Yes Bank Moratorium: How Competitors Swooped In To Fill The Fintech Void
Most of the disruption from Yes Bank’s moratorium was anticipated. But there was another unintended consequence playing out.
The Reserve Bank of India’s decision to place Yes Bank Ltd. under moratorium last Thursday pinched in many ways. Depositors could not access their money, borrowers had to scramble for funds, and investors had to face a whiplash in equity and debt markets.
Most of that was anticipated. But there was another unintended consequence playing out. That across fintech firms and third-party mobile applications that require payment services.
Many of these firms had built their services atop the systems of the private bank, which had emerged as one of India’s more digitally savvy lenders. At the beginning of last week, around 21 of the 38 live third-party application providers were using infrastructure provided by Yes Bank for UPI transactions, according to archived information available from the National Payments Corporation of India’s website.
As Yes Bank’s systems were taken offline to comply with the terms and conditions of the moratorium, most of these fintechs also saw their systems go on the blink. Among them were large payment service providers like PhonePe.
Yes Bank APIs Go Offline
Soon after the moratorium was imposed on Yes Bank, the RBI and NPCI had to isolate the lender from the payment and settlement systems. As a result, services such as debit cards, ATMs and electronic fund transfers were disabled temporarily. Most of these services are back online now.
By disconnecting the digital payment channels of the bank, a majority of Yes Bank’s API protocols ceased to function.
APIs are essentially software tools that provide a link between a back-end IT system and a front-end provider. Bank APIs allow a fintech company to service the end customer by using the banks’ underlying infrastructure at the back-end including its payment systems, loan book or account opening systems. Banks also provide APIs to third-parties for compliance and regulatory aspects as well.
PhonePe took to its social media handles to alert users that its services were impacted. Others did the same.
PayNearby, a payment company focused on rural areas, was among those that took a hit. It used Yes Bank’s APIs for Aadhaar-enabled payments system transactions and was processing over 1 million transactions a day. “When the moratorium was announced all transactions stopped,” said Anand Kumar Bajaj, the company’s founder and chief executive officer.
The problem emerged mostly from the collections part of the payment process.
Nikhil Kumar, co-founder and chief evangelist at API infrastructure firm Setu, explained that for payments to take place, you need a collections infrastructure. There were five large collections systems provided by Yes Bank, all of which were impacted last week. “Collections would technically go to the banks’ nodal and escrow account, which means that these funds are now stuck,” he explained. “When it comes to disbursements, which essentially means moving money and settling funds between accounts, people using Yes Banks’ APIs could not automate payouts.”
Also Read: Yes Bank: Missing Pieces Of The Puzzle
Opportunity In Crisis
But every crisis brings its own opportunities.
In this case, other nimble private lenders, saw an opportunity to capture the business of fast-growing digital companies and swooped in. NPCI enabled the switch.
ICICI Bank was among the most aggressive in garnering business that earlier rested on Yes Bank’s systems. It transferred some of the largest mobile and payment applications to its services.
PhonePe, which was one of the most prominent payment service providers to be hit, moved to ICICI Bank Ltd. Similarly, BharatPe announced that it would be migrating to ICICI Bank while Ola and MakeMyTrip have also integrated the banks’ APIs to restore their respective payments facilities. Cashfree, another payments and banking technology firm, claimed to have migrated 1 million UPI handles to ICICI Bank within 100 hours of the Yes Bank moratorium.
Emails and calls to ICICI Bank representatives on Wednesday went unanswered.
Others moved to private lenders, including IndusInd Bank Ltd., RBL Bank Ltd. and Kotak Mahindra Bank Ltd.
“When the moratorium was announced, all transactions stopped, but thanks to the banks and NPCI’s leadership by 3:00 am on Friday we had integrated two new banks. Later on Friday we had two more banks,” said Bajaj of PayNearby.
The process wasn’t as simple as it may appear in hindsight.
Under normal circumstances, if a third-party application provider is to replace its anchor bank with another bank, all the user IDs or UPI handles would need to change to the new bank. For example, users with a @ybl handle or UPI ID/virtual payment address, would need fresh ones from ICICI Bank with the @icici or @okicici handles. For merchants, this would mean that all existing QR-codes would need to be replaced, involving substantial financial cost and time for payment companies.
But given the gravity of the situation, both NPCI and individual banks made exceptions and cut down the long processes.
According to a payment industry executive, NPCI allowed a temporary re-engineering of PhonePe’s and other applications’ UPI payments chains. By doing this, existing UPI handles, that were created with Yes Bank’s API facility by the companies initially, could be used even though the underlying bank infrastructure had shifted.
For instance, the current practice for routing using UPI is that money is debited from the customers’ account then moved to a virtual escrow account and subsequently it is credited to the merchant’s account, three payment experts explained. The NPCI, however, has the ability to interchange parts of the payment chain, they said.
Simply put, NPCI first allowed PhonePe and others to replace their underlying API which was provided by Yes Bank with other banks. This allowed the existing payment handles to continue to be used.
Then the NPCI re-engineered the process at the NPCI switch that lies between individual payment companies that were using Yes Bank’s network and the new anchor banks at the back-end. This was done so that transactions could be routed smoothly between third-party applications and their new partner banks.
“In UPI, @ybl is just the address resolution layer,” Kumar of Setu explained. Let’s say you want to pay an @ybl user from an application that does not have the same bank at the back-end. “The payment request comes to the NPCI and it routes the transaction to the new underlying bank, which then passes it on to PhonePe, who resolves the address to the users’ bank account," he explained.
Also Read: Yes Bank Revival Is A Formidable Challenge
While NPCI and other private banks acted quickly to restore impacted services, Yes Bank lost hard-earned business.
RBI-appointed administrator to Yes Bank, Prashant Kumar, admitted that the lender will lose some of the fintech network that it had built over time. “If individual companies, fintechs and startups have been affected they should take a call based on their own business needs,” Kumar told BloombergQuint. “We’re having very good relationships with them. I think once the bank comes to normalcy we will be able to get them back.”
Also Read: Yes Bank Crisis: RBI’s Trysts With Large Private Bank Failures
Queries sent to Yes Bank remained unanswered. NPCI declined to comment.