They have cracked the payments piece but to do the same in the lending space, fintechs need important permissions from RBI
As Nandan Nilekani observed at the FE CFO Awards earlier this week, India has cracked the payments piece; we have built ourselves a democratic network perched on the sturdy United Payments Interface (UPI). It is high on volumes, very low on costs—in sum, a large inclusive system built on small-ticket transactions than can be accessed from wherever one is. Seriously, as Nilekani rightly said, there is nothing like this anywhere in the world. Right now, Indians are just starting to discover the joy of digital payments; whether via banking channels or via the UPI which is now clocking close to 2.5 billion transactions every month. With 700 million smartphones in circulation, volumes and values can only be expected to get bigger.
But if numbers tell a story, the real one to celebrate is that of P2M (person-to-merchant) transactions on the UPI. Last December, at Rs 68,170 crore, they topped the value of debit card transactions at PoS (points of sale), which was `64,676 crore. Interestingly, at close to one billion, P2M transactions trumped debit card transactions which were roughly 380 million; the volume of credit card swipes at PoS machines in December was even smaller 174.21 million. This is clear evidence of how many more merchants are now accepting digital payments, and while the ticket sizes could remain small compared with those for credit card and debit card transactions, that’s of little concern. In fact, as of now, P2M transactions account for just 16.5% of the value and this may increase only slowly.
Indeed, it is one thing for retail payments on UPI to be galloping, thanks to PayTm, PhonePe,GooglePay and the attractive cashbacks and promotions they have offered, but that merchants are latching on to UPI is wonderful. This is as much the result of the zero-merchant discount rate (MDR) regime as it is the result of innovations in merchant-alert systems; the pandemic, of course, has been a key catalyst. Players like Paytm and PhonePe have come up with solutions like the Soundbox and voice alerts, respectively, which produce an instant audio notification for a successful transaction at the merchant’s end. It helps that consumers see convenience in QR codes even for small-ticket payments of under Rs 1,000. What has helped are some unique and comforting UPI features; auto pay for instance—which allows you to programme a set of business rules, say, “debit my account every time I take a Ola” or “every day, put `10 in my SIP”. That has helped fintechs roll out a suite of financial products.
But while fee-based businesses—selling insurance or mutual funds in sachets—is all very well, the need of the hour is lending. And here fintechs are excelling, helped by technology and UPI. Thanks to fintech lenders, thousands of small merchants and vendors are now able to access credit. Armed with e-NACH mandates, and empowered by access to CIBIL and GST records as also bank statements, these lenders are disbursing thousands of small ticket loans. The likes of a BharatPe and LendingKart have shown us how an app can be worth a thousand branches. The beneficiaries now number 150-million-plus and are mainly small entrepreneurs; they could be running a cycle repair shop, a coaching class or a trading outfit, and can’t offer any collateral. The strike rates are high; one analysis by Credit Suisse shows just ten players, have between them, brought on board roughly 70 million merchants.
But, given their limitations, the lending landscape is changing very slowly; between their own proprietary platforms and partnerships with fintechs, frontline private sector banks are able to do anywhere between 50% and 75% of the business digitally. The nimble, smaller new-age private banks that have the best-in-class systems are among those that are exploring the market in partnership with fintechs. The pampered, public sector banks, with their large deposit franchises are as complacent as ever; even the best and biggest of them doesn’t want to take any risks.
There is a fair bit of co-lending already taking place as fintechs offer other lenders their electronic platform. But if digital lending—secured or unsecured—has to take off in a big way, fintechs need to be able to borrow because simply raising capital won’t be enough. Some of them worry they could soon be short of resources, and are hoping to be able to tap the overseas bond markets while others are teaming up with NBFCs. Some are hoping they can start by partnering NBFCs and later become a bank. The point is the regulator must facilitate lending by fintechs through partnerships with other financial institutions; for starters, they should consider increasing the 10% cap on equity acquisitions in fintechs by banks and insurers. This would also help fintechs attract early-stage investments. If the economy is to grow, small merchants need credit and banks could take a long time before they are able to reorient themselves, but in the way they view customers and in the way they use technology. In the meantime, fintechs must lead the way, but for that the regulator must play ball.