The sudden collapse of the Yes Bank

But PhonePe had to act quick because Yes Bank was a sinking ship. One which had slowly taken on water for months, but which was finally reaching the point of no return. And the impetus to abandon ship came on 5 March at 8:58 PM, when the RBI announced on its official Twitter channel that it had placed a moratorium on Yes Bank Ltd.

In one fell swoop, Yes Bank’s customers were subjected to a one-time Rs 50,000 ($674) withdrawal cap, cessation of loan activity, and a freeze on all current and savings accounts of the bank for the next 30 days. In that time, government-run State Bank of India (SBI) would resuscitate Yes Bank by pumping as much as Rs 10,000 crore ($1.3 billion) into the business for a 49% stake.

What the central bank seemingly didn’t take into account, though, was the impact this moratorium would have on India’s online businesses. Because—despite 7.39% of its loans going bad, corporate governance failures, and a founder arrested for fraud—Yes Bank was an invisible cog helping turn the wheels of India’s digital economy.

PhonePe was just one of the many businesses affected. Fellow payments startup BharatPe was another. Yes Bank was a partner bank to both companies. Others used Yes Bank’s API . These ranged from food delivery company Swiggy to online travel aggregator MakeMyTrip and ride-hailing company Ola. Payments intermediary Razorpay also relies on Yes Bank’s APIs to do business.

With Yes Bank, for all practical purposes, out of action, all these digital companies were tripped up.

“We are now going back to doing merchant payouts manually,” said Jatin Mazalcar, CFO of Meesho, a social commerce company. Payments aggregator Razorpay, meanwhile, has paid merchants out of its own pocket as merchants’ money in Yes Bank is blocked. “40% of RazorpayX business (which deals with merchant payouts) was done via Yes Bank’s APIs,” said Harshil Mathur, CEO of Razorpay.

“We are suffering the backlash for Yes Bank screwing up on its loan book,” said the founder of a fintech company, who did not want to comment on this publicly.

PhonePe, though, whose payments were powered by Yes Bank, was back in action in record time.

The entire fracas raises multiple questions. About how Yes Bank became so embedded in India’s digital story in an ecosystem where banks aren’t particularly known for their software. Or why companies like PhonePe and others had no contingencies in place despite Yes Bank’s struggles being common knowledge. And perhaps most importantly, about the role of the country’s retail payments body, the National Payments Corporation of India (NPCI), in all of this.

Business continuity: casualty

As the first company to launch UPI payments in India and Yes Bank’s first payments app partner, PhonePe was a predictable casualty. It accounts for nearly 50% of the 500 million-plus transactions that flow through Yes Bank. Despite their mutual dependence though, PhonePe didn’t wake up to Yes Bank’s plight until it was too late.

“Multiple levels of redundancy exist, sir. Just never imagined the bank itself going totally dark like this. Lesson learnt in the hardest possible way…,” said Sameer Nigam, PhonePe’s co-founder and CEO, on Twitter.

This should have been a body blow. Partner banks and third-party apps need a great deal of coordination. Usually, the payments infrastructure to run an app is maintained by the bank or its tech partner. The partner bank also takes care of all the settlements between different entities while making payments. All of this, of course, is subject to the usual regulatory hoops and multiple approvals.

“We would have gone live with ICICI by April anyway. No one anticipated the moratorium and there is little we could have done to speed this up any further,” said a PhonePe spokesperson over email.

Yet within a day of the moratorium, PhonePe went live with its new partner bank. Despite this new marriage, all PhonePe’s users—both old and new—would retain the Yes Bank-issued @ybl handles . It is a curious transfer—usually, it is the partner bank that owns the handle. In this case, while Yes Bank owns the handles, the settlement is done by ICICI Bank.

While extraordinary situations demand extraordinary measures, the swiftness of PhonePe’s switch raised a few eyebrows. On Twitter, PhonePe’s Nigam said it did this with regulatory approvals. But at least three sources from different fintechs, some of which do not directly compete with PhonePe, said it was able to do this because PhonePe rather than Yes Bank maintained the infrastructure needed to run UPI on the back end.