Here's why banks are still laggards in the UPI payments race

The Reserve Bank of India (RBI)-regulated Unified Payments Interface (UPI), one of the biggest fintech revolutions in India so far, has found all leading commercial banks in the country lag behind.

Walmart-backed PhonePe, Google Pay and Paytm Payments Bank have taken a march over Indian banks who are still struggling with their poorly designed apps and inadequate IT systems.

The top-3 players hold around 94% of the UPI payment market in the country in terms of number of transactions and 95% in terms of total value, according to January 2021 data.

“Most of the aggressive players such as PhonePe, Google Pay, Paytm and Amazon Pay are offering cashback facilities to attract new customers and make it more popular. However, the cash-burn can’t be a long-term strategy,” said a senior banker. He however added that for some strange reasons, mainstream banks are not promoting their apps adequately.

PhonePe, which climbed to the top slot in January 2021 pushing off Google Pay to the second slot, handled 969 million transactions in the month, clocking Rs 1.92 lakh crore in total value. Google Pay reported 854 million transactions with Rs 1.78 lakh crore in value. Paytm is a distant third with 333 million transactions and Rs 37,846 crore in value. All three put together, they handled 2.2 billion transactions worth Rs 4.08 lakh crore. Total UPI market in January 2021 stood at around Rs 4.31 lakh crore.

All three players are gung-ho about the growth in India’s retail digital market. For instance, Walmart is betting big on PhonePe, the digital payment arm of its recently-acquired Flipkart. After opposing the divestment of PhonePe stake, Walmart has let Flipkart spin off PhonePe into a separate entity and invested a majority of $700 million it raised a couple of months ago. The five-year-old PhonePe has reached a valuation of $5.5 billion.

On the contrary, banks are going slow in pushing UPI transactions. While Axis Bank comes at the fourth rank with around 72 million transactions worth Rs 618 crore. Yes Bank and ICICI Bank are at seventh and eighth position with 14.8 million and 10.5 million transactions, reporting Rs 3,218 crore and Rs 1,984 crore respectively. SBI’s app comes at ninth position with a paltry 4.3 million transactions worth Rs 2,359 crore.

Of course, National Payments Corporation of India (NPCI) has recently capped the volume of transactions via UPI on third-party apps at 30% beginning January 1, 2021.

The players who are already in the 30%-bracket have been given two years to bring down their exposure phase-wise, amid criticism that NPCI is trying to stifle competition.

This would mean that all three players will have to bring down their exposure phase-wise. NPCI said the move is to address the risks and protect the UPI ecosystem as it further scales up.

Meanwhile, the RBI’s move to bring competition to NPCI and expand the retail digital market with a flurry of new innovative products will also eventually trim the concentration of business under the three big players.

The RBI has begun the process of issuing licences to private entities which will help device new and innovative products and systems, complimenting NPCI’s efforts towards enhancing retail access and scope in digital payments. The central bank has said that the new entities, once approved by the RBI, will set up systems that are interoperable with those already in place, built by the NPCI. To draw more participation, RBI said the new entities can operate for profit, unlike NPCI.

At least half-a-dozen applications from various consortiums have reached the central bank while a few others may make their application soon. Among the prominent applications are Tata Group consortium, supported by Airtel Digital, HDFC Bank and Kotak Mahindra Bank; Paytm-Ola-IndusInd Bank consortium; and Amazon-ICICI Bank consortium. Another consortium is led by RIL’s subsidiary Jio Infosystems and So Hum Bharat Digital Payments, a subsidiary of Infibeam Avenues, and tech giants Google and Facebook as partners.