How Indian banks are making $64 billion from a freebie

On more than 6 billion separate occasions in just one month, the ringing of cash registers in India was replaced by audio confirmations on a digital sound box. Add instances of people paying one another rather than merchants, and the world’s most-populous nation drummed up more than 10 billion cashless transactions in August. All were online, instantaneous… and cost nothing.

At least most of them didn’t. Since April, customers dipping into their mobile phone wallets to settle bills of more than 2,000 rupees ($24) have to bear a maximum 1.1% fee, but only if they are scanning a different platform’s quick-response code. This charge goes from the merchant to his QR code provider — Amazon.com Inc.-owned PhonePe or homegrown Paytm — for hooking up with Alphabet Inc.’s Google Pay. But the Unified Payments Interface, a common protocol for people to send and receive money into accounts at different banks, remains free for regular use. 

Banks do try to impose some costs on high-volume users, and the government gives them money to promote low-value online transactions and make formal credit available to disadvantaged groups like street vendors. Yet, a lot of the lenders complain about being made to watch the swelling wave of online payments from the sidelines, rather than being allowed to ride it. Without a profit motive, how will India sustain an industry that — starting from nowhere seven years ago — has come to transact nearly $2 trillion of value annually?

It appears that those concerns are overblown. Even with a free public utility, India’s payment revenue swelled last year to $64 billion, behind only China, the U.S. and Brazil, and rivalling Japan, according to McKinsey & Co.’s latest global survey. The rising tide of online transactions has led to a surge in digital commerce. That has, in turn, lifted other boats: Credit card usage has also expanded. 

Nor has the lack of a profit motive stifled innovation. New initiatives like pre-approved credit lines will supplement the original protocol that only allowed customers to debit bank accounts or wallet balances to pay someone. Since last year, credit cards have also been allowed to be linked — but only if they are on India’s RuPay network. Visa Inc. and Mastercard Inc., which have grumbled about the country’s absence of a level playing field, would love to be included. 

It’s a different story from other successful payment systems. While McKinsey expects instant payments, led by the Pix platform, to account for half of the growth in Brazil’s payment revenue from transactions through 2027, the comparable figure for India may not even be 10%.  

India’s profit from payments will expand because of sheer volumes. A fifth of the country’s 620 billion transactions last year were settled digitally. By 2027, the figure would rise to 765 billion, and nearly two out of three of these exchanges would be online. Nimble fintech firms would aggressively scout for every new avenue opened by technology or regulatory change. However, “there is ample room for banks to pursue various use cases depending on their specific core competencies and strategic priorities,” the consulting firm notes. 

Initially, banks were reluctant to promote the shared network, fearing it would cannibalize their proprietary apps. Those fears weren’t unfounded, though in the process of losing their moat, the lenders have won access to the world’s fourth-largest pool of payment revenue. And this is just the start. From fees on cards to interest income on credit lines, new opportunities may arise in adjacent activities. In the first two months of last quarter, Paytm distributed $1.65 billion in loans on its platform on behalf of lenders, a 137% jump from a year earlier. 

The instant-payment protocol may have become wildly popular, but it has only scratched the surface of its potential. The National Payments Corporation of India, the network’s operator, is taking it global. From Paris to Singapore and Dubai, there will be plenty of fees and currency-exchange commissions to be earned when Indian tourists use their rupee wallets — funded by credit lines from local lenders — at shops overseas.

For India’s banks that have turned a giveaway into a catalyst for last year’s 38% revenue growth, it makes sense to not upset the status quo. There’s much to be gained from an online payment system that is familiar, fast, and free.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.