India’s payments landscape — including a guesstimate
Most of the online guesstimates you find are driven through assumptions and are very structured. But that may not be the case in your interview. So I am sharing an unstructured one.
During the lockdown, you would’ve observed your mother shopping for Sarees/Kurtis through a Whatsapp group? Was this common in India before a year or so? No.. Now, this new mode of buying and selling goods through social media platforms (Instagram, FB stores, Whatsapp, etc.) is called “Social commerce”. For understanding the evolving social commerce landscape in India and an interesting guesstimate, check out: https://themanagementconsultant.medium.com/social-commerce-the-next-frontier-of-online-commerce-market-sizing-ad3ad68e0da9
Problem Statement: Guesstimate the total market size of UPI transactions and then the revenues FinTech firms such as GPay, PhonePe, PayTM, etc. make when we use UPI. Also, recommend how UPI’s market share could increase.
I will first share a lot of information first and then take the info which is important to us to solve it.
The GDP of India is $2.8 Trillion in 2019. Household consumption has always been the driving force and pillar of India’s growth story. India’s household consumption has contributed to nearly ~60% of GDP in 2019. That is almost $1.7 Trillion.
But where is most of this going? India is mostly filled with people like you and me. So to answer this, let us understand what you and I spend on. It is usually groceries, housing, utilities, education, travel/commute, etc. Not very surprisingly, India spends (~30% of total consumption) most on food too. ~12% on housing, ~5% on utilities, ~13% on transport, and ~7% on clothes.
UPI transaction volume and value has been growing rapidly — ~130% Year on year. But the average value per transaction has been more or less constant (~$25). ~60% of the total UPI transactions happening are P2P — like you or me transferring to self account or friend’s account for rewards and cashback :P
“P2P transactions form the bulk of transactions on UPI and account for about 60% of the share by value. The NPCI is in the process of determining the exact share of P2P2M transactions — so far we think it is about 3%.”
Ex-CEO, NPCI
The 3% are those transactions that the merchants ask us to do their mobile number since their QR code is old or invalid.
Paytm and PhonePe have monthly active users of ~62 million each. While GPay has ~78 million. GPay’s domination is due to multiple cashback, campaigns, and offers.
So coming back to our story, UPI account for ~7% of the total consumption ($1.7 Trillion). This is in fact higher than credit card or debit card transactions and will soon be close to direct banking transaction value (~$200B).
Spend on food accounts for more than 50% of the UPI spend. But just about 10% of the total food spend is through UPI. The other avenues where UPI spend goes are Utilities, housing, entertainment, etc. On merchant transactions, these firms make INR 0.3–0.35 PSP (payment service provider) fee per transaction.
“..peer-to-peer transactions do not create any value..”
Deepak Abbot, Senior VP — PayTM
Step 1: Market size of UPI transactions
Using the above spend through UPI and given percentages of total consumption, we can assume majorly customers spend on ~30% Food, ~12% on housing, ~5% on utilities, ~13% on transport, and ~7% on clothes.
So total consumption open for UPI transactions = ~65% of total consumption
This is $1.1 Trillion.
The average ticket size is $25. So the number of transactions = 44 Billion
The average revenue on each UPI transaction is INR 0.325 per transaction.
Hence market size = INR 0.325*44 Billion = ~INR 15 Billion
Step 2: Let us now try to estimate the total revenue all the FinTech firms such as GPay, PhonePe, PayTM, etc. are making when we use the UPI.
From the above information, it is clear that the total value of UPI transactions for household consumption is $125 Billion (7% of $1.7 Trillion). The average ticket size of the average transaction value is $25.
So the number of transactions is 5 Billion. As all these are consumption related, we can assume they are transactions to a merchant.
Since peer to peer transactions do not create any value to FinTech firms, we can ignore those while calculating revenue.
But on merchant transactions, these firms get INR 0.3 — 0.35 PSP fee. Assuming an average PSP fee of INR 0.3 (used to make calculations easy)
Protip: Since the number of transactions is in billions, even the 3rd decimal makes a huge difference. The approximation here should depend on how particular your interviewer is on these things
We get total revenue through UPI transactions = 5 Billion * 0.3 = ~INR1.5 Billion. This is just 10% of the market open to UPI.
Step 3: Recommendation to increase market share
The major share of consumption in India is food (groceries, restaurants, etc.). Only 10% of total food spend (~$500 Billion) is through UPI. As the other avenues such as utilities could be linked to government and clothing and housing would not be very frequent spend for most Indians, food spend (important for every section of people) is a huge opportunity for UPI to penetrate and gain market share.
Notes:
- You see that this is not like a typical guesstimate which you can lead through your assumptions. There are two ways in which this can happen in an interview
- Conversation with the interviewer: He/She will keep giving you facts as you proceed in the interview. Hence it is very important to be structured
- A lot of information through a document: Interviewer will give you complete industry landscape and unnecessary information (like I stated above :P). You should be able to think of the framework and take only those numbers which will be useful to you
2. Additionally, the interviewer can give you market shares of different players to make you guesstimate their revenues or give different margins for different consumption types to make the calculations complicated.
Hope this made some sense. Follow for more content on the Indian market and cases/interview prep.
Respond with any alternate methods/extensions you can think of. Will help me improve the content I post. Also, happy to hear your suggestions on what I could post. :)
