DIGITAL TRANSFORMATION: THE UPI SUCCESS STORY - Sarthak Desai

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It has been a great journey for the Indian digital payments system in the last five years. I can connect with that as my journey with paying at retail stores has been going parallel with the Indian digital payments system. It has brought me to a position where I can freely roam in my city without having to ensure to keep my wallet with me. I can vouch that I can manage with 500 Rs cash for a month. All this has been possible because of the emergence of UPI as a mode of payment acceptable at almost every retail store in urban India. Last month, the UPI system clocked 421 crore transactions (15% MoM growth) valued at 7.7 lakh crores (17.8% MoM growth). In the last 4 years, it has grown with a CAGR of 400%. The rising share of UPI as a mode of payment in India is making major financial services companies like Visa and Mastercard feel butterflies in their stomach. UPI already has surpassed American Express in terms of the number of transactions. In FY21, money exchanged through the UPI platform was 2.8 times the value of debit and credit card transactions done through POS terminals. So, what reasons are behind this phenomenal success of UPI? Let’s uncover this.

It all started with the formation of the National Payments Corporation of India (NPCI) in 2009 by the Reserve Bank of India to integrate all payment mechanisms in the country. Later in 2011, the RBI discovered through one of its studies that only six digital transactions happen per person annually despite more than 10 million retailers accepting payments through POS machines. So, RBI decided to build a new payment system in 4 years that would incentivize people to make more digital transactions. That system was eventually launched in April 2016 as a pilot project with a network of 21 banks. It was named as Unified Payments Interface, or as we more commonly referred to as UPI.

UPI is a payments system that can house multiple bank accounts of a user under a single mobile application of any participating bank. Through this mobile application, peer-to-peer payments and peer-to-merchant payments can be done seamlessly. It’s a money transfer system that works 24*7 and for 365 days and transfers your money within 10 seconds, unlike other payment modes which require at least a minute. The other advantages of UPI are that it is an easily understandable, accessible, secure, and interoperable (payment can be done from any mobile application of participating bank) payments system.

UPI was given a boost during the demonetization exercise of the Indian government when people were scrambling to find a good payment medium that can resolve cash crunch issues. It kept on registering exponential growth rates even after sufficient amounts of cash were restored in the economy. In 2019, after seeing the success of Google Pay in India, even Google had recommended the Federal Reserve to start a real-time money transfer system on the lines of UPI. The pandemic also helped in the successful journey of UPI as people avoided any contact with other people while making payments. Now, people are not using UPI because of safety reasons or cash crunch in the economy but more out of convenience.

This has been possible because of the proactiveness of RBI towards making India a more digitized economy. Even the Bank of International Settlements (BIS), an international financial institution created by the central banks of the world to create monetary standards across the world (BASEL norms), in one of its papers, suggested how the world can take lessons from RBI in being “proactive and equal partners with private sector entities when it comes to fostering innovation in finance”.

The UPI payment system is currently dominated by two private players, PhonePe with 45% share and Google Pay with 41% share. Taking this into consideration, NPCI in Nov 2020 came with a regulation that required any UPI service provider to cap their market share below 30% by 2023. This was done to make the UPI payment system more competitive and to avoid any major system failure arising out of over-dependence on one or two players. This will help other market players like Paytm, Amazon Pay, etc with more opportunities. It would drive more innovation in this sector. However, the regulation should be modified so that it doesn’t become much of a hindrance to existing customers of current market leaders.

NPCI has also created many modifications to the UPI system by introducing UPI AutoPay in 2020. Through the AutoPay system, automatic payment mandates can be made for monthly OTT subscription fees, bill payments, EMI installments and even applying for IPO. NPCI is also planning for offline UPI payment through the use of near-field communication to provide the benefits of UPI even in rural areas. NPCI has also created an international company to help expand the network of UPI in other countries. It has plans to start a QR code-based UPI payment system in Singapore, Malaysia, Thailand, Philippines, Vietnam, Cambodia, Hong Kong, Taiwan, South Korea, and Japan from 2022. This will go a long way in creating a worldwide payment system like the SWIFT system used currently by many countries of the world.


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