Fintech firms eye investments in 'switching' as UPI's scale picks up

Fintech companies are eyeing on a critical piece of payments -- switch -- as India’s real-time payments system Unified Payments Interface (UPI) grows its dominance. 

 

Companies are investing in fintech firms that specialise in switching services, driven by the growing dominance of UPI, the absence of merchant discount rates (MDR) on the platform, and expectations that credit transactions with intrinsic value will increasingly move to real-time payment rails.

 

These investments in critical technology stacks enable fintechs to process transactions faster, with higher success rates, while handling large volumes with greater stability.

 

This is important for high-voltage transaction hours such as booking railway tickets via Tatkal, concert and entertainment bookings, among other things.

 

“For meaningful technology investments, firms are partnering with switch players, either building capabilities from the ground up or through partnerships. While UPI’s rise has affected debit card transactions, credit card transactions continue to grow in value and volume. With credit lines on UPI taking shape, people are looking at a switch very seriously,” said Mehul Mistry, global head, strategy, products & marketing, Zeta. 

 

A payments switch, in this case UPI, is a standardised routing layer that allows to route transactions across different participants; payment apps, banks and National Payments Corporation of India (NPCI) -- the body running UPI. 

 

Fintech major PayU acquired a majority 70 per cent stake in banking infrastructure firm Mindgate Solutions, which is also a UPI switch provider, in September. Zaggle acquired a 38.34 per cent stake in Mobileware, which is into a similar digital payments infrastructure, in May.

 

Other payment majors such as Cashfree Payments and Razorpay have built the switch in-house.

 

“If one really wants to specialise in that (switch), if one is a serious payment aggregator, then it makes strategic sense to invest in such capabilities. We built it in a house that took us 10 months. It’s just that it’s not easy because a lot of the payments today are UPI,” said Reeju Datta, co-founder, Cashfree Payments.

 

He added that it also enables companies to push new features faster to their merchants, with faster compliance to NPCI’s circulars, and better analysis of payment error codes that can further improve workflows.

 

“Historically, the credit space has been dominated by four to five banks, which issued a majority of the credit cards. Now, we have a scenario where if you are technologically advanced as a smaller bank, you can punch above your weight,” he added, while explaining that smaller banks will also try to forge partnerships with fintechs to scale credit on UPI in the future.