Clipped from: https://www.thehindubusinessline.com/opinion/upi-needs-more-than-just-monetising-opportunities/article66998525.ece
While banks are quietly imposing caps on UPI usage, their reasons for not making adequate money are different
Unified Payments Interface or UPI as it is popularly known, processed transactions worth ₹14.89-lakh crore last month. That’s a total of 9,451 million monthly transactions, and these numbers have grown exponentially in recent years. Now, all players in the ecosystem, whether they be banks, payment gateways/aggregators and back-end technology providers, are beginning to think how much load they can continue to process.
Apparently, the news is that banks are restricting the usage of UPI. To put things in perspective, a user can transact up to ₹1 lakh every day through UPI and can swipe any number of times within this limit. The average ticket size, however, is just ₹1,580 per transaction, suggesting that UPI remains a substitute for petty cash and users are yet to draw comfort beyond small-scale uses.
In a way, most players in the ecosystem are also happy that UPI remains a small-ticket transaction avenue. This is because most of them are unsure whether the infrastructure is robust enough to handle large payments. By default all banks have to support UPI payments. It’s almost a mandatory requirement irrespective of the bank’s size or its digital infrastructure. This points to an important question of whether all are well-equipped to handle the load. Apparently, senior executives at some of the smaller banks say they face the issue of reconciling end-of-day UPI transactions. Consequently, on an average, these banks end up with unreconciled net outstanding of at least ₹3-10 lakh daily. For a quarter, it works out to ₹1-3 crore of money stuck in the system. While this doesn’t seem to be a big number, considering banks are strained on the cost front even otherwise, unreconciled outstanding is certainly something that could be avoided.
Who is to blame?
But who is to really blame for this mess which is brewing? The government decided against MDR or merchant discount rate for UPI in 2019 (implemented from January 2020). This is often cited as the cause for not having a strong back-end infrastructure, as the players aren’t making money in the bargain. While the players in the UPI ecosystem are compensated through government subsidy — ₹2,137 crore was allocated in FY23 — this barely makes good the likely income lost and trickles down the entire payments chain. Banks end up gaining a bit in the process, while the payment gateways and back-end players don’t.
For FY24, the subsidy has been reduced to ₹1,500 crore and this would barely cover any losses, thus turning UPI into an unviable proposition. This argument is acceptable, but just partly.
And does that still justify curbing the volumes deliberately, but quietly?
Walk into any kirana store, super-market or petrol pump, and you’ll notice QR stickers of different payment gateways. But only one of them may be operational. What this implies is that if payment companies A, B and C were looking to monetise payments from a certain store, only Company A is securing business from the customer. Companies B and C may have their QR codes operational at the store, but since they are unused, they don’t end up making money out of the merchant. They are there but not there!
While this is a less spoken about issue, it could be one of the key reasons for players at different layers of the payments value chain losing money. The other less spoken about thing is that most fintechs and payment enablers price their QR at least 10 basis points (bps) per transaction. Therefore, while much noise is made about the non-chargeability of UPI, especially by the fintechs, the reality is that losses swell because of the mismatch mentioned above. Where a payments enabler should have earned ₹1 lakh a day hypothetically ends up making only ₹30,000 because not all QRs are generating income, but costs are outlined based on the number of merchants.
Simply put, their business models are drawn on an expected merchant base and that gets built up — a factor which is important to play the valuations game — but ultimately the plan fails because there aren’t enough checks and balances to ensure that every merchant on-boarded is generating business for the payments company. This mismatch is as much a concern as not being able to charge for UPI transactions.
For the system to evolve meaningfully, the critical stakeholders in the space, including NPCI and the big guns of UPI such as Paytm, PhonePe and Google Pay, should take stock of reality. To begin with, this itself could weed out unused QR stickers and help companies reduce or manage costs efficiently.
With the government’s stand is quite clear on this subject that at least in the near-term UPI transactions may not involve charges, it’s better the system cleanses itself rather than play the blame game and allow status quo to persist.
Now, who will volunteer to bell the cat at the cost of risking valuations, which are already under pressure?
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