5 Key Factors Behind the Success of India’s UPI

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    How the country’s United Payments Interface expanded so rapidly, along with key lessons that UPI offers payments companies

    Mahesh Swaminathan

    Senior Consultant – India Lead

    India’s United Payments Interface (UPI) has created a tsunami in the world of real time payments system. The UPI number of transactions for the month of June 2023 closed at 9,335 million, with projected to reach 1 billion transactions per day by 2026-27 [1], representing over 75% of all retail digital payments transactions during 2022-23.

    With over 300 million active monthly users [2] as of Nov 2022, UPI has transformed how Indians make payments, allowing them to transfer money instantly from one bank account to another, from a customer to a business, or between individuals.

    UPI transaction volume contributed 52% of the total digital payment in FY 21–22, and UPI transaction volumes are predicted to grow in the future at 42% CAGR [1].

    Secret Sauce: Factors That Led to UPI’s Phenomenal Growth Story

    Design Simplicity

    TECHNICAL: Owned and Operated by NPCI (National Payments Corporation of India) – The UPI’s minimalistic ‘containerization’ approach to backend design interface handles the heavy-lifting, enabling the banks’ CBS [core banking solution] to provide just 3 interfaces – to look-up customers, check balance in the customer account, and debit from an account, enabling quick onboarding of member banks onto UPI network [3].

    CONSUMER: UPI offers a simple two-step authentication process, by which consumers can directly transfer money in real-time, eliminating the need to store the payee’s money in a digital wallet while making a payment.

    UPI123PAY – launched in March 2022, enables India’s estimated 400 million feature phone users from the rural markets, to make payments through UPI and adopt digital payments.

    Smoother Integration

    UPI enabled third-party apps, including fintech market leaders like Google Pay, Paytm, Walmart owned Phone Pe etc. For example, in Google Pay, by adding a UPI-enabled bank account, followed by successful verification, a user can initiate transaction within minutes.

    “Service” as a Customer Acquisition Strategy

    1. Member partnerships of 445 banks (65 Payment Service Provider, 380 – Issuer) enabling the customers to access and reach UPI-enabled app and products
    1. Network effect of leading digital platforms like Google Pay and Paytm, with their extensive merchant acquisition campaigns during the pandemic, enabled in critical customer mass for UPI [4]

    Encourage Both High-Volume and Low-Value Transactions

    The per day transaction limit is set at INR 1 Lakh (USD 1200), and INR 5 Lakh (USD 6000) for payment and merchants.

    With financial inclusion in mind, the bottom-of the-pyramid market is serviced with UPI Lite – an on-device wallet-based UPI system with which users can transact low-value transaction (< $25) even in places with low or no internet connectivity.

    5 Payments Lessons from UPI

    1. Promoting Cashless Transactions

    UPI has helped to change the mindset of over a billion people against a common “Cash is King” idea, and reduce the physical currency and improve transparency across the system.

    2. Product Development

    Open-Source approach, and support provided by civic technology firm like iSpirit – in countering technology and operational challenges.

    Interoperability amongst the member bank’s diverse technology backend solutions to join a common platform payment network.

    3. Innovation in Fintech Solutions

    Encouraging member partners to serve and provide new-age fintech solutions can be achieved only with Open architecture + Platform-service-mindset. UPI encourages startups to build innovative products & services on top of its platform, with BNPL (Buy Now, Pay Later) and pre-approved credit lines being some of the few applications.

    4. Financial Inclusion

    The UPI-based digital payments system is built with Aadhaar [Unique Identity number for the citizens of India] as its base. Even users without debit cards can use an UPI address to transfer money from their Aadhaar-linked bank accounts in real time.

    Enabling access to UPI for all types of customers across the spectrum, with both high and low value transactions, is the key to success.

    5. Strong Regulator Backing

    The Indian government and RBI (Reserve Bank of India) played significant roles in driving the success of UPI. With RBI offering incentives for banks to join the NPCI, and in the promotions of UPI.

    UPI Goes Global

    Being one of the largest remittance recipients in the world, amounting to $100 billion in 2022, significantly ahead of No.2 China and No.3 Mexico, India’s approach since 2020 is the Internationalization of UPI to reduce the cost of cross-border transactions [5].

    UPI is now live in Singapore between its national payments system PayNow, and neighboring countries Bhutan and Nepal launched UPI in April 2023. With active discussions underway with 30 more countries including UAE, Australia, Hong Kong, the remittances market is ripe for disruption.

    By not signing the Osaka declaration on cross-border data flow in 2019, India’s view has been that the critical digital infrastructure, which mediates payments, identity, and flow of data, should be public infrastructure owned by the government, and not privately by BigTech firms. The India Stack initiative – was built to regain control over data, on this stance against “digital colonization”.[6]

    India, with its leadership in digital payments infrastructure and its current G20 presidency, looks to lead the way forward and integrate its technology solutions with other nations. With an aggressive global expansion plan to establish UPI as an alternative to SWIFT to mitigate the recent geopolitical risks.

    “Look at what India has accomplished with the UPI, Aadhaar, and the payments stack, and you will see the value of having an open, connected stack which works. And that is what the internet is. Having responsible regulation which preserves all of this are some of the core elements.” – Sundar Pichai, Google CEO.

    What the Future Holds for Industry Stakeholders

    1. UPI will remain free in the short term. The idea of introducing MDR charges for UPI payments created quite a stir in April 2023, and so regulators backed away from this idea. UPI transactions will continue to follow the zero-MDR policy in the near future. The government has been making budgetary allocations every year to incentivize banks and payment providers.

    1. UPI attracts interchange fee. The introduction of interchange fee for prepaid payment instruments – Gift cards, wallets etc. up to 1.1% on transactions over INR 2000 (~USD 25+) introduced as of April 2023, signals the first step towards monetization structure under UPI.

    1. Market Cap on Digital Payment Apps. With top 2 players Walmart’s PhonePe and Google Pay holding 83% market share as of August 2022, the NPCI proposed imposing a 30% market share cap for all the payment companies–possibly limited new onboarding or other similar measures—which would take place toward the end of 2024. This will prevent UPI from being fully colonized by BigTech and open-up opportunities for the other wallets and PSPs.

    1. UPI expands the pie even for card networks. Connecting to UPI network will provide Visa and Mastercard access to vast untapped network of over 230 million shops that use QR code to receive money. Since October 2022, UPI payment via select Rupay credit card became acceptable to deepen the scope of payment options and card penetration in India.

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    [1] The Indian Payments Handbook – 2022-27

    [2] Govt of India Report

    [3] National Payments Corporation of India and the Remaking of Payments in India – cgap.org

    [4] Blog article: pjpaul.info

    [5] World Bank Report

    [6] Blog: Restofworld.org – India UPI payments diplomacy

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    Mahesh Swaminathan

    Mahesh Swaminathan has over 20 years of industry experience from the emerging technologies & services industry. As a market strategist, Mahesh advises technology start-ups in the areas of GTM, Digital transformation and consumer insights.

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