Big Picture

UPI: India’s biggest and boldest payments interface bet yet

The Unified Payments Interface (UPI) will take the power of smartphones to its next level in India, making instant money transfers an every-minute possibility. Developed by the National Payments Corporation of India (NPCI) under the guidelines of the Reserve bank of India, the Unified Payments Interface (UPI) is the new face of cashless payments, fast-tracking India into a cashless economy.

Background:

India continues to be driven by the use of cash; less than 5% of all payments happen electronically. Various studies have shown that India uses too much cash for transactions.

  • The ratio of cash to gross domestic product in India is one of the highest in the world.
  • The number of currency notes in circulation is also far higher than in other large economies. India had 76.47 billion currency notes in circulation in 2012-13 compared with 34.5 billion in the US.
  • Some studies show that cash dominates even in malls, which are visited by people who are likely to have credit cards, so it is no surprise that cash dominates in other markets as well.

What exactly is UPI?

The Unified Payments Interface (UPI) is a new system developed by the NPCI and the RBI to aid instant transfer of money using a cashless system. Using UPI services, one just requires a smartphone and a banking app to send and receive money instantly or to pay a merchant for retail purchase. In the long run, UPI is likely to replace the current NEFT, RTGS, and IMPS systems as they exist today.

The UPI ecosystem functions with three key players:

  1. Payment service providers (PSPs) to provide the interface to the payer and the payee. Unlike wallets, the payer and the payee can use two different PSPs.
  2. Banks to provide the underlying accounts. In some cases, the bank and the PSP may be the same.
  3. NPCI to act as the central switch by ensuring VPA resolution, effecting credit and debit transactions through IMPS.

How does it work?

UPI, built on IMPS, allows a payment directly and immediately from bank account. There is no need to pre-load money in wallets. It allows payments to different merchants without the hassle of typing one’s card details or net-banking password.

How UPI is different from existing payment networks

Currently, NEFT, RTGS, or IMPS systems are used to send or receive money. For all of these, one is required to furnish detailed information of the recipient. For example, for a NEFT transfer, bank account details of the recipient, the IFSC code of the bank, bank account number, etc. are required.

  • For IMPS transactions, either the IFSC code of the bank or the bank-generated MMID code is required. While IMPS transactions are available around the clock, NEFT and RTGS are available for a limited time and not on Sundays or other public holidays.
  • With UPI, only the mobile phone number of recipient is needed and one can send money instantly, any time or day of the week, in a secure environment using just Smartphone.
    upi

 

The possibilities with UPI:

  • Using UPI, one can send and receive money instantly using only a unique id linked to your mobile phone number.
  • By using its integrated payment system one can make merchant payments. Instead of paying by cash at any store, one can use UPI to make a transfer from bank account to the merchant’s account instantly.
  • UPI-based financial transactions are available 24/7 including Sundays and public holidays.
  • Also, while pre-paid wallets can’t do more than Rs.10,000 worth of transactions without KYC (know your customer) norms in a given month, a UPI-enabled platform bank account can transfer up to Rs.1 lakh instantaneously.
  • Besides, the cost of each transaction is going to be less than Rs.0.45, and one can also factor in all the savings from, and to, bank accounts.
  • UPI will usher in low cost, high-volume payments and create a new ecosystem where customers and merchants will come together for faster and simpler electronic payments. It is likely to benefit overall payments ecosystem, as the payments service can be provided by banks to the merchant with an entry level smartphone and there is no need to install a PoS machine. Thus, it is likely to reduce the overall merchant acquisition cost for the banks.
  • The most important aspect of UPI is its open architecture. The user interface is fully flexible and banks are free to create most intuitive interface. The innovation will also bring all the key stakeholders on a common platform, creating a plethora of services that are unheard of in today’s global payment offerings.

Safety and compatibility aspects of UPI:

UPI has been developed by the National Payments Corporation of India (NPCI). The system has been designed keeping in mind all security aspects as per RBI regulations. UPI is based on the IMPS framework making transactions highly encrypted and fully secure to use.

  • Money transfers with this interface are secured with the two-factor authentications as mandated by RBI: mobile phone handset and the mobile PIN as the second.

Can UPI completely replace Cash or Cards?

According to RBI’s estimates, the cash floating in the system is about 18% of the country’s gross domestic product, making India as one of the most printed currency-dependent country in the world.

UPI’s success depends on few factors. For example, consider these numbers:

  • There are 760 million Aadhaar cards, and with 26 million of Aadhaar numbers getting added every month, soon the total Aadhaar card issuance will touch a billion by next year. Out of India’s 900 million mobile phones, 120 million are smartphones.
  • So, even though the use of smartphones is increasing, its nowhere near the levels of Aadhaar registration. In India, it is estimated that there are over 25 million merchants and only 1.2 million have card readers. Still a major chunk of risk-averse customers hesitate to use cards.
  • All efforts therefore must be made to increase smartphone penetration if UPI is to succeed, eventually rendering cards redundant for online payments.

Why a digital solution like UPI may succeed?

The rapidly-growing smartphone penetration and the proliferation of bank accounts have the potential to herald a new age of digital payments.

  • Also, India has around 240 million smartphone users and is expected to grow to 520 million by 2020. Various government initiatives like the National Optical Fiber Network initiative and Pradhan Mantri Jan Dhan Yojana will provide a significant fillip in the proliferation of low-cost acquisition infrastructure by allowing smartphones to substitute costlier point of sale (PoS) devices.
  • Banks which have almost half of its branches in semi-urban and rural areas, are witnessing more than 50% of transactions through digital channels and are growing at over 30% every year. This shows that the customer is ready to go digital provided banks offer user-centric solutions.

Conclusion:

UPI is a great step in right direction and it is set to become an efficient alternative to mobile wallets and make cashless payments faster, easier and smoother for millions of people in India. It has potential to make micro payments cashless which will benefit both buyers and sellers. However, its success is dependent on the number of products and services that banks and other payment system participants shall offer when using the UPI.

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