PhonePe: Why Plan B Is Crucial in FinTech and for You
The Reserve Bank of India (RBI) put a moratorium on Yes Bank and, immediately, several companies that were fully dependent on it for banking services were out of service. One of the most glaring examples was PhonePe that claims to have 15 million users. Despite having such a large user base, for strange reasons, PhonePe was using only Yes Bank as its payment services-provider (PSP) bank. 
 
Luckily, PhonePe managed to get ICICI Bank on board and resumed its services quickly. But this incident highlights the dire need to permanently have a plan B ready, especially for a critical business like financial markets.
 
An industry expert, who has been dealing in financial technology sector for the past almost three decades, told me that the PhonePe case was self-inflicted disaster. “How can a unified payments interface (UPI) app have only one payment gateway? That too when National Payments Corporation of India (NPCI) encourages all UPI service-providers to have as many payment service-providers (PSPs) as they can? In this case, PhonePe may have gone for PSP with lowest bidding or cheapest transaction rates offered by Yes Bank. But this is an important lesson for all other players in the market,” the expert, who does not want to be named, says.
 
PhonePe has now added ICICI Bank as its banking partner and is also allowing existing customers to use @ybl handles for money transactions through UPI. 
 
Yes Bank was the first in India to digitise business-to-business (B2B) supply chain with its API (application programming interface) banking services. It allowed cash payment or receivable facility from any enterprise resource planning (ERP) system to businesses and also provided daily account settlement for easy reconciliation.
 
Yes Bank needed to expand its business in a market where majority were well-established players. It had the technology and, coupled with lowest and cheapest charges, it soon become preferred PSP for several apps as well as smaller banks, including cooperative, district and urban cooperative banks. These banks shared the Indian financial system code (IFSC) of Yes Bank for carrying out electronic inter-bank transactions for their customers. 
 
When RBI imposed the moratorium on Yes Bank, many other UPI apps switched their PSP as per their plan B. Smaller banks, however, are not that lucky and will need to go through an ordeal of on-boarding other big banks with necessary permissions from RBI for changing their IFSC code or wait until Yes Bank becomes fully functional again. 
 
IFSC is a unique 11-digit alphanumeric code where the first four characters denote name of the bank, the fifth character is zero (0), followed by six digits representing designated code of that particular branch of the bank.
 
With IFSC, transferring money online has become easier and hassle-free. RBI assigns IFSC codes to branches of the bank to allow them conduct financial transactions smoothly through national electronic fund transfer (NEFT), real-time gross settlement (RTGS) and immediate payment service (IMPS). Banks like Yes Bank provide IFSC codes to smaller banks based on their requirements. For example, a small bank with a few branches can use a single IFSC code, while a  bank with multiple braches may go for several IFSC codes.
 
As per RBI data, Yes Bank had 3,253 IFSC codes, out of which it used 1,145 for own branches. The rest were provided by Yes Bank to several small banks from across the country. Inter-bank transactions in all these branches or banks that use IFSC codes of Yes Bank have come to a standstill from 11 February 2020. 
 
There are about 251 cooperative, district and urban cooperative banks that will have to get a letter of acceptance from another bank through which they are willing to route their transactions. This process of on-boarding a new bank for IFSC code can take up to two weeks, says a senior (now retired) official from RBI. 
 
Yes Bank’s strength in digital payment market was its human resources. However, following the dwindling financial position of the lender, many of the techies who were handling digital transactions business, left the Bank, the expert told me. 
 
Earlier in 2017, State Bank of India (SBI) changed IFSC codes of about 1,300 branches following the merger of its five associate banks and Bharatiya Mahila Bank. 
 
After the Yes Bank debacle, almost every UPI app and financial services-provider is activating, or has already activated its plan B to have another banking partner or PSP on board. Financial technology providers have learnt their lesson; but end-users or consumers are still searching for their plan B. Given the kind of digital literacy in India, many users really need hard core education on UPI and online financial transactions. 
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