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As UPI dominates, will banks step up to reclaim their market? UPI continues its meteoric rise, handling 69.6% of India’s digital transactions and reaching %20.6 lakh crore across 14.8 billion transactions in August 2024 alone. Yet, banks contribute a mere 2.1% to this ecosystem, largely dominated by third-party apps. With upcoming caps on these apps’ market share, banks have a key opening to leverage their infrastructure, trust, and customer relationships to capture a bigger slice of India’s digital payments market.
The Unified Payments Interface (UPI) has significantly transformed how Indians transact, paving the way for a cashless economy. According to the DigiDhan Dashboard, UPI accounted for 69.6% of all digital payment transactions by volume in India during FY 2023-24. It has become the most preferred mode of payments, processing 20.6 lakh crore across 14,863 crore transactions in August 2024 alone. This marks a nearly 31% increase in the value of transactions and a 40% increase in transaction volume compared to the previous year. UPI continues to make digital payments faster and more accessible, driving financial inclusion across both urban and rural regions.
In August 2024, this growth is driven by a leading few players contributing to more than go% in terms of volume of transactions has raised concerns regarding market and Technology concentration. It is because UPI enables free instant payments, discouraging other players from promoting it aggressively due to a lack of revenue generation. To address this issue, the National Payments Corporation of India (NPCI) proposed a 30% volume cap on Third-Party App Providers (TPAPs) in November 2020. UPI players were initially given two years to limit their market share to 30%. Although the original deadline was set for December 2022, it has since been extended for another two years to the end of 2024. Despite this extension, there has been limited progress toward implementing the cap so far.
The strong presence of a few third-party UPI apps presents risks and opportunities for various stakeholders. The reliance on a few platforms for UPI transactions poses a risk of service disruption ifa leading app experiences technical issues. For consumers, this could lead to inconvenience, while for merchants, it may directly affect business operations, causing potential loss of sales and reduced customer satisfaction. Therefore, it is important to consider the impact of market cap on customers and merchants. Two major TPAPs will be directly affected by the 30% market cap, as they currently lead the digital payments ecosystem. However, these restrictions are anticipated to increase competition among banks, fintechs, and other smaller players, who are likely to seize the opportunity to broaden their presence and enhance their services.
Bank’s customers spend more time on TPAP and limited time on the Bank app or branch, so they are becoming customers of TPAPs, instead of sponsored banks. Bank-based apps currently contribute only 2.1% to the UPI ecosystem, highlighting the need for banks to take a more proactive and visible role. Banks have a significant opportunity to leverage their trust and infrastructure and compete more effectively with fintechs to increase their market share in the growing UPI ecosystem.
Invest in merchant channel and consumer acquisition: One of the leading reasons for the success of UPI TPAP is investment in merchant channel development and services merchant within defined service levels, the Banks have to traverse the same path leveraging their current account-based business customers.
Innovative product launches: Banks can introduce products like sound notification devices with NFC- enablement to modernise payment infrastructure, like what fintechs have successfully implemented. These innovations will help banks stay competitive in the merchant space by offering more seamless and efficient payment solutions, attracting both small and large businesses.
Promote UPI on credit: By promoting UPI-based credit transactions, banks can tap into a growing demand for credit flexibility in digital payments. This not only enhances customer convenience but also helps banks acquire a higher-value customer base that prefers credit-based options leading to revenue generation for the banks.
Merchant support ecosystem through field service agents: Banks should establish a dedicated team to build strong merchant channels and networks, learning from TPAPs that have scaled efficiently by offering hands-on merchant support and incentives. This direct engagement can help banks better understand merchant needs, improve service delivery, and create tailored solutions to meet local market demands.
Leverage declining debit card usage: With a year-on-year decline in debit card usage, banks can strategically focus on UPI as an alternative business stream. As debit card usage decreases, UPI offers a more popular alternative, positioning banks to cap- ture business that would otherwise be lost to fintech’s and other players in the digital payment space.
Cross-selling financial services: Once banks acquire UPI customers or offer UPI services to their own customers, they may focus on cross- selling additional financial services like loans and savings products, as these services are already part of their core banking offerings, supported by sufficient capital. This strategy deepens customer relationships by offering a broader range of services, transforming UPI into a gateway for more comprehensive financial engagement, and driving long-term revenue growth. Banks have a pivotal opportunity to reshape their role in the UPI ecosystem. By adopting innovative solutions, enhancing merchant engagement, and expanding financial services, they can capitalise on the potential market shift. This proactive approach will enable banks to increase their market presence and contribute to a more competitive digital payments landscape.
This article first appeared in DataQuest on 1 November 2024.
