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UPI eating into revenues of banks, NBFCs

In February, 80% of the total retail digital payments by value was from UPI, whereby the intermediary got no chance to charge its cut from these transactions

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The Unified Payments Interface (UPI), which has made online as well as in-shop payments easy and convenient, is eroding the revenues of banks, non-banking finance companies (NBFCs) and fintech companies, as their income from fees and charges vanish. The share of UPI is growing in retail payments, as a result of which processing agents are losinh out on over time, say analysts.

“The shift in merchant payments towards low-yielding form factors such as UPI, coupled with rising competitive intensity across modes, is driving the overall payments fee yields lower across the ecosystem,” HDFC Securities analysts wrote in a note.

UPI is a real-time payments system that facilitates the instant of funds between bank accounts. The National Payments Corporation of India, an umbrella organisation that operates retail and settlement systems in the country, developed the platform.

In February, 80% of the total retail digital payments by value was from UPI. This is excluding digital payments such as IMPS and NEFT, which process transactions and recurring payments of large amounts such as equated monthly instalments of loans in addition to other retail payments.

The share of UPI in person-to-merchant payments widened to 42% in the first nine months of FY22 from 28% in FY21.

In 2019, the government cut the merchant discount rate (MDR) on UPI transactions to zero to encourage greater use of the digital system. MDR is a charge paid by merchants to payment service providers for the infrastructure to give customers digital payment options.

In February again, a little over half the share in person-to-merchant transfers happened through UPI, data shows. The share of UPI is expected to increase as more merchants adopt it as a digital mode.

“UPI will continue to grow but the disproportionate growth we have seen so far may become more stable,” Nitin Aggarwal, an analyst at Motilal Oswal Financial Services, said.

Banks have a dominant share in the MDR payment pool as card issuance and usage are largely through them. Banks can charge MDR on card-based payments and other digital modes.

Analysts estimate that the fees collected through cards and other payment modes account for at least a quarter of the total fee income of banks. This is now threatened by the surge of UPI.

In Axis Bank, the share of retail card fee income in overall fee income has come down to 1.9% in the third quarter of FY22 from 2.5% four years ago.

For State Bank of India, the country’s largest lender, UPI users have increased to 175 million in Q3 from 87 million two years ago. UPI’s share in remittances has also been rising and remittance charges contribute to about 25 percent of fee income for SBI. True, UPI has acted as a customer tool for SBI’s YONO app, but its usage has meant forgoing too.

While banks have several sources of revenue, fintech companies such as Paytm suffer intensely due to the MDR waiver. UPI’s rise has been a big factor in Paytm’s troubles convincing its investors about its future revenue.

The outlook on payments is vague, though. In December 2021, the Reserve Bank of India had said it would revisit the charges involved in various digital payment modes through a discussion paper. The intent is to keep payment costs reasonable for customers so that the adoption of digital payment modes is not hindered.

Market participants said the RBI could allow a nominal MDR on person-to-merchant payments involving UPI but may bring down charges levied currently on card swipes.

Will the government change the rules on MDR for different payment methods? Until it does, most payment processing agents have a tough road ahead. Given their multiple streams of fee income, banks are perhaps among the least affected.

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