India has solved the payments puzzle, as Nandan Nilekani noted at the FE CFO Awards earlier this week: “We have established ourselves a democratic network perched on the robust United Payments Interface” (UPI). It has a high volume of transactions and a low cost of transactions—in other words, it’s a big, transparent system focused on small-ticket transactions that can be accessed from anywhere and leads the path to fintechs.
There is nothing like it anywhere in the world, as Nilekani correctly said. Indians are only now discovering the joys of digital payments, whether through banking networks or through the UPI, which now processes close to 2.5 billion transactions every month. With 700 million smartphones on the market, volumes and prices are only going to rise. If numbers say a tale, the P2M (person-to-merchant) transactions on the UPI are the ones to celebrate. They surpassed the value of debit card transactions at PoS (points of sale) in December, with Rs 68,170 crore, surpassing the value of debit card transactions at PoS (points of sale), which was Rs 64,676 crore.
P2M transactions, at nearly one billion, outnumber debit card transactions, which totaled about 380 million; credit card swipes at PoS machines were even lower in December, at 174.21 million. This is strong proof of how many more retailers are now accepting digital payments, and although ticket sizes may remain small relative to credit and debit card transactions, this isn’t a big deal. In reality, P2M transactions currently account for just 16.5 percent of total volume, and this is only expected to rise slowly.
It’s one thing for retail payments on UPI to be soaring, thanks to PayTm, PhonePe, and GooglePay and their enticing cashback and promotions, but it’s another to see merchants embrace UPI. This is due as much to the zero-merchant discount rate (MDR) regime as it is to advances in merchant-alert systems; the pandemic, of course, has played a role. Paytm and PhonePe, for example, have built solutions such as the Soundbox and voice notifications, which create an instant audio message for a successful transaction at the merchant’s end.
It helps that QR codes are seen as convenient even for small-ticket purchases of less than Rs 1,000 by customers. Some unique and soothing UPI features have helped, such as auto-pay, which allows you to program a set of business rules, such as “debit my account every time I take an Ola” or “put Rs. 10 in my SIP every day.” Fintechs have been able to roll out a number of financial products as a result of this.
Although fee-based businesses such as selling insurance or mutual funds in sachets are fine, lending is the need of the hour. Fintechs are succeeding in this area, thanks to technology and UPI. Thousands of small businesses and vendors already have access to credit thanks to fintech lenders. These lenders are disbursing thousands of small ticket loans thanks to e-NACH mandates and access to CIBIL and GST data, as well as bank statements. Bharat and Lendingkart, for example, have shown how an app can be worth a thousand branches.
The beneficiaries now number in the hundreds of millions, and they are often small business owners who don’t have any collateral. They may be operating a bicycle repair store, a coaching class, or a trading business. The strike rates are high; according to a Credit Suisse report, only ten players have taken on roughly 70 million merchants between them. However, considering their weaknesses, the lending environment is developing slowly; frontline private sector banks are able to do anywhere between 50 and 75 percent of their business digitally, thanks to their proprietary platforms and collaborations with fintechs.
The Path To Fintechs
The nimble, smaller new-age private banks with best-in-class programs are among those partnering with fintechs to explore the market. Even the best and biggest of the pampered public sector banks, with their broad deposit franchises, are as complacent as ever. Others are concerned that they will quickly run out of money and are hoping to access overseas bond markets, while others are partnering with NBFCs. Some are hoping to begin by partnering with NBFCs and then grow into a bank.
The argument is that the regulator must make it easier for fintechs to lend through alliances with other financial institutions; for instance, the 10 percent limit on equity acquisitions in fintechs by banks and insurers should be raised. Fintechs will also be able to gain early-stage funding as a result of this. Small businesses need credit to expand, and banks can take a long time to reorient themselves, not only in terms of how they perceive customers but also in terms of how they use technology. Fintechs must lead the way in the meantime, but the regulator must comply.