Can Cost Apps Enterprise Past UPI Hype To Plug Large Losses?

India’s digital funds progress is so intently linked to the expansion of the unified funds interface or UPI that usually the 2 are clubbed collectively in any dialogue pertinent to the sector. However the truth is that UPI is only one a part of the digital funds panorama.

This consists of debit playing cards, bank cards, web and cell banking, digital wallets, Unstructured Supplementary Service Information (USSD)-based fee modes, financial institution pay as you go playing cards, real-time gross settlement (RTGS), nationwide digital fund switch (NEFT), Aadhaar-enabled funds, FasTAGs, and others. However UPI is nonetheless thought-about the flagship digital funds scheme and most funds apps are geared round this normal.

As per the digital funds dashboard maintained by the IT ministry’s Digital Economic system & Digital Cost Division (DEDPD), UPI or BHIM accounted for round 27.38% of complete digital transactions in FY 2019-20 amongst 16 fee modes. In June, UPI recorded 1.34 Bn transactions price INR 2,61,835 Cr in June 2020, whereas it noticed 1.23 Bn transactions price INR 2.18 Lakh Cr in Could 2020 for a median transaction dimension of INR 1,769. 

As compared, UPI transactions tanked to 990 Mn transactions in April, in opposition to 1.25 Bn in March. The worth of transactions additionally fell reaching INR 1.51 Lakh Cr in April, in opposition to INR 2.06 Lakh Cr in March 2020.

For June 2020, excluding BHIM app, UPI apps facilitated 1.32 Bn transactions with a cumulative worth of INR 2,55,773 Cr. This averages to INR 1,937, which is a big bump up by way of the typical dimension of an UPI transaction from Could’s INR 1,769.

Digital Funds Stretches Nicely Past UPI

However since UPI transactions represent solely part of the overall digital funds ecosystem, it will be inaccurate to make any claims concerning market leaders in digital funds simply on the premise of UPI market share.

As per the Sensor Tower, Google Pay grew to become essentially the most downloaded digital funds app throughout the globe, with main traction coming from India. In February 2020, Google Pay was downloaded 15.6 Mn occasions, with 13.04 Mn downloads coming from India alone. Google Pay additionally topped the listing in January 2020 with 13.four Mn downloads in complete.

Because the UPI funds stream is normal on competing platforms, funds apps have resorted to add-ons and provides to draw extra customers. All apps additionally supply cashbacks and reductions for UPI-based funds. For instance, Google Pay and PhonePe each supply have cashbacks for purchases made by way of their platform or by way of companions. In Paytm’s case, these reductions are additionally provided for utilizing the Paytm pockets or Paytm Funds Financial institution by way of third-party apps similar to Swiggy and Zomato. And naturally, moreover particular person transactions or P2P transfers, UPI apps are being more and more used for service provider (P2M) transactions as effectively by way of QR code and apps. In addition to UPI funds, PhonePe has additionally enabled ATM providers by way of native retailers. 

Large Losses In Service provider Transactions For Google Pay, PhonePe

However regardless of the pretty massive share of UPI amongst all digital funds, the income mannequin for purely UPI-based funds providers will not be sustainable in the long term. 

Inc42 accessed the NPCI round quantity OC-77 dated December 6, 2019 by way of a confidential supply. The round, which has not been launched formally by the NPCI on its web site, outlines the funds and charges between issuers and acquirers in addition to fee has not been posted within the official round information, apps that solely assist UPI-based funds will solely earn income by way of peer to look transactions with zero service provider low cost fee relevant on P2M transactions. 

This price construction, mixed with the information associated to the transactions from every platform for Could 2020 as reported by Entrackr, offers us a transparent perception into this. Cost apps similar to Google Pay, Paytm, PhonePe, Amazon Pay and even the federal government’s BHIM app are shedding over INR eight Cr for Could 2020, as per DataLabs evaluation of the switching price that these apps must pay for every transactions.

Google Pay and PhonePe have the largest web losses for facilitating UPI transactions, after extrapolation of information based mostly on a median UPI ticket dimension of INR 1,769 for Could 2020. For June 2020, with a median UPI transaction dimension of INR 1,937 and solely a slight enhance in variety of transactions from 1.23 Bn to 1.34 Bn means that whereas the market share numbers could differ barely, the general quantity of losses can be barely greater for every firm. Because the switching price is paid on every transaction and the scale of the transaction solely has a minor impression on the price paid, the losses in June can be hover across the INR eight Cr mark that was seen in Could 2020.

In actual fact, given the zero MDR rule to push digital funds by way of UPI and RuPay, fee apps similar to Google Pay, PhonePe, Paytm, Amazon Pay stand to earn little or no from UPI funds, if something in any respect.

NPCI didn’t reply to Inc42 queries on the veracity of the round. We additionally didn’t obtain responses from PhonePe or Google Pay in relation to the losses suffered by each corporations in facilitating UPI funds. 

The loss is borne by the acquirer app in addition to the issuing and buying banks as per mutually agreed phrases. However since funds apps must pay for the extra expense of buying retailers and clients, the general loss to those apps similar to Google Pay, Paytm, PhonePe and Amazon Pay is far greater. 

Whereas in service provider transactions utilizing bank card and debit card (MC/VISA), the buying financial institution, issuer financial institution and community earns a share of 1.5% and 0.9% of the worth of the transaction respectively, there’s no such charges for UPIs because the authorities is seeking to push adoption by way of zero MDR.

P2P Transactions Much less Damaging To Cost Apps

Just like the P2M mannequin, the P2P mannequin for UPI fund switch can also be loss making for all gamers — once more led by Google Pay and PhonePe for Could 2020. However it’s much less burdensome. 

Based mostly on the switching price charges as per the NPCI round, the 19.Three Cr P2M transactions on PhonePe resulted in a web lack of INR 3.four Cr, whereas Google Pay suffered a lack of INR 3.2 Cr. Paytm additionally suffered a lack of INR 1.Three Cr for UPI-based P2M transactions by way of switching charges paid and never having earned any commissions as per the zero MDR norm. 

Based mostly on the typical ticket dimension of INR 1769 for UPI transactions in Could 2020 and the identical metric for earlier 4 months of the yr (ranging between INR 1512 and INR 1678), it may be surmised that extra UPI transactions are below the INR 1000 mark than over it. Assuming a 60:40 ratio, the 35.9 Cr P2P transactions on Google Pay resulted in a web lack of INR 36 Lakh, whereas PhonePe suffered a lack of INR 25 Lakh. 

The Want To Suppose Past UPI 

Diversification of income is vital for long-term sustainability in funds in India. For instance, Paytm has offset its UPI dependency by way of its Funds Financial institution, fee gateway income in addition to Paytm Pockets utilization — all of which aren’t ruled by the switching price and the zero MDR of UPI funds. 

A UPI-heavy funds mannequin is not going to reap a lot rewards. Within the case of Google Pay, exterior India, the platform at the moment permits on-line and peer-to-peer funds by connecting a historically issued fee card. Google is seeking to convey related performance to the Indian market as effectively, which will certainly assist it earn extra income.The corporate confirmed final yr that it will even be increasing the use circumstances for Indian model of Google Pay app so as to add assist for financial institution bank card and debit playing cards. 

“We’re also making payments available to debit and credit cardholders through ‘tokenized’ cards — a secure way of paying for things using a digital token on your phone rather than your actual card number,” Google had mentioned.

Google Pay, for example, has an in-app digital storefront for retailers and different apps referred to as the Spot platform. Equally, PhonePe has Swap for digital storefronts and in-app providers, whereas Paytm can also be bringing digital shops from close by retailers. Additional, PhonePe is wanting past UPI with the purpose of sale funds vertical, having tied up with PoS options supplier Payswiff final yr. It additionally operates a digital pockets like Paytm, however it’s nonetheless UPI that drives many of the utilization on PhonePe due to the convenience of use and the truth that one doesn’t want to take care of a pockets steadiness to make use of it. 

So whilst UPI has been one of many largest success tales to emerge out of India on this century, fee apps can not simply hope to maintain their enterprise with UPI alone. The over-dependency of fee apps similar to Google Pay and PhonePe on UPI will grow to be a heavier cross to bear in the long term. These and different fee apps have to diversify their income supply or fashions within the close to future. 

One potential approach for fee apps to variety may very well be the New Umbrella Entity (NUE) for Retail Cost Methods, which has been proposed by the Reserve Financial institution of India (RBI). The central financial institution has invited startups, tech corporations and different companies to compete instantly with the Nationwide Funds Company of India (NPCI), which has created the nationwide digital funds infrastructure. Because of this “payments system operator, payments services provider, or technology services providers” will be capable of create a funds ecosystem extending to modes similar to ATMs, point-of-sale units (PoS), Aadhaar-based funds and remittances.

The Draft Framework for authorisation of a pan-India New Umbrella Entity (NUE) for Retail Cost Methods has set a minimal capital requirement of INR 500 Cr and has stipulated sure circumstances in shareholding patterns for any firm in search of approval to grow to be the NUE. It would even be liable for establishing, managing and working new fee techniques, particularly within the retail area. The NUE would even be allowed to function clearing and settlement techniques, determine and handle related dangers similar to settlement, credit score, liquidity and operational and protect the integrity of the techniques, monitor retail fee system developments and associated points within the nation and internationally. Additional, it may well stick with it every other enterprise “as suitable to further strengthen the retail payments ecosystem in the country.”

With inputs from Sandeep Singh