YES Bank crash hits the UPI gravy train

When the Reserve Bank of India took control of troubled private sector lender YES Bank late Thursday night, not many people expected it to impact the country’s growing United Payments Interface (UPI) that enables digital payments. It is a sector that has seen tremendous growth in the past few years conducting a whopping 1.32 billion transactions last month.

However, consumers on multiple fintech platforms and services were in for a massive shock: as the moratorium on YES Bank came into effect, major fintech platform Flipkart owned PhonePe crashed as National Payments Corporation of India (NPCI) took bank’s ATMs offline. This was on account of the bulk of transactions (about 40%) served by YES Bank as the lone acquirer bank/ PSP.

Companies that use YES Bank for online payments also include food tech platform Swiggy, Microsoft’s Kaizala, travel firms MakeMyTrip and Cleartrip, according to data sourced from NPCI.

In essence, the day-long outage meant that there was a 40% drop in transactions on the UPI platform.

Analysts tracking the sector say that UPI transactions might take a hit for a month or two. YES Bank had registered 514 million transactions. It had moreover conducted 415 million transactions and had a 45% share of the total UPI transactions in October 2019, when the UPI transactions touched the 1 billion mark for the first time.

After the service that offers banking facilities to more than 175 million users went down, PhonePe founder and Chief executive officer Sameer Nigam took to Twitter and said, “We sincerely regret the long outage. Our partner bank YES Bank was placed under moratorium by RBI. The entire team’s been working all night to get services back up as soon as possible.”It was only late on Friday night that the fintech firm became functional again.

Meanwhile, Harshil Mathur, CEO and Co-founder of another major fintech player Razorpay said, “Our core business, Payment Gateway solution remains unaffected and settlements continue to be processed as per schedule.”

Mathur added that though their auxiliary services are facing some minor disruptions: “we are working with other banks and authorities to ensure business continuity - we are working towards resolving these issues at the earliest.”

Why did this happen?

One of the major reasons for the chaos that followed the moratorium was that YES Bank was one of the first banks to open up their Application Programming Interface (APIs) to multiple startups and fintech firms. Moreover, a few months ago, they had launched the API Sandbox, helping developers and businesses create fintech products with the PI 50+ virtual APIs. The platform was expected to host 100+ APIs by the end of the fiscal.

All this meant that many of these players depended only on YES Bank for their digital payment needs.

“This has come as a rude awakening. It will ensure that fintech firms and startups will look at diversifying their options and not linking up to just one provider,” says Siddharth Pai, investor and founder of VC firm 3one4 capital.

On March 2, the NPCI had mandated that large third-party app providers offering UPI payments must have collaboration with multiple banks, instead of relying on a single bank as their acquirer bank/PSP. While PhonePe had just only one bank as its PSP. Google Pay has four PSPs, both Truecaller and MakeMyTrip have two PSPs each.

All the other third-party app providers for UPI are dependent on a single acquirer bank to process their UPI payments, according to NCPI data.

The NPCI had mooted a multi-bank model for UPI apps in 2017, where companies were asked to use more than one bank for their UPI needs.

The recent notification said that large third-party app providers, which are processing more than 5% of the total monthly volume or value on the UPI network, should move to a multi-bank model from a single-bank model.

What happens now?

Pai says, “It is going to change the way things work. It has meant that these companies will become more cautious and work with multiple banking partners to ensure that the business continuity is not impacted on account of external factors.”