banks did not have any incentive to join the bandwagon as there was no money to be made while for the BigTech and fintech firms customer acquisition was a major reason to enter the payments space. Also, regulatory limitations may have prevented banks from entering the space which did not yield any returns.

The bank earns money through the merchant discount rate (MDR) when you make a transaction using a debit or credit card. This MDR is a fee paid by merchants (receiving party) for accepting payments through debit and credit cards.

But there is zero MDR on UPI transactions, so banks do not have any incentive to join UPI. And hence did not put in their resources and efforts to develop the technology and ecosystem.

All the while, third-party application providers (TPAPs) like Google Pay and PhonePe were spending tons on marketing their UPI solutions to increase user adoption, which yielded multiple benefits in the long run. Today, they are the face of India’s most popular choice of digital payment, they own vast amounts of data on consumer spending, and they own and lead the development of the UPI tech stack.

However, with the growing popularity of UPI transactions, the National Payments Corporation of India (NPCI) proposed that no apps would hold more than 30 per cent market share on UPI in terms of payment volumes in order to avoid a monopoly situation. However, it has extended the guideline for two saying it would hit growth.

UPI growth

After touching a new high of Rs 12.11 lakh crore in October, UPI transaction value for the month of November has come in at Rs 11.90 lakh crore while the transaction count has remained the same - 7.30 billion as it was in October.

The rise in the October transaction values was fuelled by the festive rush and volume spending. However, the November numbers, in terms of count and value are above that of September with transaction value at Rs 11.16 lakh crore and count at 6.78 billion.

PhonePe continued its dominance in November, with the Flipkart subsidiary processing nearly half of all the transactions during the month. Google Pay and Paytm were in the second and third positions, respectively, in terms of the number of UPI transactions during the month. The top three apps accounted for 95 per cent of all UPI transactions in November.

While Google Pay recorded a growth of 1.8 per cent MoM, Paytm and PhonePe recorded a decline of 2.5 per cent and 1 per cent, respectively, in terms of transaction volume.

According to the RBI’s Payment Vision 2025, UPI is expected to register an average annualised growth of 50 per cent.