According to Moody’s Investor Service, Indian fintechs will face challenges in extending payment dominance to other financial services as major banks have significantly improved their digital products that customers have widely adopted.

Privately owned fintechs have spawned the digital payments market in India and fueled the rapid growth and increase in financial inclusion, the rating agency said in a March 17 report. “The introduction of the Unified Payments Interface in 2017, which allows instant money transfer, has been a major catalyst for the development of digital payments due to the ease of use of apps running on the system.”

Moody’s called the instance of Paytm benefiting from a spike in demand for non-cash transactions after demonetization in 2016. “Likewise, PhonePe was one of the first private companies to introduce a UPI payment app to the market.”

Still, the dominance of fintechs in payments may not translate into competitive advantages that they can use to expand into other financial services, as India’s primary digital transaction network or UPI has an open architecture that evens the playing field for all businesses. said Moody’s.

“Banks, which play a vital role in facilitating UPI payments, have access to transactions on the network. As a result, the dominance of fintechs in digital payments may not lead to a significant data advantage over banks.”

Fintechs are also not allowed to charge fees for UPI transactions.

“Since UPI transactions aren’t rewarding, the payment fintechs have been trying to use their platform to sell other financial services,” Moody’s said. “But until now, their penetration into other retail financial services has been low, due to limited competitive advantages from their large customer base.”

The rating agency cited the Reserve Bank of India’s restriction on Paytm Payments Bank from taking on new customers. “Even after three years in business, it had a market share of less than 0.1% for deposits by March 2021. Market share in asset management products, such as insurance and mutual funds, is also minimal.”

In addition, regulations such as common, interoperable QR codes and a market share limit ensure that no single entity dominates a segment. The market share of a single company on the UPI per transaction value has been capped at 30% from 2023. Google Pay and PhonePe are each exceeding the limit, so they will have to reduce their shares.

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