More and more FinTechs are entering the market with UPI support

By Puja Sharma

Unified Payments Interface (UPI) transactions have begun to reduce banks’ and non-bank fee incomes as they increasingly dominate merchant payments. As a result of government rules, the homegrown payments channel does not earn merchant fees, and the increasing trend of UPI usage is now biting banks and other payments players who have been its biggest fans.

The up-and-coming FinTechs are aggressively entering the already crowded UPI market: The latest FinTech to join this market is the India-based startup, Slice, which became a unicorn late last year, it is rolling out UPI to all its existing users as well as over 10 million customers on its waitlist. The firm is entering a crowded market with the addition of UPI support. Over 80% of the UPI market share is held by Google Gpay and Flipkart-backed PhonePe. Several other players accept unified payments interface, including Paytm and Tata Neu.

Businesses across the country have reaped the benefits of QR-based UPI payments, especially small stores since they do not have to pay merchant discount rates (MDRs) to the banks or non-bank service providers, known as acquirers. Unlike RuPay, all non-RuPay card transactions are billed by banks and tend to hurt merchant margins. As a result of the pandemic, consumers are using their mobile phones instead of cash to make payments.

The National Payments Corporation of India (NPCI), the umbrella organisation for retail payments in the country in its release reported that Unified Payments Interface (UPI) logged 4.52 billion transactions, amounting to Rs 8.26t, in February. Further, with one month remaining in the financial year, UPI has achieved the goal of over 40 billion transactions in FY22.

According to data released by the National Payments Corporation of India (NPCI), the umbrella organization for retail payments in the country, the UPI, India’s flagship digital payments platform, processed 4.52 billion transactions in February totaling Rs 8.26t, as reported by the IBS Intelligence in March this year.

As of last year, UPI became the preferred method for low-value transactions, comprising nearly three-fourths of transaction volumes under Rs 500, HDFC Securities said in a report. According to the report, “Merchant payments are moving away from high-yielding forms of payment, such as UPI, as well as increasing competitive intensity across payment modes,” causing overall payment fee yields to decline.”

Despite the surge in UPI usage, banks are not the worst hit. There will be a lot more pain for fintech players since they have fewer ways to make money. For instance, Paytm, owned by One97 Communications, generates two-thirds of its consolidated operating revenue from its payment business.

The limited cross-selling potential of UPI as a payments system further limits revenue streams for FinTechs, according to other sector experts. Even though FinTechs dominate the UPI, analysts at Moody’s Investors Service said they do not have exclusive access to transaction data. Through intermediary banks acting as payment service providers (PSPs), the funds in every transaction initiated by a customer app are sent from the sender’s bank account to the recipient’s, because only banks can provide such services on the network. As a result, banks have access to transaction data, just like FinTechs.