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UPI transactions crossed the 5-billion mark in a month for the first time in March 2022. In April, the number of transactions reached 5.58 billion, amounting to Rs 9.83 trillion, according to the National Payments Corporation of India (NPCI) data. In a couple of years, UPI transactions are poised to hit 1 billion a day.
(Source: NPCI)
Unified Payments Interface (UPI) has moved the goal posts for the digital payment firms in India. Though the digital payments market is scaling fast, profitability has become a growing concern.
Profitability woes
Google Pay and PhonePe account for nearly 80 percent digital payments market share. However, these platforms lack differentiation, and don’t have anything unique to offer to retain users.
The payment companies are spending a lot of money on marketing and educating users and vendors. For example, Google Pay spent millions in cash back to onboard customers.
The customer acquisition cost (CAC) is prohibitively high. However, the bigger players can’t afford to blink; if they slack, the competitor will eat into their market share. On the other hand, the higher acquisition cost also means a bigger barrier of entry for smaller players. Nevertheless, at some point, the bigger players have to turn a profit; it doesn’t make sense to sink money into CAC indefinitely.
NPCI has capped the transaction amount–INR 1 lakh per day– to protect users from scamsters and frauds, and in the process ended up limiting the number of transactions on the digital payment platforms.
MDR
The merchant discount rate (MDR)–the cut merchants have to give the platforms for each transaction– for UPI payments is zero. In 2020, India scrapped MDR for UPI to promote digital payments; closing the door on profitability for the payment firms.
Remember, MDR is still applicable for payment methods like credit and debit cards (except RuPay). Zero MDR has been a huge issue for digital payments service providers. The Payments Council of India (PCI), the largest industry body for digital payment aggregators, has asked the government to reconsider its decision to waive the MDR for UPI payments, especially considering these players are spending a lot of money on maintaining the payment infrastructure.
As per PCI, zero MDR could result in losses of around INR 5,500 crore from UPI and RuPay debit card payments.
Diversification
Google Pay, PhonePe and Paytm account for 95 percent of the market even though banks such as HDFC, and SBI also offer similar services. As per a recent NPCI report, 323 banks were live on UPI.
(Source: Statista)
Most banks have diversified long time ago and are not putting all their eggs on the digital payment basket. SBI has been offering insurance products for two decades. They also offer services such as mutual funds, asset and wealth management.
So the next logical step for the UPI firms is to diversify their business and start upselling or cross-selling other products and services. Insurance is a good place to start because the larger Indian insurance market still remains untapped. Moreover, most of the Indian population still lives in rural areas, and that is where the opportunity is.
Today, digital payment firms are acquiring users in rural areas at a faster click than banks. Meaning, the former has a huge user base to leverage.
PhonePe has already identified new channels to make money. The payments firm has been granted an insurance broking licence from the Insurance Regulatory and Development Authority of India. In addition, PhonePe is also looking to set up an asset management company and has applied for a mutual fund licence from the Securities and Exchange Board of India (Sebi).
Paytm, which started as a digital wallet, has projected itself as a super app that offers a wide range of services from railway tickets to bill payments. Paytm also offers third party insurance products on its app.
