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The biggest casualty of the COVID-19 pandemic is discretionary spending. Either people do not have the liquidity to spend, or they are conserving cash for rainy days.
COVID is terrible news for the fintech ecosystem. The sector already faced operational challenges, including narrow margins, high customer acquisition costs, and massive burn. The fledgling digital payments mean stressful times for the entire industry. Payment fintech stress, which had always existed beneath the surface of the industry's growth narrative, became impossible to ignore once transaction volumes began falling across nearly every category simultaneously.
A total of 1.25 billion UPI transactions, worth Rs. 2.06 lakh crore, were processed by the National Payments Corporation of India, the organization responsible for processing retail payments, in March.
The March transactions represent a 6% fall in volume and a 7% decline in value of UPI transactions compared to 1.33 billion transactions worth Rs. 2.22 lakh crore in February.
All digital channels operated by NPCI, such as IMPS, Fastag, and Aadhaar Enabled Payment System (AePS), recorded reduced traffic in March due to COVID-19 restrictions. The reduction comes despite advisories from the Government, RBI, NPCI, and banks urging citizens to move towards digital payments to avoid cash-based transactions, citing health risks.
IMPS transaction volumes fell by 20%, Fastag volumes declined nearly 23%, and AePS recorded a 16% decline. Only the Bharat Bill Payment System (BBPS) bucked the trend, recording a marginal increase in transaction volumes. A predictable need drove the BBPS uptick. People still had to pay utility bills, insurance premiums, and loan installments regardless of what was happening in the broader economy. Essential recurring payments held. Discretionary and mobility-linked payments collapsed.
We have to keep in mind that the lockdown began only on March 25th, 2020. It was initially announced for 21 days and remained extended till May 3rd, 2020.
The decline in digital payments would be much larger in April, as the lockdown covered the entire month. The March numbers only captured a partial picture of the stress the digital payment ecosystem was absorbing.
42% of Indians increased their use of digital payments, and the biggest gains were in purchasing essentials and mobile recharges, according to a survey conducted by the consultancy firm Local Circles.
Many retail stores and local general stores reported a rush and spike in orders during the lockdown. E-commerce platforms, especially those delivering groceries, reported demand five times the normal level.
Digital payments, and especially contactless payments, were the preferred modes of payment in these segments. The lockdown brought a large number of first-time users who were not tech-savvy towards digital payments.
The lockdown also brought in many first-time users who were not tech-savvy. Getting them onto digital payment platforms without any in-person help was not easy. Many had never linked their bank accounts to a UPI app. Simple onboarding became a real challenge for payment companies, and not all of them were equally prepared for it.
Bill payments, food, groceries, healthcare, and e-education are seeing digitization. However, travel, tourism, hospitality, entertainment, and fashion, the money spinners for payment companies, are at a standstill with no upward graph visible in the near future.
While some sectors are showing growth, many are seeing no activity at all. The large players with a mix of industries can survive, but those concentrating on specific verticals face serious issues. Fintech market pressures are not distributed evenly across the industry. A payments company built around travel booking or ticketing faces an existential problem. A company built around grocery or utility payments faces a capacity problem. Both are under pressure, but the nature of that pressure is completely different.
Vishwas Patel, Co-Founder of CCAvenue, said that his overall portfolio had declined by more than 30%.
Even the sectors that did well during the lockdown showed a decline. Food and grocery sales were at 60% of pre-lockdown volumes, and hospitals were recording 30% of their normal volume.
The underlying issue for fintech companies is structural. Revenue is transactional. When transactions fall, revenue falls with them, but costs do not.
Infrastructure must be maintained, teams must be paid, and compliance obligations do not pause because of a pandemic. The cash reserves a fintech company holds at the start of a long, low-volume period determine how far it can operate without making cuts that would affect its ability to recover when volumes return.
The impact of COVID is expected to be felt throughout 2020. The festival season that sees enormous spending from the beginning of September is set to be disrupted.
The essential purchases alone would not drive uptake in transactions. While the industry is talking about the brighter side where the contactless transactions have gone up, the overall volume doesn’t look encouraging.
The effect of this also spirals as most Fintech’s depend on transaction volumes and the resulting cash flow.
The expectation is that the new converts, the first-time users of digital payments, will stay to be digital payment users when the situation improves. We will have to wait and watch if that turns out to be the case.
Writing in April 2020, the fintech ecosystem was navigating one of the most disorienting periods in its short history. Transaction volumes were falling in categories that had always grown. New users were arriving under unusual conditions. The financial runway of many companies was being measured in months rather than years.
The recovery happened, and it was faster. UPI volumes bounced back in the second half of 2020 and continued to grow. The first-time users mostly stayed on.
Contactless payments saw a huge spike during the lockdown, and it became a habit. Looking back, the pandemic dip was a short interruption in what turned out to be a much longer growth run for digital payments in India.
But the fintech ecosystem challenges exposed by the pandemic did not disappear. Narrow margins, dependence on transactional revenue, and the vulnerability of vertically concentrated business models remained real constraints. The companies that survived and grew were largely those that had either broad vertical exposure or sufficient reserves to outlast the disruption. The structural questions that COVID forced into the open about the long-term sustainability of transaction-led fintech business models are still being worked through by the industry today.
