Has the time come for payments to be a standalone revenue product? Episode #33
RBI has come up with a vision document which starts talking about reasonable charges on payments
Last 6-7 days have been interesting in the Indian fintech space. It does look like there is a slew of fintech funding news popping up recently. The funding scene is looking to be slowly getting back in action.
Pazcare, employee based healthcare and insurtech firm, raised $8.2m from BEENEXT and 3one4capital. Siply, gold based savings firm, raised $19m. Look at the end of the newsletter for more funding news.
Interestingly, last few days, RBI has been quite in news. First, they declined that they are holding any thoughts of giving digital banking licenses, which is a major setback for many neo banks and those harboring similar ambitions.
Second, they have hinted that now they are open to charging UPI payments for it to scale effectively. This is a major development, which will directly impact the fortunes of a lot of fintechs, both large ones as well as the small upstarts. I discussed this briefly in the previous episode of this newsletter here – enabling credit on UPI might be one way to introduce merchant charges on the entire UPI ecosystem.
Note – In case you are a fintech founder, looking to raise funds, I might be able to help. Reach out to abhishek@indiafintech.in. In case you are looking to invest in Indian Fintech, reach out. Would be happy to help.
So, what does this vision document say?
RBI released a vision document for payments till FY2025 which discusses the changes needed to strengthen, augment and/or regulate the existing payment infrastructure that would enable faster adoption of digital payments.
One of the most interesting lines from the documents reads - The role of RBI has transformed from being a regulator, operator and facilitator to creator of an environment for the structured development of the payments ecosystem in India. This actually points towards how RBI views itself in the whole ecosystem. They see themselves as nurturer of the ecosystem and my reading is that they will not interfere unless there are systemic risks in anything. Big moment, for sure!
While the report focuses on UPI and talks about growth of UPI as well as enabling credit on UPI as key goals, it also discusses quantitative achievements that they are likely to achieve in this period. These include –
(1) volume of cheque-based payments to be <0.25% of total retail payments,
(2) >3X increase in number of digital payment transactions,
(3) UPI to see growth of 50% CAGR and IMPS/NEFT at 20%,
(4) payment transaction turnover to touch 8% of GDP,
(5) increase in debit card transactions at PoS by 20%,
(6) debit card usage to surpass credit cards in terms of value,
(7) increase in PPI transactions by 150%,
(8) card acceptance infrastructure to increase to 2.5 mn,
(9) increase in registered customer base for mobile based transactions by 50% CAGR and
(10) reduction in Cash in Circulation (CIC) as a share of GDP.
These are big goals in itself and it directly impacts fintech firms. More on this later on.
The report also highlights that the following areas are likely to see further guidelines/clarifications:
(1) review of the different types of PPIs including timeline for full-KYC PPIs, definition of closed system PPIs.
(2) Need to bring all payment intermediaries, including offline PAs (Payment Aggregators), under direct regulation of RBI.
(3) Discussion paper to understand the impact of bigtech and fintech.
(4) Merchant payment transactions done using internet/mobile banking presently processed through PG/PA shall be revisited.
(5) Guidelines would be issued on BNPL.
(6) Possibility of implementing a National Card Switch to process card transactions at PoS terminals to increase competition and efficiency.
(7) RBI is also quite keen to develop credit products on UPI.
We are witnessing solid adoption of electronic payments, though concerns abound on its viability as a business model. The vision document does not address this issue but has raised it as an area that needs to be deliberated further. In section 4.2.12, there is a line where the report has indicated that a comprehensive review of all aspects of charges involved in various channels of digital payments shall be undertaken.
The report has also highlighted that charges are required to make digital payments viable but they should be reasonable and not deter adoption. This has been an area of discussion with investors as it has been a key overhang for the performance of SBI Cards in our view. We shall have to wait further but I am quite optimistic that the direction of thinking appears to be quite constructive as there is a focus to keep business models viable as well.
Interpretation – I do see charges being levied on UPI transactions. Both debit and credit. Interesting times ahead.
Note that the vision document is quite focused on UPI given its success and also highlights its desire to keep debit cards higher than credit cards. The larger question to answer is probably on payment behavior adoption by consumers as compared to the MDR in itself. However, it is hard to understand as we are still in very early stages of adoption of digital payment products.
So, what are the key impact and who are best positioned to benefit from the expected changes?
First of all, payments firms, who have already achieved some meaningful scale, would be smiling at this! They finally might find a way to monetize the merchant networks and huge customer base that doesn’t involve lending. Firms like Paytm, PhonePe, GooglePay will be happiest of the lot.
I see the likes of Pine Labs, mSwipe do well going forward as well.
Another set of firms or rather one firm, which will be supremely benefitted is Paytail. They have quickly scaled up 35,000+ merchants for offline BNPL and given that they process EMIs on both credit cards as well as own network, I do see increased traffic flow here. Higher number of customers and increased spending on credit-based products is a given here.
Combined with credit cards on UPI (Click here to read a detailed piece on the same), payments are set to become a revenue generating product. And it doesn’t have to be one or the other, they can now peacefully co-exist.
Exciting times ahead for Indian fintech firms.
Some recent happenings in the fintech industry
Full-stack financial services platform WeRize has raised around $15.5 million in a new round led by existing investor 3one4 Capital. They are building, India’s first socially distributed full-stack fintech platform for middle-class families in tier 2-4 cities.
Fintech platform PayGlocal has raised $12 million in a Series B funding round led by Tiger Global with participation from Sequoia Capital India and BeeNext.
Pazcare, an employee benefits and insurtech platform, raised $8.2 million (around Rs 64 crore) in a Series A funding round led by Jafco Asia at a valuation of $48 million.
mewt, a banking super-app for Indian Micro, Small & Medium Enterprises, has raised $4.6 million in its seed round led by Quona Capital, with participation from existing investor BEENEXT, DG Daiwa Ventures, Goodwater Capital, Allin Capital, and a clutch of fintech angels.
Nume, founded in 2021 by sisters Madhumitha and Niveda Harishankar, is a layer two protocol that facilitates crypto payments between merchants and buyers. It raised $2mn from Sequoia Capital India, Beenext, Whiteboard Capital, and several prominent angel investors.
That’s it from my side today. Do reach out at abhishek@Indiafintech.in for any fintech related discussions.