.jpeg)
Striving towards a cashless economy with seamless digital transactions in India, NPCI launched Unified Payments Interface (UPI) in 2016. UPI enables linking multiple bank accounts to a single mobile application, permits peer-to-peer transactions, merges several banking features, and allows fund routing and merchant payments.
HISTORICAL CONTEXT AND IMPACT ON THE INDIAN ECONOMY:
In April 2009, NPCI was formed to uniformly integrate all the payment mechanisms in India for all retail payments. In 2012, the RBI committed to building a safe, efficient, and inclusive payment and settlement system.
The massive cash crunch during demonetisation catapulted digital payments in India. Before demonetisation, only 10% of India's transactions were digital. Customers and merchants shifted to electronic payment systems such as NEFT, RTGS, mobile banking, UPI, etc. The 2017 YoY growth of UPI was 900%. By 2018, India witnessed reduced cash circulation. Hence, UPI propelled India towards a cashless economy, increasing transparency and accountability by reducing dependency on cash. In 2022, the total UPI transaction value accounted for nearly 86% of India’s GDP.
Source: NIC
When demonetisation led to a surge in demand for digital transactions, it created a tremendous load on the UPI infrastructure, causing temporary outages, disruptions, and transaction failures. Many Indians lacked digital literacy, so users hesitated to adopt UPI for fear of fraud and unauthorized access.
Despite this, UPI emerged as a driving force for financial inclusion in India. Millions of unbanked/underbanked individuals (even those in remote areas with no easy access to banks) were brought into the formal banking system by hassle-free transactions and financial literacy. Customers now shopped from online businesses and the e-commerce sector with confidence. Micro/small businesses can now have a digital payment infrastructure without elaborate hardware or expensive point-of-sale systems.
Source: ACI Worldwide real time payments
SECURITY FEATURES:
Additionally, UPI comes with an array of security features that have decreased public skepticism of it. For instance, UPI's Real-Time Reversals credit the money back to the account of the transferer immediately if the transaction fails. If not, the customer needs to contact their bank. To avoid fraudulent methods or payment, the Expiration of UPI Payment Requests occurs when the payment request is not accepted by the user within 3-10 minutes as shown on the merchant app. Lastly, the imposition of Transfer Limits maintains the security infrastructure of UPI and detects fraud or risk concerns while balancing customer convenience.
Source: Insight IAS
COMPARING UPI WITH COMPETING ALTERNATIVES:
1. UPI vs Credit/Debit Cards:
Debit and credit cards collectively accounted for 7% of the transactions in volume and 14% in value. Aggregate debit card transactions by value stood at ₹7.2 trillion in FY23, while UPI stood at ₹139.2 trillion. Consumers and merchants prefer UPI due to easier payments and zero merchant discount rate (as debit cards do impose an inherent fee) respectively. Obtaining a credit/debit card is a tedious process and has comparatively slower payments.
Source: Economic Times
Source: Mint
2. UPI vs FedNow:
As the USA is one of India's leading remittance markets, it is reasonable to pit UPI against USA's FedNow.
FedNow charges a monthly price of $25 and additional fees whereas UPI charges nothing.
FedNow was created for P2P, B2B, and government transactions whereas UPI focuses on bill payments and P2P. FedNow has a much larger transaction limit as well.
3. UPI vs PIX:
Brazil's PIX is stacked against UPI because of its growing popularity, especially in Latin America and Canada.
User data is maintained in a centralized directory at the central bank of Brazil, as compared to the decentralized model of UPI's domain-based addressing, in which data linking a person's alias to their account is stored in their provider's database. There are trade-offs with either option.
Centralised models mean that more data is shared with the payment system which can be confidential. Decentralised models limit the options available to identify a customer.
GLOBAL RECOGNITION:
UPI has been instrumental in driving the digital payments revolution across the globe. The universality of the UPI has helped foster financial inclusion, enhance border trade, improve remittances, reduce transaction costs, encourage innovation, and bridge the digital divide.
UPI accrued 261 million uses in India with a population of 1.4 billion. NRI’s accounted for transactions worth ₹83.20 lakh crores. India has the largest share in $2 trillion of annual digital payments through UPI. India’s combined real-time payments are 7 times the combined real-time payments volume of leading global economies like the US, Canada, UK, France, and Germany and account for 40% of global digital transactions.
India's approach to UPI globalization includes promoting interoperability and standardization. This ensures that different countries can adopt UPI with minimal friction and that users can seamlessly transact across various UPI-enabled platforms India has expanded the reach of UPI to other countries as well amongst all Nepal was the first to accept UPI. The countries on board with India in UPI payments include Bhutan, Singapore, Australia, USA, Canada, Hong Kong, Saudi Arabia, Oman, etc. Various agreements with Southeast Asian nations have been signed to enable QR-based payments.
Source: India Briefing via Forbes India
Source: Moneycontrol
CHALLENGES IN UPI GOING GLOBAL:
1. Onboarding International Merchants:
Due to legacy systems and it being time-consuming to adopt new technologies, some nations are skeptical as onboarding traditional banks will resist it.
2. Embracing Zero Transactional Charges:
NPCI has imposed zero transactional charges in India. But banks earn revenue by Merchant Discount Rate so rejecting these revenue streams might be unacceptable.
3. Resistance to Transparency:
UPI uses open-banking APIs which means one bank can access the account information of a patron from another bank. Foreign banks are uncomfortable sharing their details with rival banks as offers for better services can be made.
LIMITATIONS FOR USERS:
1. Dependency on Digital Advancement:
In areas of poor network coverage, UPI transactions may fail. Additionally, smartphones and sound digital literacy are a prerequisite for underprivileged users of UPI.
2. Security Concerns:
UPI transactions are usually secure, but fraudulent access to users’ bank accounts do occur by phishing or other tactics.
3. Transaction Limit:
As per NPCI, the UPI transaction limit per day is ₹1-₹5 lakh for bill payments and merchants. The maximum UPI daily transfer limit can change from bank to bank between Rs. 25,000 and Rs.1 lakh. This hinders the use of UPI for businesses that want to transfer large amounts of money.
Authored by Shireen Peter, Nija and Siya Nandy
Under the guidance of Research and Outreach Director Liya Jomon
Comments