At a time when Paytm is already dealing with a ban on onboarding new customers onto its wallet, Macquarie Securities which is Paytm's most bearish analyst has said that the upcoming UPI Lite could pose a further threat to the wallet business.
UPI Lite is an initiative to enable small digital payments in offline mode and will be launched by the National Payments Corporation of India (NPCI) as per the directions of the Reserve Bank of India (RBI). In a circular to member banks, the payments body had said that it plans to implement UPI Lite by introducing an on-device wallet.
With Paytm's majority market share of around 60-70 percent in the wallets business in India, it could see the biggest impact from this new entrant.
Macquarie said, "The recent decision to launch UPI Lite by NPCI can potentially further de-clog the banking system network, enable them to further enhance UPI infrastructure and offer wallet-like features in UPI Lite thereby further enhance the value proposition of UPI ecosystem and reduce attractiveness of wallets."
The report adds that wallets might find some relevance owing to the attraction of cashbacks and other incentives, but UPI Lite is likely to have an impact on wallets as a payment proposition. Macquarie has maintained its underperform rating for the stock which has taken a beating of over 65 percent since its listing in November 2021.
On March 11, RBI directed Paytm Payments Bank to stop onboarding new customers based on "certain material supervisory concerns observed in the bank."
Paytm Payments Bank houses all key products offered by Paytm including UPI where it enjoys a 16 percent share in monthly volumes, as well as the Paytm wallet which has over 330 million accounts.
Post the ban, Paytm had to stop onboaring new customers for its wallet but in an interview with Moneycontrol on March 15, CEO Vijay Shekhar Sharma said that the ban does not impact onboaring of new UPI customers.
UPI Lite is only for payments up to Rs 200 and a balance of up to Rs 2,000 can be maintained in the wallet at a time, according to NPCI. Seventy five percent of the total volume of retail transactions in India is below Rs 100, and over 50 percent of UPI volumes have a transaction value of up to Rs 200.
NPCI is planning to implement this in two phases -- in phase one, UPI Lite will process transactions in near offline mode i.e. debit offline and credit online, and at a later point, will process transactions in complete offline mode i.e. debit and credit both offline.
Macquarie said, "The real challenge is managing the debits in a core banking system (CBS). The issue is that when debits are presented, especially a lot of small value debits, it chokes the banking infrastructure as the debit entry is a complex entry with multiple checks and balances, requiring validation and multiple backups. Hence moving this offline could significantly declutter the CBS network & enable banks to further enhance UPI infrastructure and reduce failure rates."
Currently the high volume of small value of UPI transactions has put a heavy load on banking servers and banks have to keep 40-50 servers running to manage the infrastructure.
While UPI has been witnessing a sustained surge in volumes over the past two years, growth in transaction volumes for prepaid payment instruments (PPIs) like volumes has been slow.
UPI transactions grew from Rs 41.03 trillion in FY21 to Rs 74.55 trillion until January in FY22. In the month of February, UPI transactions accounted for 80 percent of the country's retail transactions by value. Meanwhile, wallet transactions have grown only from Rs 1.97 trillion in FY21 to Rs 2.41 trillion in FY22, as of January.