UPI has ushered in new era for banking sector

The mega app promises to bring every banking function to the smartphone and reduce the cost and time taken for making simple payments. One can use the app to pay for any transaction below Rs. 1 lakh for as low as Rs. 50. 

The announcement by ten of the country's biggest banks along with the Reserve Bank of India to launch a Unified Payments Interface (UPI) has just ushered in the Uber moment for Indian banking and promises to change the landscape for the industry, which has been facing multiple headwinds over the past few months.

The mega app promises to bring every banking function to the smartphone and reduce the cost and time taken for making simple payments. One can use the app to pay for any transaction below Rs. 1 lakh for as low as Rs. 50.

While the biggest impact of the app will be on third-party payments, it also promises to separate the wheat from the chaff in the banking system itself. It will also quicken the much-awaited consolidation process in the banking sector, leaving fewer and stronger players in the field.

The banking industry, which has already been facing a lot of pressure of late from rising competition, shortage of capital, stressed loan books and falling margins now has another challenge in front of it: that of embracing technology at superfast speed. Domestic lenders that fail to keep pace with this technology upgradation may fall behind the competition and eventually go out of the race altogether. Since this massive technology overhaul will itself require massive expenditure on capacity building, lenders with weaker balance sheets are going to face the pressure most.

This has come about at a time when the sector has been witnessing dramatic technological changes and disruptive innovations besides the asset quality challenge. With RBI issuing “differentiated” licences, the competitive landscape for incumbent banks is changing like never before.

Yet, till date the incumbent banks continued to enjoy a competitive advantage, which also acted as an entry barrier for the new entrants. Technology has now made those classic advantages redundant.

While all banks by and large have their own digital platforms by now, the non-linear benefits of this technology boom will only accrue to those players who can move fast to capture the market and build superior cross-selling capabilities and also offer a diversified products portfolio to monetise their customers better. That means the benefit will accrue mainly to the early movers who can scale up quickly and expand transaction activity and product capabilities.

The private sector players have been faster than their public sector peers on this front with better success rate in encouraging transaction activity levels and float. Analysts say the eventual winners on the digital banking platform will be those entities which can quickly master the ‘small value, high volume’ transactions war.