Government subsidy for Unified Payments Interface (UPI) transactions is not enough to cover the losses banks are incurring from operating the real-time payment system and a way of monetising needs to be devised, Bank of Baroda Chief Digital Officer (CDO) Akhil Handa has said.
“I think overall, there has to be a path to monetisation. Of course, I say this as a commercial organisation. The government, obviously, has a much larger mandate. If the government and the finance minister, in their infinite wisdom, have taken a call that UPI needs to remain free, then that is what it is,” Handa told Moneycontrol.
BoB was the third largest UPI remitter bank in India in August with 432.5 million transactions conducted on the bank’s servers.
In comparison, over 1.79 billion transactions were conducted on the country’s largest lender State Bank of India’s (SBI) UPI servers in August. HDFC Bank, with 594.2 million transactions, was the second largest UPI remitter bank in the month.
In an interview, Handa shared his views on ways to make UPI a sustainable payments model for banks and commented on RBI’s recently launched digital lending guidelines. Edited excerpts:
What is your view on the monetisation of UPI?
All said and done, there are investments to be made. It is like a toll road, you levy a toll on the road for maintaining the highway. That is the case with the digital payments ecosystem.
To keep running it smoothly, there are continued investments that you need to make and somebody has to foot that bill. I think this is the right opportunity to have a conversation around who foots that bill, but I think the government has taken the call that it will partially foot that bill and then commercial organisations need to also assume part of the financial burden.
Is government subsidy enough for compensation?
The government subsidy is not enough to cover the losses that we make. I think overall, there has to be a path to monetisation. Of course, I say this as a commercial organisation. The government, obviously, has a much larger mandate. If the government and the finance minister, in their infinite wisdom, have taken a call that UPI needs to remain free, then that is what it is.
Most ideally, as a commercial organisation, I would like to see a nominal fee. I really do not think that a nominal fee is something that customers will not like at this point in time or may not be able to bear. In fact, we could do a test, a localised pilot to see if customers are able to bear it.
What is needed by banks to lower UPI transaction failure rates?
We are the third-largest UPI remitter. We have the lowest Technical Decline (TD) rate of 13 basis points among the top banks. The point I am trying to make is in many ways, public sector banks are in no way inferior to their private counterparts, it is only a perception. These are hard numbers.
We have fine-tuned our applications enormously. We spend a lot of time on this and there is quite a bit that our technical team has done. Reducing connection timeouts, the bank has implemented a packet capture mechanism at the application and network level. So these things have collectively resulted in a lower TD rate.
Do you think the RBI’s digital lending guidelines will impact the bank’s partnership with fintechs?
That does not impact us much as we were never in these sorts of arrangements with fintech companies. While working with lending fintech companies, we broadly partner with them in two ways.
One is as a technology service provider and the second is, if you want to be a business augmenter, then you come (in) through a co-lending route. These are the only two ways.
We do not get into FLDG (First Loan Default Guarantee) and all these models, so it does not impact us in any way really.
Will the FLDG model survive?
To that extent, in many cases I do not understand how the FLDG model will work because the reality is, very interestingly, why does a fintech get into an FLDG arrangement? It is because he wants to use the balance sheet capacity of a financial institution to lend. Why would they not do it on their own book? Because they do not have access to institutional finance.
When you do not have the ability to generate institutional finance, then you should actually not be in the business of lending. Because then what happens is that you are actually shifting the risk onto the financial institution and what good is 10-15 percent FLDG because you do not have the balance sheet capacity to absorb that loss.
For us, augmentation of business through fintech channels was never a sizeable business. What has always made sense is to use the technological ability of fintechs to augment my own processes and that is what has created this operating leverage. Now, I am able to do many things at a far lower cost. For me, that has always made more sense institutionally.
Can you share updates on the BoB digital co-lending platform?
Currently, we have onboarded two of our NBFC (Non-Banking Financial Company) partners on our digital co-lending platform—UGRO Capital and Clix Capital. These are in the MSME (micro, small and medium enterprise) space, and we are onboarding multiple partners in the retail space, in the housing finance category and further adding more partners in the MSME space. There is also a discussion on in the gold loan space. The original plan was to onboard six partners.
By end of Q2, we would have run our initial loans through this digital co-lending platform; there is a lot of integration effort required between partners and the bank, and then subsequently we will start scaling the platform Q3 onwards.
Can we expect the co-lending platform to generate the targeted Rs 10,000 crore of loans this fiscal year?
We will have to see, it also depends upon two things—the pace at which partners are onboarded and what kind of pipeline do the partners have.
Every product category that you bring onto the platform, takes some time. But once one category is on the platform, getting another player from the same category onboarded is relatively quicker.
Are you planning to utilise digital channels for overseas business growth?
We are keen on the UAE, East Africa and the UK where we have a good retail presence and good business. These are territories of interest to us in terms of rolling out a digital bank proposition. The success of the BoB World digital banking platform domestically tells us that this can get replicated in other markets and these are the markets where we have a retail presence.
These markets have dramatically digitalised over the last four years and so it is important to roll out digital propositions. India has taken giant strides in digitisation, but in many ways, some of these markets are more advanced in certain areas of digitisation, which can be important enablers to roll out digital products.
Is BoB planning to launch a Metaverse lounge?
We are studying what is the value we can add to our customers through Metaverse.
Do you think the use of banking services can pick up in the Metaverse?
It could, why not?.These are the frontiers of technology. You tell me if VR (Virtual Reality) or AR (Augmented Reality) headsets will pick up, or if Oculus (maker of gaming products) will become mainstream because, if they do, then metaverse will absolutely become mainstream.