UPI came into existence just a few years back, and in such a short term, it has gained immense popularity. But, while UPI was expanding, why didn’t banks join in? How did they miss the UPI bus? Let’s find out.
Earlier this month, the deputy governor of RBI, Mr T Rabi Sankar, said something which made a point that banks had missed the UPI bus while all the non-banking players went for a long drive.
So, this is what he said, “How’s it that a system of transactions between two bank accounts has evolved in a way where most of the business is owned by non-banks?”
This means that transferring money from one bank account to another is a function of banks, and they have various products to get the job done. But, banks failed to scale UPI during its days of inception, leading to non-banks and fintech startups dominating a major chunk of the digital payments space.
Why Didn’t Banks Jump on the UPI Bandwagon?
The bank earns money through the merchant discount rate (MDR) when you make a transaction using a debit or credit card. This MDR is a fee paid by merchants (receiving party) for accepting payments through debit and credit cards.
But, there is zero MDR on UPI transactions; hence, banks will not get any incentive if they choose to adapt to UPI. So, they didn’t put in their resources and efforts to develop the technology and ecosystem.
While banks were ignorant, third-party application providers like Google Pay, PhonePe and others were actively spreading the word and pitching attractive offers to their customers. Today, these apps have become the first choice of digital payment.
Looking at the growing popularity of UPI Transactions in India and a few players dominating the UPI space, the National Payments Corporation of India (NPCI) proposed apps not hold more than 30% market share on UPI in terms of payment volumes. This was done to avoid the monopoly of any one UPI player.
But, a few weeks back, NPCI extended the deadline by two years for UPI apps to comply with its market share guidelines stating that if the cap was implemented from January 2023, it would lead to a lag in growth.
In a nutshell, fintech companies have positioned themselves well to ace the UPI game.