Payment Processing Is Changing In India

Includes: BABA, INDA, MA, V
by: Darspal S Mann


Expectations that MasterCard and Visa will be the natural leaders in the Indian payment industry might be misplaced.

UPI, RuPay and Payment Banks can pose a major challenge to the growth prospects of payment processing behemoths in India.

Rather than financial majors, a new crop of startups and small firms seem much better placed to monetize the market shifts.

The payment processing industry is undergoing a major change in India, and believing that payments processing behemoths like MasterCard (NYSE:MA) and Visa (NYSE:V) or other major financials in the iShares MSCI India Index (BATS:INDA) will be the natural beneficiaries of the long-term growth offered by the shift might be misplaced. Most of the trends and technological shifts taking place in one of the fastest growing geographies for the industry suggest a major disruption is underway and the space is worth tracking closely.

As for investors, the opportunity is not difficult to understand. Besides being one of the fastest growing economies, the country has one of the highest cash usages (almost 95% of consumer transactions) among major economies and majority population is not covered by the banking industry, while digital infrastructure is fast getting placed, with more than 225 million smartphone users and an Internet economy that is expected to reach $200 billion by 2020.

As the market prepares for the Ant Financial IPO, the development may further highlight the opportunity. Ant Financial, owned by Alibaba (NYSE:BABA) and valued close to $60 billion, runs the Alipay payments service, which is China's biggest payments service with 450 million active users and actively looking to expand globally.

UPI, RuPay, Payment Banks

All these may seem random words that are rarely covered by the Street, but all of them combined may drive the future of the Indian payment processing industry, maybe even the Indian financial industry, while reducing cash in the payment system and improving financial inclusion.

UPI (Unified Payment Interface), launched earlier this year, is an electronic fund transfer system that is designed as an open platform to allow all players to build solutions on top. As an interoperable payment facilitator of instant online payment from a mobile using a Virtual Payment Address as a payment identifier, the solution should offer a major boost to the fintech industry in the country. The platform stands in contrast to the U.S. where the system is largely dominated and some may even call "walled" by a couple of major players, or even China, where the dominance of Alipay is fast getting recognized. 20 banks have already adopted UPI, but by March next year, 50 banks, 15 million customers and 100 merchants are expected to adopt UPI, driving almost one million transactions per day. NPCI also is planning to launch UPI 2.0 by early next year, an upgraded version that may further accelerate the push toward a cashless economy. As a disclosure, please note that I'm long RS Software listed in India, the company that built the UPI software for the National Payments Corporation of India.

RuPay is an Indian payment switch that competes with Visa and MasterCard and is fast getting adopted by smaller banks looking for a cheaper alternative. The transaction cost is almost one-third of the fees charged by the two biggies, which is leading to a "hockey stick" kind of adoption. RuPay cards make up close to 40% of the total debit cards issued and command more than 20% market share of the ATM transactions, not bad for a product launched just four years ago.

Payment Banks, eight entities that were recently provided license by the RBI, are expected to launch operations over the coming months. And given the absence of legacy issues or ties to any particular customer base, the players have a chance to adopt completely new engagement models and monetize the underserved, but huge market opportunity of serving the credit and remittance requirements of unorganized sector, low-income households, farmers, migrant workforce, etc.

Disclosure: I am/we are long RS SOFTWARE (INDIA).

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.