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regular-article-logo Wednesday, 21 February 2024

Players in UPI segment look towards digital credit model for path to profitability

The dominance of UPI payments and the widespread usage of more than 25 crore users, create an effective channel to provide small-ticket credit to hundreds of millions of customers who are currently unserved or under-served by the traditional lending models

Our Special Correspondent Mumbai Published 11.09.23, 09:50 AM
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Representational image File picture

After the widespread adoption of UPI (Unified Payments Interface) and the consequent boom in online payments, digital credit is projected to be the next major area of target for players in the UPI segment as they chase profitability.

Though these could be for small ticket and unsecured loans, they could offer a better proposition than rival facilities such as credit cards, analysts at Bernstein said in a report.

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According to the brokerage, the dominance of UPI payments and the widespread usage of more than 25 crore users, create an effective channel to provide small-ticket credit to hundreds of millions of customers who are currently unserved or under-served by the traditional lending models. Moreover, an added incentive is the provision of credit, unlike deposits and payments, is also likely to be profitable.

It estimated that a profit of $15-20 per customer from small ticket lending models, coupled to the large underserved population, provides the potential of a large valuation creation opportunity for banks.

This comes at a time the four UPI players (Paytm, PhonePe, Google Pay, Cred) have captured around 95 per cent of the UPI transactions even as the share of banks is limited. However, even though digital payment transactions have shot up over the past few years, the zero MDR (merchant discount rate - the rate at which merchants are charged for accepting debit/credit card payments) of UPI transactions have limited the size of payments profit pool in the country. Further, the lack of physical distribution and restrictions imposed by the RBI on mobilising deposits could see them tapping digital credit for attaining profits.

“The financial services sector has seen the emergence of new lending models (microfinance, consumer durable lending) and the winners in many of these segments have grown to become a significant part of the sector. We see the digital credit model to be one such new model and see it growing into a sizable lending segment and one or two winners emerging from this segment,’’ the report said.

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