Clipped from: https://economictimes.indiatimes.com/prime/fintech-and-bfsi/npcis-bharat-billpay-en-route-to-a-billion-transactions-is-set-to-be-the-next-payments-disruption/primearticleshow/80912226.cms
Synopsis–In August 2016, the National Payments Corporation of India’s UPI went live. In just over three years, it was clocking over 2 billion transactions a month. NPCI’s Bharat Bill Payment System is on a similar trajectory, with close to 19,000 registered billers and counting. This could be the beginning of the next big disruption in India’s payments ecosystem.
India’s digital-payments industry is seeing a lot of action. If the United Payments Interface (UPI) clocking over 2.3 billion transactions in a month isn’t enough, the Reserve Bank of India’s equally successful and more complex initiative, the Bharat Bill Payment System (BBPS), signals the silent revolution under way in India’s digital-payments ecosystem. BBPS, like UPI and RuPay, was also developed under the aegis of the National Payments Corporation of India (NPCI).
UPI’s unheralded sibling has done more legwork and the less glamorous function of onboarding more billers, which could create a new disruption over the next few years. Among the disparate organisations it onboarded in the first phase are state electricity boards, water authorities, DTH, and state-run cooking-gas companies.
Since its launch in October 2017, it has digitised utility-bill payments of pretty much every organisation one can think of. Similarly, fee payments of close to 19,000 educational institutions can now be done through BBPS. Besides more traditional payments such as insurance, credit card bills, and loan EMIs, the platform allows payment of municipal taxes and housing-society dues.
But how does it handle payments across different services, given they may require different modes of payments?
While UPI is a payment and settlement method, BBPS is an interoperable market infrastructure and technology platform that facilitates all payment modes. It is a business-to-business (B2B) platform with a business-to-customer (B2C) connect.
Before BBPS, there were close to 500 billers and most banks and payment companies were forced to enter into a direct arrangement for linking their system to the billers’ IT infrastructure to enable digital payments.
“It was a big effort to take legacy utility companies online and do direct deals with each of them. There are way too many billers and we all had to do crazy things. You need a company just to do these direct deals with each of them,” says Bipin Preet Singh, co-founder and chief executive officer of MobiKwik, which offers a mobile-based payment system and digital wallet. “We have been moving bill payments on our platform to BBPS over the last two years. Business-development effort has been reduced for small and new players entering the market, and so is the pain of going through a one-to-one arrangement.”
To give a perspective, during December 2020, BBPS recorded 29 million transactions, almost double the number it had reported during December 2019 and a similar jump in the value of transactions to a whopping INR3,900 crore.
“The biggest advantage is it runs on existing railroad infrastructure and the investment required for all the partners is incremental and not substantial. For all partners, APIs are available and inexpensive to integrate with our system. There was no unified national platform where participation does not become different for different partners to latch on to our system,” says AR Ramesh, chief of BBPS, who has headed the division from its formation more than five years ago in 2015.
This is Ramesh’s second stint at NPCI. He has previously worked for more than two years on deputation from ICICI Bank as the chief project officer of RuPay, NPCI’s card-payments offering that competes with Visa and MasterCard.
AR Ramesh, chief, BBPS
“This is going to be a huge opportunity, as all the billers are building IT infrastructure in all new categories. A lot of new customers will come online through assisted models, through physical channels such as shops. We have a network effect now and smartphone adoption solved accessibility issues,” adds Ramesh, who has worked with ICICI Bank for close to 13 years and Standard Chartered Bank for five years.
Working with NPCI means that it works on a not-for-profit model and takes near-zero margins while creating a standardised model, bringing down costs and accelerating consumer adoption of digital payments.
BBPS has been looking to enable recurring payments of billers that have an online billing system. This system can be integrated with the interoperable platform of BPPS to provide a seamless digital solution by linking them with consumers. The interface could be of that of mobile-payment apps such as Google Pay or Paytm.
The genesis of BBPS and how it works
In 2013, the then Reserve Bank of India governor Raghuram Rajan had set up a committee, which came up with the idea of BBPS. The central bank had estimated that over 30,800 million bills amounting to INR6.22 lakh crore were being generated each year in the country’s top 20 cities in 2013. BBPS sets standards for payments, clearance, and settlements.
In late 2015, RBI gave NPCI the mandate to run BBPS and the pilot was started in August 2016. In October 2017, on Dhanteras, BBPS started its commercial rollout. During the first phase, it had permission to cover utilities in electricity, water, gas, telecom, and direct-to-home (DTH) services. For each category, the commercial framework was based on the nature and the business model of the category.
Ramesh says that RBI realised that customers wanted all the bill payments at one place and only a centralised organisation with a government mandate could bring all the parties online, especially with many of them using legacy systems.
Here is the simple explanation of how it works. BBPS’s centralised Bharat Bill Payment Central Unit (BBPCU) is connected to a financial operator running a Bharat Bill Payment Operating Unit (BBPOU) at both ends — consumers and billers (utility firms) (see flow chart).
A biller operating unit (BOU) is a bank or a financial institution — mostly banks — that manages the utility’s business account, while the consumer operating unit (COU) is any bank’s app or a mobile-payment app such as PhonePe or Paytm.
Even physical retail stores can act as a COU as long as they can work with a financial institution to connect it to BBPCU. An operating unit can do both functions, too, and these operating units (OU) need to get approval from the RBI to become part of the ecosystem. RBI has been relaxing the regulations necessary to be an OU so that the entry barriers are reduced.
BBPS uses three APIs for diagnostics for checking every three minutes whether all the partners in the network are active, fetching bills, and checking transaction status.
This initiative also coincided with the completion of digitisation by power utilities under the central government’s Restructured Accelerated Power Development and Reforms Programme (R-APDRP) launched in 2008. The programme gave grants to state electricity utilities to adopt IT for billing and collection among several other things. Other utilities such as DTH, broadband, and telecom were already online.
To illustrate, for the Kerala State Electricity Board (KSEB), Paytm acted as the BOU (biller operating unit), helping it integrate its billing system with that of BBPS in a tender floated two years ago. Paytm offered to do it for free while also offering to pay the money in advance, whereas banks were paying only a day later.
“Our digital transactions were at 20% before we latched on to BBPS system. Within two years, it has moved to 50% in 2020, most of which can be attributed to BBPS and mobile-payment apps,” says Ravi Chandar, deputy chief engineer for IT at KSEB.
Paytm deposits INR1 crore every day in KSEB’s account in the morning while topping up, depending upon that day’s collection. The end customer could be using Google Pay or PhonePe to make a payment, but it is routed through Paytm’s network, which helps the Noida-based company to provide better rewards than its competitors.
KSEB pays INR1.75 as commission per transaction for the payment services. However, in some urban pockets, the organisation has seen 93% of payments taking place through online channels. It has over 771 physical collection offices across the state, employing over 1,400 people.
“The main problem is the lack of commercial value, even though you cannot ignore this because it brings close to 25% of the engagement seen by fintechs. Every payment going zero, from UPI to bill and recurring payments, is not good for the business.”
— Bipin Preet Singh, co-founder and chief executive officer, MobiKwikKSEB aims to increase online-payments coverage to over 95% in the next two years, reducing collection costs associated with employees at cash counters and handling cash. It has also appointed a body to look at the cost savings and efficiency that the digitisation programme has brought.
Prior to the BBPS integration, KSEB had integrated its systems with five banks under the National Automated Clearing House (NACH), a high-volume repetitive-payment solution of NPCI, like most other utility-payment companies across the country.
With only 10% of all bill payments done digitally in the country, the scope of growth for BBPS is huge. As evidenced by the growth of UPI during the last couple of years, even converting 50% bills digitally, as some utilities have done, could mean more than a billion transactions in a year from the current rate of more than 200 million this fiscal.
The churn is already here
Not everyone is happy about BBPS’s strategy of assembling every single biller under the sun. Payment-gateway firm BillDesk, which has been working with billers, has been hit badly by the growth of BBPS.
The low margin in the consumer segment, where BBPS now holds sway, has forced mobile-wallet firms like Paytm and PayU to focus on enterprise bill payment, where the solution can provide software-service revenue, apart from other opportunities such as credit.
“The main problem is the lack of commercial value, even though you cannot ignore this because it brings close to 25% of the engagement seen by fintechs. Every payment going zero, from UPI to bill and recurring payments, is not good for the business,” says Singh of MobiKwik. Others in the industry concur that someone has to pay for the transactions.
A co-founder of another fintech firm says that BBPS negotiates low commission rates, which is bound to kill several fintech startups looking to build business through the bill-payment ecosystem.
The emergence of BBPS could also threaten the business models of several fintechs that enable such recurring payments, though increasingly they are targeting commissions for cross-selling financial products and credit. The system also brings down the cost of entry for new startups in the fintech space.
“It does not make sense for other players, including banks, to do anything. If they start onboarding all recurring payments such as insurance, EMIs, credit-card bills and others, it will stop creating value for so many players in the industry. Currently, a lot of players get 2% to collect EMIs. Once BBPS enters the scene, that will go to zero,” says the founder quoted above.
While high literacy and Internet penetration in developed economies meant that many consumers were paying for utilities digitally through websites and apps, the payments were often done using cards rather than cash. In India, to accelerate adoption, the country required a public infrastructure like BBPS.
“India needs a mass-market payment system that is run as a public utility. In the UPI world, payment players should expect utility profits rather than monopoly profits. Similarly, bill presentation should be run as a public utility. This isn’t a place where monopoly profits should apply. Fintech players are now innovating on top of the public platforms,” says Sharad Sharma, founder of iSPIRT, which does policy advocacy for digital India under the IndiaStack initiative.
The bottom line
The centralisation of payments has created standardisation and efficiency in the ecosystem even though it might cause short-term pain to a few firms, says Shailaz Nag, founder and chief executive officer of DotPe, a startup that helps businesses launch digital stores. Nag, who previously headed PayU, adds that this has the potential to create newer businesses.
UPI’s growth has created several challenges for banks that have not kept pace with investments in IT infrastructure, and this has hurt most of its partners in the payment ecosystem. Many banks have seen a rise in transaction failure rates for UPI.
Since the government mandated zero merchant discount rate (MDR) for UPI payments, none of the companies has been making money from these transactions. However, it has helped the cause of digital-payment adoption by a lot of small and medium businesses, merchants, and shops across the country.
“The opportunity for innovation is enormous. Many hard problems need to be solved. As a result, there are many unicorns in the making in this space,” says Sharma of iSPIRT.
(Graphics by Sadhana Saxena)