UPI – a Decacorn by 2025?

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Few weeks ago, Whitehat Jr. in a landmark event for the Indian startup ecosystem got acquired by Byju’s for an all cash valuation of $300M. The Indian startup system is coming of age & we expect a lot more success stories coming in especially from Technology and related segments. 

Any enterprise needs to be supported by ancillary activities to be successful. In this article, we look at one of the major supporting levers behind the success of Indian startups – The Indian Stack, especially UPI Platform, enabling economic inclusion of a large swathe of the Indian population & small businesses which earlier didn’t have means to go digital. We want to understand & quantify the impact of UPI in the Indian ecosystem, & hence we try to assign a ballpark valuation to UPI platform had it been a listed or VC funded company.

Indian Stack – The Best in the World

Described as Technology for 1.3 Billion Indians, the Indian stack is an open Application Programming Interface (API) with biometric-enabled Aadhaar as its base, enabling an entire digital world around a uniquely identifiable individual. Gone are the days when the customer needed to provide multiple ID-proofs in paper, wait for verification & then avail the service, all replaced by API linked instant services built upon the Indian Stack. This has immensely reduced the cost of doing business & customer acquisition for the private players & enabled access into the customer segments earlier unthinkable of.

Image Source: https://www.indiastack.org/

Payment Challenges – Three Pain Points

Before delving into what value can be attributed to UPI, let’s take a detour and understand how conventional card / wallet payments work & what limitations do they have in the Indian context. 

There are four parties involved in a conventional card transaction – Payer, Merchant, Card Issuing Bank & Merchant Acquirer Bank. Additionally, the transaction is supported by a network association like VISA, MasterCard for facilitating the actual transfer of the money. 


The total cost burden a merchant must bear for facilitating the transaction is called the Merchant Discount Rate (MDR). The actual MDR in India (and globally) depends on multiple parameters. Here is an old example. For sake of simplicity, we assume the MDR for plastic transaction is 1% of the transaction value. Hence for a transaction of 100 Rs, a merchant receives 99 Rs. The Merchant Discount fees of 1 Rs is used to cover the effort of Card Issuer in the form of Interchange fees (~80% of MDR), Network Association for actual transfer of money between issuer and acquirer (~5%-10% of MDR), & Acquirer bank fees (~10%-15% of MDR).

Three major pain points arise in this whole sequence of the processes in the Indian context – 

  • Cost – As a small retailer, spending 1% on every card transaction seems a steep cost. Wallets started charging money to convert wallet balance into bank cash. Additionally, the cost of maintaining a POS machine made plastic payments infeasible for small businesses
  • Clearance Delay – In traditional card transactions, payments to merchants are cleared only at a particular frequency (a day or two usually)
  • Interoperability – Before UPI, wallets were a closed system. A consumer couldn’t transfer money from his Paytm Wallet to his/her friends Mobikwik wallet without routing through a bank.

Enter UPI – Disrupting Payments

UPI cracks the interoperability challenge by introducing standard protocols from the scratch –  using Aadhar Verified VPA addresses for the receiver & sender verification. Additionally, the Zero MDR regime committed by the Indian government took out the cost considerations for the small merchants. Now, any merchant can accept UPI payments without having to pay anything for the transaction. This induced a network effect with more & more merchants as well as payers opting for UPI payments. Following the IMPS protocol enabled the receiver to get the money directly into the bank account as well. Like any well designed process, UPI transactions hit off exponentially.

Valuing UPI

Back to the promised question, what value can we assign to UPI platform? We follow a few simplistic approaches to establish a ballpark range for UPI’s valuation. These approaches are not the best in method, but gives us a good starting point to understand the positive impact of the UPI in Indian ecosystem.

First, we collate how Enterprise value of Visa and MasterCard have moved with the Total Processed Value (TPV) over last 10 years’ time frame. Using a simple linear regression model, we assign UPI an Enterprise value of ~$8 Billion. This value serves as a upper bound of our analysis, given at present UPI doesn’t monetize transactions and is at subscale level vs established networks like Visa and Mastercard.

This is best case scenario valuation based on today’s TPV and will move higher as UPI transaction TPV grows over time. Mind that, better comparable would be UnionPay and ELO, but they are yet to be listed.

Second, we do a What-If analysis taking EV/Sales on one-axis & possible network MDR which UPI might be able to achieve on second axis. Again, we use Visa & Mastercard as a benchmark with EV/Sales with its value ranging between 14x-20x EV/Sales. The analysis again pegs UPI valuation between $2B – $9B. Here we assign a similar network fee scenario for all of UPI transactions as Visa and Mastercard to come up with some revenue estimate and then use public market EV/Sales multiple on the business to create a potential valuation range. 

Alternatively, we can view UPI as an utility platform facilitating transfer of assets. With this viewpoint, the functionality of UPI is surprisingly similar to that of a financial exchange platform. For instance BSE, helps transfer assets and money between two parties via depository accounts. We can clearly draw parallels between UPI platform and BSE – buyer & seller of the security act like customer & merchant, depository accounts are the issuer & the acquirer banks, and the exchange just like UPI processes the actual transaction.

Hence, we assign a valuation to UPI platform by understanding how Enterprise Value of publicly listed exchanges have moved with their annual turnover. We believe emerging market focussed exchanges – Singapore Exchange (SGX), Hong Kong Exchanges and Clearing Limited (SEHK) & B3 S.A. – Brasil, Bolsa, Balcão (B3SA3) are good comparable for our purpose. 

Again, substituting TPV of UPI as the annual turnover in the simple linear regression model, we arrive at a valuation of $2.3 Billion to $7.4 Billion for UPI Platform.

The discussed approaches, though widely different in nature, converges to similar ballpark valuation of UPI platform in the range of $3 Billion – $8 Billion.

One key point to take into account here is that UPI is a Zero Merchant Discount Rate platform which catapulted its adoption. Remove zero MDR & we may observe a substantial fall in transaction volumes – at least in short term. We try to incorporate this phenomenon by doing a case wise scenario on a the mid-range valuation of $5B.

Even with a conservative estimate of just 10 percent transaction retention, UPI platform is worth north of $500 Million. However, in reality it’s a free government undertaking & it will be so in the foreseeable future, providing an impact of much more than Multi-Billion Dollars. 

Based on all of the above scenarios, my base case valuation is somewhere around $3B – $5B for UPI. These analysis can be refined further by breaking down UPI transactions into various categories (P2P, debit, credit etc.) and assign an MDR range to each category to estimate potential revenue and assign a revenue multiple. 

With current growth rate, UPI can easily double / triple TPV in next 3 – 6 years and enter decacorn club in terms of valuation if it was a VC funded company.

Given the seamless user experience, pipeline of new initiatives like NFC & recurring payments on UPI & plethora of opportunities it has opened in the Indian ecosystem, my take is UPI will be worth much more in future!!.. It will rise in value the way Alipay rose in China and will help in creating a thriving startup ecosystem in India. 

Special thanks to Sajal Maheshwari for all the help and crunching data for this article.

APPENDIX


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