A 'miracle' in India will disrupt e-wallets and incumbents
In March, the National Payments Corporation of India reported that UPI bridged more than 178 million transactions and over $3.7 billion. At this rate, incumbent payment innovators might just get disintermediated themselves.
As countries around the globe endure fragmented payment markets, where citizens and businesses suffer from cash dependency, poor accessibility, high transaction costs and low interoperability between different payment systems, India’s Unified Payment Interface presents a miracle model that other developing economies can emulate, as they look to move away from cash-centricity and overhaul their own payments infrastructure in pursuit of speed, security, auditability and financial inclusion.
India launched UPI in August 2016 to little fanfare as a mobile-based real-time payment system that facilitates interbank transactions. The interface, regulated by the Reserve Bank of India, India's central bank, instantly transfers funds between two bank accounts via a mobile platform. As an open platform, it can be adopted by any mobile intermediary that wishes to provide an instant payment facility to its customers.
This initiative, which has since thrust India to the forefront of countries with effective national payment systems, is the product of the National Payments Corporation of India, a quasi-governmental, not-for-profit organization that incorporates the Reserve Bank of India and the Indian Bank Association.
The uptake of UPI by major payments service providers has been enthusiastic; WhatsApp, with over 200 million users in India, has incorporated this capability, as have other third-party payments apps such as Google (via its Tez payments platform), Amazon (AmazonPay), Softbank-Bharti (Hike) and Flipkart (PhonPe).
In addition, virtually all of India’s leading banks are participating, including the State Bank of India, HDFC Bank and ICICI, which are each providing this service free to their customers via their own banking apps. At last count, there were 91 banks participating and that number is growing by the month.
Needless to say, the rapid growth of UPI and its user base casts a long shadow over other entities bringing electronic payments to India. Among the casualties of UPI’s holistic offering are the traditional mobile wallets and card-based systems.
UPI provides a direct-to-and-from bank account service for individuals needing to make peer-to-peer (P2P) payments, with industry estimates suggesting that more than 90% of current UPI transactions are P2P. This uptake is having a profound effect on another e-payments vehicle looking to replace India’s cash-based ecosystem, mobile wallets.
The rise of mobile wallets was propelled by India’s 2016 demonetization mandate, which removed 85% of India’s currency from circulation overnight. In this void, consumers and businesses sought legitimate alternatives to cash transactions, with mobile wallet majors rolling out the welcome mat as an industry trailblazer. The emergence of UPI, however, brings new convenience to this space that leaves wallet providers in jeopardy of losing market share just two years on.
Among UPI’s advantages over traditional mobile wallets is the user onboarding process. Wallets require users to download an app, go through an in-person know-your-customer process and link it to their bank accounts to access funds. UPI, in turn, provides direct to-and-from bank transactions, pre-secured by two-factor authentication, with KYC results having already been conducted by the bank.
UPI also stands tall under customer data security criteria. UPI users do not disclose extensive personal information to the conduit payment service provider (WhatsApp, Google, etc.). Instead, the payment service provider manages the first factor in two-factor authentication, typically using possession-based criteria such as a cellphone number or knowledge-based criteria like a login credential.
The second authentication is conducted by UPI itself, typically manifesting as a single-use PIN number (knowledge-based criteria), with biometric authenticators such as fingerprints soon to follow. Biometric inherence-based identifiers tap into the extensive database of Indian residents already amassed by Aadhar, India’s national identity verification system.
A lack of interoperability between wallet providers and banks presents a third competitive advantage for UPI. The movement of money from a user’s wallet to a bank account commands a three percent fee with every transaction, which can add up quickly.
At the same time, some incumbent wallet providers like Paytm can send payments to a same-brand wallet without friction and free of charge, however the movement of money to the wallet of a competing provider is still not possible, limiting the wallet’s functionality outside of its immediate network.
In what could be construed as a reactive move against the rise of UPI, Paytm has enabled its 5 million merchant customers to accept payment into their merchant Paytm wallets via UPI- enabled applications. As retailers adopt UPI itself, however, consumers will be able to pay merchants direct to their bank accounts without the need for a wallet intermediary.
This has massive implications for online transactions and online-to-offline (O2O) transactions, where shoppers visit a physical location and use an online app to pay the merchant in-person.
Incumbent mobile wallet providers won’t be suffering from the fallout of UPI’s rise alone. As retail locations continue to adopt UPI acceptance, it will present a major challenge to credit card, debit card and point-of-sale terminal providers, whose value to retailers will become severely diminished.
This rings especially true when considering that debit and credit card fees in India charge 1.5-2% per transaction on average and can take as long as three days to settle and clear.
Furthermore, POS terminal providers also charge installation fees, rent fees and additional charges, should the recipient fail to meet a minimum transaction volume threshold each month. While it is estimated that India only has three million POS-enabled retail locations, UPI’s combination of a no-minimum-balance policy, absence of recurring transaction fees, and provision of real-time payment capabilities have the potential to suppress POS expansion in its infancy.
While these competing payment mechanisms present a conflict for banks, the rate at which financial institutions are signing on to UPI suggests they recognize its massive potential to relegate the significance of wallets and cards as electronic payment channels.
There are no guarantees for nationwide adoption of UPI. Incumbent providers have had a substantial head start on customer acquisition, with their retention efforts driven by an array of features, generous loyalty programs and big advertising budgets. These offerings, combined with consumers’ traditional reluctance to switch payment habits, present a robust emerging offering.
That said, the portents for UPI are positive and its recent momentum is impressive. Per Fidelity National Information Services, UPI-based transactions increased a hundredfold from 92,000 to 9.2 million transactions in its first nine months. At the same time, India’s user base for digital transactions will triple to 300 million by 2020 as use cases grow and new users from rural and semi-urban areas enter the market, according to a recent report from ACI Worldwide.
Reaching the holy grail of ubiquitous UPI penetration will depend upon several factors. Banks must keep UPI transaction fees at a minimal or zero fee, while ongoing upgrades must continue accommodating emerging electronic payment habits and providing value-added capabilities to appease consumers, such as secure biometric authorization from a smartphone.
Here we have a public-sector initiative, championed by a central bank, supported by a prolific group of commercial banks and rolled out by a not-for-profit company, that has the potential to upend the payments industry inside the world’s fastest-growing national economy. Fintech innovators and real-time payment providers around the world should take note from this stellar example of public-private collaboration and the benefits it can bring to consumers and businesses alike.