Cashless Catalyst: How UPI is Redefining India's Payment Ecosystem
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Aman Baheti
The Indian payments industry is currently undergoing a significant digital transformation, propelling growth across both business-to-business(B2B) and business-to-consumer (B2C) sectors.
A central catalyst in this revolution is the Unified Payments Interface (UPI), an Indian innovation that has garnered international recognition for its effectiveness and widespread adoption. More than 40% of all payment transactions in India are now conducted digitally, with UPI being the preferred choice for over 40 crore individuals and 5 crore merchants. The seamless integration of UPI into the daily commerce of Indian life, ranging from local kirana stores to expansive shopping centers, exemplifies its versatility and user-friendliness.
India's leadership in digital transactions is evident in its global standing, boasting the highest rate of digital payment adoption, with a notable58% increase in transaction value within a single year. This leap from INR71.97 billion in FY 2021-22 to INR 113.94 billion in FY 2022-23 underscores the rapid embrace and utilization of digital payment modes.
Key Players in the Payments Bank Industry:
- Paytm Payments Bank
- Airtel Payments Bank
- Fino Payments Bank
- India Post Payments Bank
- Jio Payments Bank
- NSDL Payments Bank
The Elephant in the Room: Paytm's Role in the Digital Revolution
Paytm has been instrumental in pioneering the digital payment revolution in India, with its comprehensive payment ecosystem and user-friendly interface. Dominating the UPI market as the third-largest player in terms of transaction volume, behind PhonePe and Google Pay, Paytm has led merchant transactions with a robust market share of approximately 40%. However, the recent cancellation of Paytm Payments Bank Ltd's (PPBL) license by the Reserve Bank of India (RBI), effective February 29, 2024, opens significant opportunities for other players in the sector. The company’s revenue relies on payments and financial services largely. In FY23, 81% of the revenue was accounted for by payments and financial services while 19% came from the cloud and commercial services.
UPI Scanner Opportunity:
As of December 2023, PPBL boasted a remarkable network of 35 million UPI scanners across India. Airtel and Jio Payments Bank, leveraging their extensive user base from other services, are well-positioned to capitalize on this opportunity. Following RBI's directives, Paytm has transitioned its Nodal account to Axis Bank, ensuring continuity of services through its QR, Soundbox, and Card Machines beyond the RBI's March 15, 2024 deadline.
Transaction Dynamics:
As India's largest Payments Bank, Paytm processes millions of transactions monthly. In January 2024 alone, the bank handled 122 million transactions, including 114 million debit transactions and 7.9 million credit transactions, amounting to approximately INR 720 billion. This presents an unparalleled opportunity for other payment banks to engage a broad user base, as digital payments now constitute an integral part of life for over 400 million Indians.
Listed Players to benefit from Paytm’s debacle
Jio Financial Services: A New Frontier in Investment Opportunities
Jio Payments Bank is making strides with the introduction of digital savings accounts and the integration of UPI features in Jio Bharat phones. Backed by a 23% stake from the State Bank of India (SBI), Jio Payments Bank is committed to adhering to RBI guidelines. Recent developments include successful sandbox testing for consumer durables and personal loans, an expansion of insurance company partnerships to 27, and a comprehensive range of insurance products.
Fino Payments Bank: A Tier-II Story
After spending its first few years (as a payment bank) building a distribution network, customer base, and product offerings, Fino crossed 1Cr+ customer base in Q3FY23. The payments bank also launched a QR-based merchant acquisition program. It has built a pan-India presence in the last 5 years which are mostly located in Tier-2 and Tier-3 cities. They applied for a small finance bank license in July 2023 and the plans for the SFB model, branch locations, and revenue mix are outlined for future expansion.
What’s troubling the payments industry lately?
Recently, the Reserve Bank of India (RBI) took significant regulatory action by revoking the license of Paytm Payments Bank Ltd (PPBL) and mandating the closure of its nodal accounts by February 29, 2024. This move places Paytm under scrutiny, highlighting ongoing challenges in adhering to the stringent regulatory guidelines set forth by the RBI. The concerns leading to this decision include allegations of money laundering, sparked by an audit that revealed numerous inactive wallet accounts within the bank.
This situation underscores the RBI's intensified focus on the compliance framework of payments banks, especially regarding their KYC processes and the management of customer information. It's not the first time the RBI has imposed penalties; Fino, Jio, Airtel, and Paytm Payments Banks have previously faced fines for various compliance failures.
The incident with Paytm Payments Bank serves as a critical reminder of the need for a collaborative effort among regulators and stakeholders within the financial ecosystem. The goal is to uphold regulatory standards without compromising the integrity and trust of the banking sector. In response to the RBI's actions, Paytm's CEO has committed to working closely with the regulatory body to address and resolve the issues promptly, signaling a proactive approach to compliance and operational integrity.
Valuation Check:
One 97 Communications
The intrinsic value for OCL is seen at INR 463. This valuation assumes a smooth business transition for the company and a 30% Cash Burn for loss-making segments.
Fino Payments Bank
EPS for FY25 is seen at INR 15.4. We anticipate a target of INR 385 taking a 25x Multiple.
Jio Financial Services
The FY25E BV is seen at INR 185. We assign a multiple of 2x and anticipate a target price of INR 370.
