Why digital payment firms should not rely on single bank

Recently, the Bengaluru-headquartered digital payment company PhonePe, which has over 200 million registered users, experienced an extended service outage after the RBI placed Yes Bank under a moratorium.

The outage lasted for nearly 24 hours and though the PhonePe team worked overnight with NPCI and its new UPI partner ICICI bank to ensure that all systems were up and running within a day, it was evident that over-dependence on a single bank can be a risky proposition for digital payment firms. As per a PhonePe source, the company had already stated in several forums that they were actively working on adding other partners, which was also per a recent NPCI advisory.

In accordance with this advisory, they would have gone live with ICICI by April 2020. The source said that no one anticipated the moratorium and there was little it could have done to speed this up any further.

Experts with whom THE WEEK spoke to, feel that such over-dependence can result in operational and counterpart risk when one of them becomes defunct. “Any two players (in this case the payment companies and the banks) love ‘sticky’ services that integrate their operations,” said Meera Aranha, Professor of Finance and the Chair for the PGDM programme in Banking and Financial Services (BKFS) at T. A. Pai Management Institute, Manipal.

“So, they remain tied to each other for a long time, if not forever, unless the situation ‘frees them up’. PhonePe, perhaps, would not have moved away from Yes Bank, but for the crisis in that bank. When one is dependent on a single client, one can just be one decision away from disaster. Even though common sense suggests that diversification reduces fragility, past research has proved that regardless of size, even a modest diversified business model reduces vulnerability to a crisis. In this specific instance, the customers of PhonePe, the most significant payments partner of the bank, who were using their digital wallets for their day-to-day transactions had to suffer disruption due to the Yes Bank crisis,” she said.

Meera said that the payment system and digital wallet companies are set up by new-generation startups, who are comfortable dealing with new generation bankers. “Such businesses require specific infrastructural capabilities, such as API (Application Programming Interface) banking. It is a perception that most of the old generation bank cannot provide these services; this may be mainly due to the underselling of the strengths and capabilities of these old banks. Hence, there is a dependency on larger banks, mostly on the massive new-generation private banks.”

Brand expert Harish Bijoor was of the opinion that most contracts factor in mirror sites and seamless transition partners in such ventures. “Seamless transfer mechanisms from one service to another need to be a part of the early contract. A bank can collapse such as in the Yes Bank case, or there can be an earthquake that kills servers or whatever,” Bijoor said.

Banking experts say that the RBI moratorium on Yes Bank and subsequent service disruption of PhonePe app shows that operating with a single banking partner is no longer a practical solution. “The multi-party model is a proven method in the case of third party payment applications. Therefore, it is imperative for fintech companies including digital payment platforms and payment banks to migrate to the multi party model,” Robin Bhowmik, Chief Business Officer, Manipal Global Academy of BFSI told THE WEEK.

Alok Shende of Ascentius Consulting is of the opinion that the moratorium on Yes Bank was not such a black swan event that could not have been anticipated by fintech players or digital payment companies. Rather they should have been aware and should have worked towards having a multi-bank model that is the need of the hour. “As the news flow on Yes Bank was getting intense, even a modicum of risk mitigation could have guided companies to diversify their banking relationships,” said Shende.

However, a PhonePe spokesperson said that the company had been in talks with ICICI Bank for the past few months and a majority of the integration was underway and would have happened by April. The spokesperson stated that it is not correct to infer from the app outage that the platform was either unaware of or did not anticipate the problems for business continuity that could come from relying on a single bank, given the issues already faced by Yes Bank.