Banker’s Dilemma — The UPI Challenge: Paying to Play

“I saw a bank that said ’24 Hour Banking’, but I don’t have that much time.” — Steven Wright, American Stand-up Comedian.

While this is part of a stand-up routine, what Steven Wright said is turning out to be true in the world of ‘Insta-Everything’. More than ever before, finance platforms have become so effortless and inter-operable that it is easy to innovate and disrupt with a simple idea. Banks today are under solid pressure to both perform and stay relevant in the market at the same time.

Take the introduction of India’s very own payments platform: UPI (Unified Payments Interface). It has simplified and democratized payments to such an extent that the entry point for anyone to build a brand-new UPI payments app is very low. While a front-end and user experience can be built, owned, and facilitated by a third-party app like Whatsapp Pay or PhonePe, it is the banks that have to invariably do the heavy lifting for UPI transactions. Contrary to popular belief, QR code scans, VPA verifications, and funds transfers have to be processed by banks instead of the third-party apps to ensure user data security. The third-party apps therefore tie up with sponsor banks (or PSP) to enable this for customers. For example, a user of Whatsapp Pay is ultimately registered with a scheduled Indian bank, immaterial of where his/her bank account is.

This is a huge problem for banks. On the one hand, they need to act as the middleman to securely forward and route the traffic, while, on the other, they need to process fund transfers in real-time using their core banking systems. Digital transactions using UPI at a local saloon or a pani puriwala add to unprecedented transaction volumes that is difficult for banks to size for. The real killer is that cost per transaction remains high even for low-value transactions. Topping this, there is no room for errors as banks are shamed and their competencies are questioned when UPI transactions fail. For a bank, this leaves them with no incentives to participate because most transactions carry no margins (Edited as From Jan 1, 2020- MDRs are zero) and the ones that do are in the order of a few paise because of MDRs (Merchant Discount Rates). This wasn’t the case with other payment instruments like debit cards or credit cards. UPI, the cards killer, is unlike any system that banks have witnessed before.

“Our competitors aren’t taking our market share with devices; they are taking our market share with an entire ecosystem. This means we’re going to have to decide how we either build, catalyse or join an ecosystem. This is one of the decisions we need to make.” — Stephen Elop, Nokia CEO, 2011

We all know what happened to Nokia. Similar storied examples exist even in the biggest of Tech companies — Sony Betamax, Microsoft Zune, Blackberry, Google Glass, Amazon’s Fire Phone are all examples of having fantastic tech but not focussing on the ecosystem. Not participating in UPI is not an option for Indian banks because their customers’ loyalties are at stake in this digital-first (soon to be digital-only) world. For example, you have large e-commerce giants participating in UPI-based payments because it gives them the right set of tools to keep their users engaged within their ecosystem where they can get them to shop more. And the incentive for internet giants to rollout a UPI app is about building those engaging user experiences to retain users within their ecosystem where users can be subjected to more advertisements. Such ecosystems are becoming key for the survival of enterprises today and that is why every serious business in the consumer space right from large handset providers, desktop OS providers, mobile network operators, food delivery apps to cab aggregators participate in UPI. Such ecosystems are very powerful because they can dictate the terms on how other players like banks can participate. For example, to get the user to open their wallet for the item in mind, an ecommerce company can entice them with cheaper EMI offers from other banks where they don’t hold an account. Not just a lost opportunity, it also leads to poor customer stickiness. This sort of commoditization is leading to a dog fight that may ultimately push some banks into a corner where they will lose relevance and merely become ‘ledger-as-a-service’. Such a disaster is on the cards (pun intentional) and many of us will witness it during our lifetime.

While the marriage-of-convenience with third-party ecosystems may pay in the short term today, banks will have to vigorously innovate to turn it around for themselves to stay relevant in the market. This will require them to adopt a culture of experimentation where prototypes are built and destroyed rapidly. They need to get used to failing fast and learning faster from the failures. They also need to adopt technology practices such as cloud that facilitate an agile culture.

Cloud is no more an “IF” question, its no more a “Why” Question, it’s now a “How Quickly Can I get onto a Cloud Journey Question?”. Banks have spent too much time evaluating TCO of Cloud versus On-Premise models and the cost of opportunity has never been accounted for. The intangible advantages of agility, flexibility, scale, performance far outweigh the costs. This requires a mindset change, a skillset change, and CIOs/CTOs need to play a far more aggressive role here. (More on this subject in a different article)

For instance, one cannot simply achieve rapid innovation with traditional on-premise techniques that involve a massive CapEx and a pre-defined technology stack. This is because one cannot make a heavy CapEx investment in the order of many crores and fail in the name of experimentation. In that way, a traditional on-premise approach becomes the anti-thesis of innovation.

Cloud, on the other hand, makes it convenient for business decision-makers and the IT teams. With a software-defined hyper-scale infrastructure and a pay-per-use model, cloud enables quicker provisioning and de-provisioning of systems that keep the costs under control. There are also a wide-range of platform tools like autonomous transaction processing, developer cloud service, and Oracle Kubernetes engine that developers and system operators can leverage quickly to build features and deploy resilient systems to enable faster go-to-markets.

Ultra-flexible payment models like Oracle’s Universal Credits enables the much-needed fungibility; that is, if you have overgrown VMs and need powerful servers like Oracle’s Bare-Metal compute, you could simply retire the VMs and move to bare-metal without requiring double investment. Or, if your use-case has evolved and you wanted to shift from traditional compute for ML, you could simply replace these compute credits with GPUs to enable better machine learning. This is very important because technology becomes obsolete over time and one needs to always be on the latest and most powerful tech to keep up with the pace. And, this is not possible anywhere except cloud. As RBI and NPCI open the gates for banks to move UPI, Bharat Bill Pay and Fastag to Cloud, it is very important that banks leverage the time and opportunity.

Oracle can help enable with this innovation, lower cost and deliver a quicker go-to-market for your UPI application. Watch this space for a solution to some of the problems of UPI Scaling using Oracle Cloud.

To paraphrase Oscar Auliq-Ice’s quote — “Much sweat, much pay — Less sweat, less pay.” This is NOT true for banks to succeed in payments — “Less sweat, more pay” has to be the mantra!