Who will write the next chapter of India’s fintech story?

“How is 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.” These were the words RBI Deputy Governor T Rabi Sankar used to make the point that banks had ceded the UPI space to non-banks.

One of the reasons why this happened was that the banks did not see much business value in the new technology at the time of its release. Banks make money from card transactions through the merchant discount rate (MDR). But the government cut MDR to zero on UPI, meaning banks had no incentive to scale up the new technology.

“When a revolutionary technology comes along, it may initially affect a small part of the business. Scaling it up, improvising and innovating on it to affect the rest of the business is just one small step away. You miss the first step; you miss the train,” said Sankar, addressing a conference organized by the country’s apex banking industry body, the Indian Banks’ Association.

All the while, third-party application providers (TPAP) like Google Pay and PhonePe spent tons on marketing their UPI solutions to increase user adoption, which yielded several benefits in the long run. Today, they are the face of India’s most popular choice of digital payment, they own massive amounts of consumer spending data, and they own and lead the development of the UPI technology stack.

Who will own the future of fintech innovation?

The RBI, along with the National Payments Council of India, TPAPs and banks, has been working to improve UPI and expand its use cases regularly. Earlier this year, credit card transactions, cross-border bill payments and ATM cash withdrawal features were added to the package, along with UPI Lite – an internet-free payment method.

“These initiatives build on UPI’s phenomenal success and collectively cover almost all customer segments from low-value debit transactions to high-value credit and cross-border transactions,” said Sumit Gwalani, co-founder of money management platform Fi Money.

Building on this, RBI recently introduced the Single Block Multiple Debit (SBMD) functionality while expanding the scope of cross-border bill payments via UPI.
“SBMD will greatly increase the convenience of making UPI payments for users, while improving the efficiency and security of transactions from e-commerce to secondary market transactions,” Gwalani said.

Add to this the Account Aggregator framework, which democratizes consent-based access to consumer financial data, and the Open Credit Enablement Network, which automates the lending process for financial institutions. What you get is a heady mix of digital infrastructure ripe for the next fintech revolution.

Fintechs such as Fi Money, Paytm, Google Pay and PhonPe have the perfect vantage point to envision how these developments can come together to benefit consumers. Their deep understanding of India’s technology stack, coupled with a collaborative government and regulator, will allow them to ensure that India maintains its top position when it comes to fintech innovation.

While they have to partner with banks to offer financial services in the absence of regulatory frameworks like digital banking licenses, fintechs are well positioned to write the next chapter of India’s fintech revolution.