Losing your touchpoints (Part 2 of 2)

In the first part of this essay, I objectively analyzed how banks have fared with respect to tech-first UPI payment apps for contactless payments. The conclusion - Banks appear to be losing the contactless payments race rapidly to fintech intermediaries.

In this part, I discuss the strategic implications of this loss in market share, in what appears to be a non-revenue generating function of a bank's business, especially in India.

Banks risk disintermediation

Over the past year, if you open GPay, which you would, given the app’s 35% share of the UPI payments, you’d see Axis Bank’s ACE credit card being marketed as a way to manage your money and get cashbacks on purchases. On PayTM,? similar offers for co-branded credit cards by HDFC and SBI greet you. Nothing wrong with it, they are all operating within legal bounds. But consider the impact they have on a user thinking about a good credit card. You open an app for payment, and you are marketed a specific credit card from a specific company, without being able to see alternatives.

Customer defaults are a powerful thing. As a de facto platform for access to financial services, non-bank UPI apps have become a gateway of discovery to financial products.

Yet they are not obliged to be non-discretionary towards financial service providers. It doesn’t end with credit cards either. It could similarly play out elsewhere. Evidence suggests that embedding an app in payments behavior of a customer might impact urgency driven/ impulse purchases.

PayTM is already seeing this with its lending vertical, where the scale and unit economics of its lending operations has improved in tandem with the increase in its payments market share since early 2021.

As of Q2 2023, as per my estimate, anywhere between 25-30% of Buy Now Pay Later (BNPL) loans were disbursed through PayTM. It has a small share of Personal loan distribution as well (1-2%).

Payment apps are like billboards dotting that part of the customer's mind where they make a daily financial decision - of saving, investing and borrowing. Parceling it out to a non-bank, third party payment app is like outsourcing that touchpoint.?

There is a direct loss of revenue streams coming from cross-selling and distribution of allied financial products

One of the key highlights of PB FinTech’s IPO back in 2021 was its rapid acquisition of non-life insurance distribution channels from banks, particularly for digital customers.

There aren’t many non-life insurance distributors listed in Indian markets, but conversations with private companies indicate that banks’ share of non-life insurance distribution may already have fallen below 50% (~75% in 2010).

Add to this dynamic the resources that PhonePe (48% of UPI payments) is dedicating to insurance distribution - this could further loosen the banks’ hold in this space. A similar logic applies to fund marketplaces. One doesn’t need to go to one’s bank/ or its app to buy into a New Fund Offering/ start a Systematic Investment Plan. You could simply apply via your UPI payment app.?

Banks no longer get to be the gatekeepers to corporate accounts

As of 2023, all three UPI-based payment incumbents -PayTM, PhonePe and GPay - have launched single click bill management services with Gas, Electricity and Local public transport service providers. We don’t get charged when we make a bill payment. But the organizations receiving these payments will be paying a material fee to these third party payment apps for putting the rails in place to receive the bills due. Pre-UPI, banks used to be the gatekeepers managing and receiving these flows.

Today, as long as the basic wireframe for payment receipts by large corporations remains the same, as provided by payment apps - they can easily switch their corporate accounts from one bank to another.? There goes the customer stickiness.?

Final remarks

In a time when most financial analysts are bullish about Indian banks, this thematic analysis might seem like crying wolf. I do not intend to portray myself as an alarmist here. The analyst view on Indian financials,? might be the right perception , in the short run. We aren’t likely to see home/ auto loans being offered on these apps anytime soon.

It might take several years for payment apps to embed themselves completely into purchasing patterns for financial products. But merge ubiquity with convenience, and at least for low risk financial decisions we might see the needle moving away from banks to PhonePe/ GPay/PayTM.?

Thereafter, efficiencies of scale that come from cross-selling products, the synergies that come from lower advertisement costs due to better brand recognition and the intermediation that comes as a result of losing out on direct customer connect - all these factors should, in the longer run, end up eating into your valuation.?

What should/ could banks do? That is the subject of a more comprehensive analysis, beyond the scope of this essay.?