How has UPI transformed the Indian economy ?

After Aadhaar, UPI (Unified Payments Interface) has been the single biggest contributor towards ushering in digitization in India. Launched in 2016, it has transformed the economy in innumerable ways in a considerably short span of four years.

UPI is an instant real-time payment system developed by NPCI (National Payments Corporation of India) and regulated by RBI. It was developed to simplify, facilitate and democratize instant payments. 

Later, in August 2018, UPI 2.0 was launched which upgraded the services by enabling users to link their Overdraft accounts to a UPI handle, pre-authorize transactions by issuing a mandate for specific merchant, view and store the invoice for the transactions and also has an added feature of AutoPay facility for recurring payments.

Features of UPI

• Any UPI client app may be used and multiple bank accounts may be linked to single app

• Instant payments possible (through Immediate Payment Service (IMPS) which is faster than NEFT), can be used 24*7 

• 2 factor authentication process

• Uses Virtual Payment Address which is a unique ID as given by the bank

• Bill Sharing facility available

• Complaints can be filed from mobile app directly

What has been its impact?

“The interface recorded 2071.6 million transactions (in Dec 2016, it was mere 2 million) in worth Rs 3860 billion (compared to 7 billion in Dec 2016) in the month of October”, according to information released by National Payments Corporation of India

UPI has been a boon to the Indian consumers. It has made transactions a lot easier with the facility of instant payments available 24*7 and since it only needs a virtual payment address to make payments, it has eliminated the need to enter bank details or other sensitive information each time a customer initiates a transaction. 

Interoperability between banks is also a unique feature of UPI. Unlike e-wallets earlier, a user doesn’t need to store money in a separate wallet for each app.

And with introduction of UPI 2.0, a user can also pay bills and make payments to merchants. There’s also a facility to autopay in case of recurring payments.

UPI has also enabled many new businesses to flourish. It has helped create business for a lot of Fintechs and startups in India. UPI’s network allows banks, e-wallets, and payment service companies to link with the framework and create applications via a smartphone device. It also acts as a domain portal for payments.

For startups, it has opened up many doors to develop creative ideas that can improve the consumer experience. There is a huge scope of innovation in this area.

Merchant-client relationship has improved tremendously. Customers no longer need to think about storing their payment details on the merchants’ side. It definitely helps the small businesses for whom the degree of confidence of the consumer is weak, and the current expense of the payment gateways is prohibitive.

Financial inclusion

The primary objective of the Indian government of launching UPI was to bring in more and more people under the fold of digitization. Since UPI is real time and doesn’t cost anything, it has helped incorporate several unorganized industries into the system.

With BHIM app which uses UPI, many unconventional users are also covered. Since BHIM is easy to use and is regulated by the government itself, it has inspired trust even in those consumers who were hesitant to use digital route while making payments, due to lack of digital literacy.

Why are banks not so happy?

Banks are probably the only ones not very excited about UPI, due to several reasons.

Expansion of digital transactions using UPI has added unprecedented transaction volumes and it is difficult for banks to process such high volume instant transactions. Since they have to process these transactions using their core banking systems, it has been quite a costly affair for the banks.

Adding to the burden of processing the transactions, there is no room for errors as banks are shamed and their competencies are questioned when UPI transactions fail. 

It leaves banks with no incentives to participate as most transactions carry no margins and the ones that do are in the order of less than a rupee, because of MDRs (Merchant Discount Rates). This wasn’t the case with other payment instruments like debit cards or credit cards. 

But since the customers’ loyalties are at stake, not participating in UPI is just not an option for the banks anymore.

Scope of UPI

There are talks happening to operate UPI in United Arab Emirates and Singapore, both of which have sizable Indian expatriates, for facilitating their ease of living.

A committee on digital payments led by Nandan Nilekani had suggested that NPCI should internationalize payment services like UPI, RuPay and BHIM.

Opportunities are also there in crowdfunding, micro-financing, peer-to-peer lending, credit rating, loan disbursement that can be built upon UPI.

“People tend to overestimate the impact of a new technology in the short run, but to underestimate in the long run” – ‘Amara Law’

If this law holds true, it can be expected that UPI has a lot more to offer in the near future.