The arrival of Unified Payments Interface (UPI) has changed the entire payments space and made payments instantaneous and seamless.
With digital payments rising rapidly, many are asking if the rise of UPI means the end of banking as we know it, whether a traditional bank can remain in a digital world, or if we are seeing the demise of traditional banking.
Launched in 2016 by the National Payments Corporation of India (NPCI), UPI quickly became the most popular payment method for millions of users.
Instantly transferring money, QR-based payments and no transaction fees, UPI has produced a seamless payment model, while broadening the scope of banking for people and enabling cashless payments for businesses.
More current data suggests UPI is experiencing a Billion plus transactions, reflecting its acceptance.
Impact on Traditional Banking
The exponential growth of UPI has caused substantial shifts in the traditional banking world, affecting various banking operations and revenue-generation sources. Here are some implications of this growth:
1. Drop in Cash Transactions:
Because UPI transactions are so easy and convenient, more people are dropping cash transactions. This has decreased the need for in-person banking transactions, opting for online transactions instead. Because of this, bank branches are experiencing a decrease in foot traffic which can affect their operations and staffing.
2. Less Use of ATMs:
ATMs have been important for cash withdrawals in the past, but the ability to instantly transfer funds has drastically reduced the need for cash.
Consumers prefer scanning QR codes and utilizing their digital wallets to complete transactions. Banks have reconsidered their planned investments in both ATM networks and cash management services because of this.
3. Revenue Loss from Transaction Fees:
Banks make a large amount of revenue on transaction charges for services such as NEFT, RTGS and IMPS. UPI transactions are largely cost-free, reducing potential revenue sources for fund transfers.
As banks rely less on payment-related revenue, banks are likely to look for alternative revenue sources in digital lending, wealth management, as well as subscription- or immersed-based revenues or other subscriptions.
4. Increased Competition from Fintech Firms
Fintech companies, along with digital payment firms, are capitalizing on UPI to deliver frictionless financial services, a threat to traditional banking.
Fintech firms provide superior user experiences, cashback incentives, and more accessible lending solutions, competing against standard banking offerings. Banks must now enhance their digital services to be able to compete.
5. Difficulties Considering Customer Retention, Engagement, and Relationship with the Brand:
Historically, banks have been the leading institutions customers turn to when completing financial transactions. However, as customers spend more time using UPI applications for everyday payments, customers become less engaged with the bank.
Therefore, this consideration is likely to decrease customer loyalty and will require banks to consider innovative methods to retain customers by developing personalized digital banking tools and enhancing the customer experience.
6. Security and Fraud Risk:
While the rise of UPI seems convenient for the convenience of the customer, the rise of UPI will create additional challenges for traditional banks regarding security and fraud.
Traditional banks are vulnerable to phishing and fake transactions. Therefore, banks in the future need to make defensible investments in cybersecurity infrastructure, fraud indicator systems, and customer responsible awareness to protect customers in every transaction.
7. Digital Transformation of Banks
The rise of UPI has compelled traditional banks to hasten their digital transformation. Many Banks today are now formalizing the development of their own UPI-enabled apps, including chatbots for AI-based customer support and integrated digital banking services. This is important in order to remain competitive in the changing financial landscape.
Will Traditional Banks Become Obsolete?
Even though UPI has certainly changed the financial environment, can we say that traditional banking will cease to exist?
1. Banking As A Center Of Financial Services:
Traditional banks are not going anywhere; they are changing. They are leveraging technology to provide a greater range of financial services in addition to payments, such as wealth management, insurance, and credit.
While these developments have nothing to do with UPI, this space ensures traditional banks have a channel of relevance.
2. Role Of Banking For Regulatory And Compliance:
Banks serve a crucial purpose in regulatory compliance for trust violations and KYC (Know Your Customer). While UPI can route a transfer in a matter of seconds, the need for a financial entity within the financial ecosystem still exists to stabilize, mitigate exposure, and enforce regulation.
Financial and securities regulators rely on banks to enforce their financial regulations and stop illegal transactions.
3. Credit and Loans:
While UPI enables users to perform convenient payments, it cannot replace functions of credit such as personal loans, home mortgages, or business loans.
Banks provide the infrastructure of the credit system. There are inherent risks in lending money and banks employ a structured approach to lending that fintech companies cannot replicate fully.
4. Trust and Security:
Despite the progress into the digital space, many customers are still comfortable placing deposits, transferring large amounts of funds, and investing their savings in long-term savings vehicles at their local bank branch versus sharing this information with digital financial payment platforms.
Banks build up trust over the years and this extra layer of trustworthiness is important to many customers.
5. Hybrid Banking:
Not only will traditional banking not die out as UPI adoption increases, but instead, a hybrid option is being pushed by banks to enhance their traditional bank products like mobile banking and online banking capabilities.
Furthermore, many banks have their own UPI mobile app or partnered with fintech to extend further offerings in order to improve customer experience with traditional banks.
The Future of Banking in the UPI Era
Rather than indicating the ultimate decline of traditional banking, UPI is actually pushing banks towards a digital makeover of their business. Banks are now emphasizing on the following:
1. Strengthening their digital banking platforms.
2. Providing customized financial products.
3. Improving their fraud detection and cybersecurity efforts.
Conclusion
UPI is revolutionizing the financial services system; however, it will not replace banks, but spark innovation. Banks will continue to adapt and undergo the process of digital transformation by incorporating UPI into their banking frameworks while also navigating their way into the payment space, credit, wealth management, and even financial advisory services.
While the institution of a physical branch may not play the same role, banks will still remain important to abide by regulatory compliance, provide a base layer of financial security, and mitigate risks across the wider economic environment.
Undoubtedly, the future will be a hybrid approach, where traditional banks offer services that cater to a different set of financial needs than a digital player like UPI.
In truth, UPI is not about “winning or losing” in a race against each other but how to – “continue to adapt and innovate alongside these newer models.”
Banks that adapt and utilize these new digital tools while continuing to provide a trusted environment and an improved range of value-added services will be successful in adapting in these processes.
