July, 2022
UPI is a great innovation and I have personally witnessed how it has in so many ways unleashed India’s commerce potential. However, I can’t help but wonder about its effect on consumer fintech innovation in India.
Consumer fintech innovation in the West has relied on interchange. That’s because interchange allows for a product that is near free for the consumer while someone else pays for it (in most cases the merchant). @BessemerVP we call this a “free lunch”.
Moreover, in the US, the Durbin amendment of 2010 made debit interchange an asymmetric playground between big banks and startups. The amendment capped the interchange charged by banks with more than $10B AUM, allowing the likes of Chime to earn higher interchange than big banks.
Categories like BNPL are also anchored on the expectation that merchants will pay interchange. BNPL startups offer a near free consumer product by convincing merchants to pay for it with a promise of an increase in topline + retention while also being cheaper than interchange.
Since UPI is free in India, the cost of a transaction decreases significantly but is still not entirely free since the banks/applications will charge fees to the sender and receiver. But the potential for interchange and building a fintech on that business model are diminished.
Consumer fintechs in India will have to rely on lending and/or fees (subscription + one time) based business models while also compete with the incumbents on a level playing field. There are obvious challenges to that.
For example, on the BNPL/lending side, fintechs not only face a challenge from the central bank which has introduced regulation and increased barriers to entry but also incumbent banks which have solid moats like lower cost of capital.
This might sound like a grim musing on Indian consumer fintech, but it’s not. If there’s one thing I've learned in my 18 years in India, it is that incumbents there really suck. The fintechs that crack a sustainable business model will surely win BIG.
As I've said before, since UPI transactions aren't being monetized today, consumer fintech innovation in India will be stifled, resulting in the concentration of loss making applications.
