UPI open architecture limits fintech growth in other fin services: Moody's

Fintech firms are ruling the digital payments space in India. Yet, the open architecture of Unified Payments Interface (UPI), which helps in instant transfers, limits advantage to them in expanding into other financial services, according to rating agency Moody’s.

Also, the country's major banks are also intensifying the competition by significantly expanding their digital offerings.

Srikanth Vadlamani, a Moody's vice president and senior credit officer, said the UPI's open architecture means that a large user base does not necessarily make a particular service provider more competitive than others on the system.

Large private-sector banks and the industry leader, the State Bank of India, have ramped up their digital product offerings in other areas, which their customers are adopting widely. This will help the banks in fending off competition from fintechs outside the payment segment.

However, public sector banks other than SBI have relatively weak digital offerings and will be negatively impacted by the rising competition, Moody’s added.

Further, despite their dominance, fintechs do not have exclusive access to transaction data on the UPI as banks play a critical role in executing UPI transactions. Funds in every transaction originated on a customer app move from the sender's bank account to that of the recipient through intermediary banks acting as payment service providers (PSPs). Therefore, banks, either as PSPs or deposit account owners, have access to transaction data as fintechs do.

Rating agency said also, customer funds stay in bank accounts. Because of this, fintechs' dominance in digital payments does not result in a significant data advantage over banks.

Banks' margins will come under pressure as many fintechs will continue venturing into other financial services, in particular personal loans and loans to small merchants. However, the overall market will also expand as technology creates more opportunities, allowing banks to counter the pressure on margins with business growth, it said.