Why are banks going slow on UPI?

It has been over six months since the NPCI launched UPI. Despite, the Govt. of India’s demonetization drive in November 2017 and the resulting cash crunch and shift to digital payments, UPI — though showing growth — appears to be struggling in the customer to merchant payments segment when compared to older electronic retail payment services like debit and credit cards and newer platforms like PayTM.

As of February 2017, 44 commercial banks in India have signed up to the UPI platform and many of them offer UPI through their mobile apps. However, once gets a feeling that commercial banks in India are still dragging their feet when it comes to pushing UPI to the market. Most of the UPI push has so far been through NPCI’s BHIM app or non bank FinTechs like Phone Pe or Trupay. Why are banks going slow with UPI?

Based on approximate “back of the envelope” calculations, it appears that commercial banks have at least one thousand two hundred crore reasons every year to go slow with pushing UPI to the market. Here’s how…

  • The total debit card transaction volume in India in Rs between Nov 2015 and Oct 2016 was INR 1,896,718,910,000 (source). I have excluded Nov and Dec 2016 due to the spikes in cashless transactions because of demonetization, which in turn may skew total transaction volume figures.
  • The approximate service charges per transaction that is paid to debit card service providers — which includes issuing and acquiring banks, card associations and merchant service providers — is between 0.75% to 1% of the transaction value.
  • Of the 0.75% to 1%, approximately 0.10% of the transaction value goes to the card association (Visa, MasterCard etc.)
  • The remaining 0.65% goes to the issuing bank of the debit card, the acquiring bank of the merchant and the merchant service provider (which often are the banks themselves). This amounts to INR 12,328,672,93 i.e. INR 1230 crore as transaction revenue from debit card transactions between Nov 2015 and Oct 2016.

The above amount does not include fixed revenue from fees that banks charge for the debit card product and services. This includes an annual fee from retail customers and bunch of fees (terminal fees, payment gateway fees, annual fees, customer service fees, account management fees, chargeback fees, batch fees etc.) from merchants.

Additionally, retail customers and merchants are also heavily incentivized to participate in the debit card ecosystem. Retail customers are offered loyalty and offer based incentives to offset annual fees while merchants are offered the potential for higher sales and better customer service.

It is clear that debit cards offer multiple sources of fixed and variable revenue for banks. When coupled with credit cards — which leverage the same retail customer base and merchant base — the even larger revenue potential of the card business make it a very lucrative revenue stream for banks in India. It is no surprise that they will work to protect this revenue stream especially from services like UPI which could significantly cannibalize revenues from their card business.

While UPI does offer some incentives for retail customers (no fees or very low fees as on date) and merchants (lower fees, instant settlement etc.), it still does not offer attractive enough incentives to banks — especially in terms of revenue streams and generation.

The incentives structure of UPI will need to evolve to better balance the needs and requirements of banks, retail customers and merchants before it becomes a business that banks are willing to bet on.