UPI: They look all the same but in reality, they’re just different
India is a peculiar country — we bypassed 3G and jumped to 4G directly from 2G. We also skipped the PC/Laptop wave and entered the smartphone wave. Due to this shift, Indians needed a new legion of payment solutions compared to the west — where credit cards drove the adoption of online commerce. Moreover, the per capita spend in the west was higher than that of Asia which hindered the wide adoption of credit cards.
India is rapidly transitioning into a digital economy. The growing penetration of smartphones and internet connectivity has ensured that Indian customers remain continually linked. This is reflected in the rise of digital banking transactions.
The government is also realizing its role in providing a favourable regulatory framework. The advent of Aadhar as a national identity instrument has made the KYC process extremely easy. By linking a customer’s mobile number electronically to his / her Aadhar account, the process of transaction is now much simpler and hassle-free.
NITI Aayog CEO Amitabh Kant recently concurred, stating that India was the “Only country in the world with over a billion mobile connections and biometrics, providing enough scope for penetration of fintech technology”.
Built on India stack, the Unified Payments Interface launched by NPCI provides an integrated open architecture set-up that could fundamentally change the way customers manage payments. It is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood. With several business channels introducing more users to the world of digital payments, an effort such as UPI is reducing the entry barrier and improving the payment system, and bringing financial inclusivity to mainstream society.
The surging popularity of UPI led to the private players wanting a piece of it. The infrastructure made it easy for them to get started with the license and the VC funding/capital made it easier for them to splurge on cashback and upfront discounts to acquire more users. However, while it’s tempting to confuse everyone’s potential business model, it must also be noted that making money off of digital payments has been difficult. Thus, for most businesses, digital payments have been an acquisition channel to attract more customers into its ecosystem and then try to cross-sell new product lines to make more revenue.
I think the different business models or rather intentions & motives can be classified broadly into four major categories. The following is a modest attempt to unpack what their present strategies and plans look like based on my understanding of the space. Without further ado, let’s jump right in —
1.Players pursuing Core Financial Services
Popular fintech players like PhonePe and Paytm are eyeing the Indian financial services market, which could touch around $340 billion in the next few years.
Using the public digital payments network(UPI) as a channel these players are cross-selling various financial services like banking, insurance, credit, and payment services to the under-served Indian population. Backed by data created by their businesses they will be planning on making and selling customized micro-finance products in their next phase.
The next stage of the evolution of PhonePe could see the company evolve into a broader player in financial services. “We will get into mutual funds, insurance, and other such categories,” said Sameer Nigam, the CEO of PhonePe in October 2019.
The above image shows how PhonePe has already progressed in the desired direction of selling micro-financial products like insurance and mutual funds as mentioned by Sameer Nigam in 2019. The founders are trying to develop the app into a Fintech Super App which acts as a one-stop solution for the customers. On the other hand, an August’20 report tells how Paytm Payments Bank has reportedly approached the Reserve Bank of India (RBI), seeking in-principle approval for becoming a small finance bank (SFB), which will enable it to extend loans.
The above steps taken by both the companies talk about the approaches taken by them to build on their already established customer base and diversify into different categories of financial services. Both are using UPI-enabled digital payments as an acquisition channel & then cross-sell various other financial products to the underserved middle class.
2.Players who wish to avoid failure of transactions
Data reveals that 62 percent of clients witnessing a botched online purchase will not return to try again on the same page. This surprising figure illustrates the value of providing e-commerce platforms with a high-quality payment solution. UPI players like Amazon Pay and Jio Pay are mostly driven by this goal.
Although the anticipation for Amazon’s dive into banking grows every year, it is important to first consider the current financial services plan of Amazon, what Amazon has launched and developed, where the company is spending, and what recent items tell us about the potential aspirations of Amazon.
Based on recent trends, it is impossible to say that the next-generation bank is being developed by Amazon. But the business remains very focused on developing financial services solutions that support its central strategic objective: to maximize engagement in the Amazon ecosystem.
As a consequence, the company has produced and released instruments aimed at:
- Increase the number of customers on Amazon, and enable each customer to spend more.
- Increase the number of merchants on Amazon, and enable each merchant to sell more.
- Reduce any buying/selling friction.
Amazon is creating a bank for itself in a way, and that could be an even more convincing move than the introduction of a deposit-holding bank by the firm.
Jio pay has entered the market with similar goals of reducing the number of failed transactions that will lead to increase their sales, as well as customer satisfaction.
Cab aggregator Ola has also integrated Unified Payment Interface (UPI) on its platform, allowing its customers to use their UPI IDs to pay for rides with similar agendas. “Payments through UPI will be much faster and convenient, and we will continue to innovate and adopt similar integration with other platforms to create a robust payment mechanism,” Ola Money SVP Pallav Singh said in a NDTV Report in 2017.
3.Players who wish to provide fintech as an additional revenue stream
The mobile money revolution is already moving beyond digital payments. Now companies like Google pay and Ola money are branching out into financial services with higher profit margins with a motive to expand into different revenue streams.
“Companies offering payment services in India have been able to create a vast customer base and expand their offerings to rural areas also. There is a strong need for the payment companies to diversify their revenue streams,” said Manish Jain, partner, digital and fintech, management consulting, KPMG in India.
Along with diversifying into different business areas they also have the added motivation of providing a better user experience to their customers and use valuable data to run targeted ads. This also helps them in keeping more and more customers under their own umbrella of products. For example, Google play store provides the option to purchase apps, games, books, and movies directly using UPI through Google pay.
Swedish startup Truecaller Pay also believes there is definitely a positive trend, and that Truecaller Pay holds the potential to be the number one revenue driver in India. It has similar strategies to diversify its revenue stream. It's soon Planning to get into the credit-lending segment which will help it to reach more customers and with a variety of services.
4.Native Banks who want to provide a better user experience
Banks’ dominance in payments is increasingly under threat from a range of directions as more and more players join the competition. Traditional players like HDFC, SBI, ICICI also have the incentive to enter the market and go toe to toe with non-banking fintech players.
While adding the UPI feature plays an important role in helping financial institutions renovate their back-end processes it also provides a competitive edge and offers customers a smooth user experience, unexplored value-added services, and an interactive marketplace.
Apps like Payzapp by HDFC, ICICI Pockets, and SBI Yono might target the customer demand area with the help of advanced customer relationship management (CRM) tools and customize their offerings to constantly delight the customer.
India is a fast developing digital economy. However less than 30% of India’s population is truly digital, hence there are long-term growth prospects yet to be unlocked. Many Indians are still not a part of any mainstream financial system. UPI is a big leap for a growing economy like India and all the banking and non-banking companies including the new players like WhatsApp Pay will try to increase their overall customer base by adopting a multi-dimensional approach of providing financial literacy and access to banking and financial services.