Mastercard CFO says ecosystem participants of India’s UPI, which process more than 10 billion transactions a month, ‘end up losing money’
India’s UPI is “fantastic on so many levels” but remains an “incredibly painful experience” for ecosystem participants, the Mastercard CFO said at a recent conference, underscoring the tensions around the mobile payments rail. Which facilitates over 10 billion transactions monthly in the country with low card penetration. ,Thank you for reading this post, don't forget to subscribe!
When questioned about MasterCard’s prospects in emerging markets like India, CFO Sachin Mehra praised UPI for helping digitization, but expressed reservations about its business sustainability.
“This is an incredibly painful experience for ecosystem participants who ultimately lose money as part of that offering,” he said at the UBS conference.
While card giants like Mastercard and Visa charge merchants for consumer transactions, UPI – set up by a consortium of banks seven years ago and supervised by the Reserve Bank of India’s special unit, NPCI – is largely free for merchants without Works at no cost.
Low costs coupled with support from the Indian government and regulatory bodies have fueled the rise in adoption of mobile digital payments in the world’s most populous country.
Of course, this is not the first time Mastercard has expressed reservations about UPI’s economic model.
“The banks that actually enable those payments lose money on those transactions. So this is a proposal that we are asking questions about whether it is sustainable in the long term or not. and who knows? We’ll see where it goes. But meanwhile, debit as well as credit is thriving in that market,” Mehra had said in May this year.
Mastercard is also not alone with this view, although some have publicly criticized UPI’s economic structure in recent times. Many fintech executives have appealed to the government to impose fees on merchants over the past few years.
But interestingly, many companies in India have innovated and built businesses around UPI in recent years.
Take Paytm’s Soundbox, which provides real-time auditory notifications when a transaction is completed. Paytm’s Soundbox processes UPI transactions at no charge to merchants, but charges them a monthly subscription fee or a one-time payment of at least 999 Indian rupees ($12) to use the device.
The Soundbox business is growing rapidly for Paytm and contributing rapidly to its profits. (On a side note, MasterCard, Visa and ADEX have recently partnered with Paytm to accept card payments on Soundbox in an effort to expand its reach among businesses in the country.)
Additionally, Soundbox has paved the way for businesses to access a wealth of cash flow data from merchants. Earlier, many of these traders accepted only cash and evaded tax.
Having access to this cash flow data, businesses are now developing modern underwriting capabilities and lending to previously disadvantaged merchants who were dependent on predatory lenders.
(Additionally, the Reserve Bank of India acknowledged the potential of Soundbox this month, and added its deployment to the Payments Infrastructure Development Fund, an initiative aimed at subsidizing the roll-out of payment acceptance tools in smaller cities in India.)
Moreover, almost all stakeholders have benefited from the shift from cash to cashless transactions, and analysts at AllianceBernstein argued this month that these benefits far outweigh the costs involved in facilitating UPI transactions.
“Banks have benefited from the sharp decline in (expensive) ATM transactions (per capita ATM transactions have fallen from ~7 to ~5 in the last 4 years). The cost savings resulting from this drop is equivalent to ~20 bps of current UPI (P2M) transactions. “Banks may also benefit from a decline in cash to deposit ratios and lending opportunities associated with rising cashless payments,” AllianceBernstein wrote in a report last week.
The report said: “The government has benefited from lower money printing costs (cost as a % of private consumption has declined from ~5 bps before FY18 to ~2.8 bps now). The cost savings resulting from this drop is equivalent to ~12 bps of current UPI (P2M) transactions. The major benefit for the government is increased tax collection efficiency. Consumers and merchants potentially earn more interest income from declining physical currency holdings, but the direct benefits are less obvious because the cost of alternatives (cash and ultimately CBDC) is zero.
For MasterCard and Visa, both of which recognize India as a key overseas market, the road ahead in the country appears to be fraught with more hurdles. New Delhi is rapidly promoting the domestic RuPay card network, which has started gaining rapid adoption due to some unique features like credit linkage with UPI.
“Within debit cards, zero-MDR (merchant discount rate) RuPay has emerged as the winner: the preference for low MDR products is evident not only in the shift from debit cards to UPI payments, but also in the shift in market share. Gives. Debit card space,’ AllianceBernstein analysts wrote.
“The MDR on RuPay (domestic card network in India) debit card transactions is zero and not surprisingly, 100% volume growth and ~50% value growth over the last 5 years has been led by RuPay cards. “Transactions through debit cards linked to other networks have declined by ~40% in the last 5 years.”