UPI will push India over the digital payments finish line

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The Indian payments market has experienced significant disruption in the last three years; disruption so vast that other countries have taken note.

But India is still heavily dominated by cash, and is now swiftly moving toward digital payments—with the government setting lofty goals around a “cashless society.” But how did it get there so fast?

Traditionally, the Indian economy has experienced low adoption of online payment systems due to its reliance on cash. This is evidenced by the fact that the number of cash withdrawals at ATMs is more than two times greater than debit card usage at the point of sale.
Moreover, with more than 460 million internet users, India is the second largest online market, ranked only behind China, yet only 26% of the total population accessed the internet in 2015.

In 2016, the Jio revolution rocked India’s telecom and data market with the launch of Reliance Jio’s 4G services. Jio made fast internet accessible and affordable to all, paving the way for the masses to embrace digital technologies and other “smart” form factors.

With the stage set for digital payments, along came Unified Payments Interface (UPI), India’s real-time payments platform and a crucial contributor to the Indian digital payments market. Launched in August 2016 with approximately 20 banks and processing 93,000 transactions (equating to INR 30 million) in the first month, UPI transactions reached nearly 800 million transactions amounting to INR 1.33 trillion in March 2019 with the support of 142 banks that are now live on the platform.

The National Payments Corporation (NPCI), India’s umbrella organization for payments and the central infrastructure that was created by the Reserve Bank of India (RBI) and Indian Banks Association (IBA), launched UPI in a collaborative effort to make India a cashless economy and drive digital payment inclusion.

A mobile-based, real-time payment platform, UPI allows users to instantly push (payment) or pull (collection) funds between two bank accounts. It allows users to pay directly from their bank account to any person or merchant without the hassle of typing card details or keying in a bank app or wallet password.

Users can simply download any of the UPI apps available on the Google Play Store or the Apple App store and log in using the mobile number registered with their respective bank. UPI supports both peer-to-peer and peer-to-merchant financial transactions, as well as various value-added non-financial transactions like real-time balance check and transaction history, to name a few.

UPI is a secured mode of payment that is convenient for users as it operates on a single click, two-factor authentication, which means that users must authorize the transaction only once by keying the UPI PIN, while their mobile number acts as the second factor of authentication and completes the two-factor authentication process.

In the real-time payments market, the interoperability of the UPI platform and the simplicity of its design make it stand out. UPI makes the consumer’s bank account portable, which means users can be a customer of Bank A, but they can link their Bank A account on the UPI app of Bank B, or with fintech apps like Google Pay or Amazon Pay. In the case of multiple bank accounts, users can link all their bank accounts on a single app. This capability makes the platform extremely convenient to operate for the end customer, a bit like a “super wallet” but using bank accounts directly, and not being contingent on a consumer having a debit or credit card.

UPI makes payment simple and secure by using unique identifiers known as virtual payment addresses (VPA). A VPA allows consumers to identify themselves with someone they want to pay, without providing card or account details, thus lowering fraud risk.

UPI also makes a merchant’s life simpler, as they can now seamlessly accept payments and facilitate in-app payments as well. With UPI, merchants can use their mobile phones as a payments acceptance tool, which drastically brings down transaction costs, especially when compared to traditional payment modes like point of sale (POS) and QR code-based payments. In August 2018, NPCI upgraded UPI to version 2.0; while version 1.0 was launched with the view to creating a successful P2P platform. Version 2.0 is more merchant-centric with features like the ability to pre-authorize a transaction with an option to pay later, which is mutually beneficial to both customers and merchants; the ability to link overdraft accounts on UPI, which will fuel more transactions in the ecosystem; and stronger verification, which further reduces fraud.

In July 2019 NPCI introduced further measures to increase UPI adoption, namely proposing abolition of all charges for payments facilitated through UPI at businesses with annual turnover of more than INR 500m.

UPI works on a four-party model, where the parties are the remitter bank, remitter PSP, beneficiary bank and beneficiary PSP. Remitter and beneficiary banks are the accounts where the actual movement of funds happens while the remitter and beneficiary payment service provider are the front end (which in this case is a mobile application) used by the remitter or beneficiary to send or receive the funds. In the UPI ecosystem, although the fund movements happen only between banks, the front end or platform can be provided either by a bank or a non-bank. Other important participants in the ecosystem are NPCI (which, as noted previously, developed and runs the UPI platform), merchants and the end customers.

In 2017 NPCI opened its doors to tech giants like Google and WhatsApp to participate in and contribute to the UPI ecosystem, as the regulators and the government realized the need for a robust real-time payments platform in India. This fintech contribution has further bolstered and accelerated UPI adoption among consumers and merchants as well as increased transaction volumes. In March 2019, Google Pay, PhonePe and Paytm each processed 220-225 million transactions out of the nearly 800 million, accounting for about 80-85% of the total UPI transactions. This underlines the importance that the big tech companies are playing in driving the UPI revolution.

Google Pay, for example, is accepted at more than 2,000 online stores and has recently ventured into the offline merchant space in partnership with Pinelabs, a leading POS provider. Google Pay will now be accepted at more than 330,000 POS terminals managed by Pinelabs across 3,000 Indian cities. Such is the potential all these fintechs have seen in the UPI platform and why they are investing heavily to drive usage. Indian payments are largely driven by customer rewards, and these players are aggressively promoting cashbacks and rewards to increase customer engagement and stickiness.

Although the past six months have seen merchant transactions pick up, there is still a long way to go in the offline merchant space. Banks are bullish about this opportunity and believe they will achieve success very soon. Apart from physical and online merchants, UPI is expected to offer additional opportunities in credit, insurance, wealth management and loyalty, among other industries.

Be it person-to-person or person-to-merchant, UPI arrived with the objective of making digital payments simple and accessible to all and it has, to a great extent, been successful in driving India toward a "less-cash" economy. What will be interesting to see is how various participants in the ecosystem contribute and work collaboratively toward making this a payment product that the rest of the globe emulates.

One thing is for sure— we have not heard the last of real-time and digital payments capabilities like UPI. The world of payments is evolving, real-time schemes continue to be rolled out globally and digital transformation has become the norm.

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