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- In its justification, the government asserted that the transaction cost can be compensated against the cost savings by the stakeholders during digital payments. Finance minister Nirmala Sitharaman had then said, “RBI and banks will absorb these costs from the savings that will accrue to them on account of handling less cash as people move to these digital modes of payment.”
- However, there is no reference point or study to back this claim.
PAYMENT INFRA BEHIND UPI TRANSACTIONS
- Payment apps have been required to make the transition from payments-as-a-fee to payments-for-free with other data or valueadded services. Prime Venture’s Swamy said that it’s unclear yet as to whether this is long-term viable but it’s clear that the cost structure should move to a fixed cost/flat-fee model and can no longer be seen as a long-term profit-centre.
- On the zero MDR concept, “just like building a road infrastructure needs resources and money, building a payments infrastructure cannot happen without revenue or capital. The concept of zero MDR is completely wrong in principle and antithetical to this.”
- In contrast, neither the Watal Committee in 2016 nor the Nilekani Committee in 2019, had recommended the zero MDR.
- In fact, the Nilekani Committee in its report suggested that India should focus on letting the market compete on the merits of the product rather than force adoption.
FOREIGN PLAYERS HAVE CAPTURED THE MARKET
- Today, many Indian founders are lamenting that despite having homegrown financial products such as UPI, the Indian fintech market is captured by foreign players.
- Despite having achieved 2 Bn transactions a month, it’s ultimately the US companies Google and Walmart-owned PhonePe, who together control over 80% of the UPI transactions.
INDIAN FINTECH STARTUPS ARE FEELING THE HEAT UPI,
- once a den of India’s leading innovators, has now become a battleground for US giants like Google, Amazon and Walmart, with Facebook joining the fray. These mega-companies have been offering massive discounts and cashbacks since beginning without even bothering to look at the revenue deadlock and negative profit margins.
- “This (UPI) has now been reduced to whoever has the money is buying the consumers. It’s pure capitalism…In the long run, you won’t see multiple players in this space, only a few deeppocketed players,
ZERO MDR IS THE CULPRIT
- “Zero MDR in UPI has allowed US giants to recapture the Indian payments market which was fast shifting towards Indian startups and companies,”
AN OPTIMAL BALANCE WAS REQUIRED
- “The MDR must be low enough to ensure that merchants adopt the payment method, and encourage customers to use such payment methods. At the same time, the MDR must be high enough to cover costs, and incentivise issuers and acquirers to keep acquiring a greater number of merchants.”
- “I do believe we will need to find a more stable model that works for the industry and the entire value chain — from banks to NPCI to the PSPs to the TPAPs to the merchants and the consumers. Right now we have an unstable ecosystem and unless we find a practical business model that works for everyone, it will be hard to sustain this,”
GOVERNMENT LACKS A ROADMAP
- “Like Aadhaar, they don’t have roadmap again,” Ram Shriram, Mahagram Payments said.
- In case of US, regulators — have been pro-business and have ensured that the innovators and players do gain from the business in the long run.
SAME HAPPENED WITH THE WALLET MODEL
- One of the key factors is not building a long-term policy around payments innovation and infrastructure to ensure the returns on investments.
- Mahagram’s Shriram said Paytm and many others had heavily invested in wallets which became a popular mode of payments during demonetisation. A number of companies including Zomato, BookmyShow, Makemytrip invested in wallets.
- However, right after demonetisation, came UPI and suddenly everyone started making investments in UPI and the wallet model died a slow death.
UPI HASN’T MATURED YET
- “It took decades before US cards became a globally accepted phenomenon. UPI is yet to see maturity as you still have to ask, ‘Bhaiya, Phonepe chalega?’ ,” Shriram added.
IMPACT OF ZERO MDR
- The poor after-sales service that UPI payments has become infamous for.
- “If you go to Google Pay asking regarding a payment issue, Google Pay would ask you to consult the issuer, the bank who enabled the payments, while the banks would tell you to consult Google Pay. In all this, it is the customer who suffers,” Mahagram’s Shriram said.
- And, due to zero MDR, changing norms, no player is willing to invest in after-sales service and product experience.
EVEN BANKS ARE LEAST INTERESTED
- Banks have lost interest in UPI too, believes IndiaGold’s Abbot. “You won’t see any bank offering any UPI offers, or even encouraging users to use their UPI apps. They know that Google Pay, PhonePe and others would continue to push UPI and they don’t need to double down on it. As a result, the infrastructure is taking a hit. Look at the downtime that SBI, HDFC have faced on UPI…clearly, they are not prioritising the scaling of UPI,” Abbot said.
NOW THE GOVT HAS CAPPED MARKET SHARE
- The new law makes it tough for popular UPI payment apps such as Google Pay and PhonePe.
- One has to ask, is the correct approach?
- Will the government impose new capping once it feels insecure about its home grown apps?
- Shouldn’t the government invest in innovation and long term policies rather than having such caps?
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