Success of UPI- by Abhay Singh
Introduction
My name is ABHAY SINGH a meticulous student of grade XII. Upon writing the
research paper on DISPOSAL OF E-BATTERIES I decided to write a research
paper on THE SUCESS OF UPI TRANSACTIONS IN INDIA (AND WHY IS
AMERICA BEHIND INDIA IN INNOVATIVE FINANCIAL TRANSACTIONS).
India accounted for the largest number of real-time transactions in 2021 (48.6
billion). This figure was almost threefold that of the closest challenger, China
(18 billion transactions in 2021) and almost seven times greater than the
combined real-time payments volume of the world’s leading economies – the
US, Canada, the UK, France and Germany (7.5 billion)
This is a huge achievement for a developing country like India.
THE SUCCESS OF UPI TRANSACTIONS
UPI transactions cross Rs.80 Trillion in FY22 and are likely to touch Rs.100
Trillion. With nearly 6 billion transactions a month, valued at over Rs 10 lakh
crore and touching 260 million users, India’s UPI has become the best-
performing real-time ecosystem in the world. Digital payments have overtaken
credit cards in India, and RBI now allows UPI payments through credit card.
How did this happen? How did India become a first mover in these financial
transactions? How did India overtake America in faster and more reliable
financial transactions?
US business magazine, Fortune carried a provocative headline: “As Silicon
Valley fantasises about Web3.0, India leaps ahead on payments”.
It reminded American readers that Bitcoin and Blockchain which promised to
transform global commerce, are yet to deliver on their promises. Another
much-hyped technology, Web3.0 which was to make it all happen, still remains
a work in progress.
India created a technology much before America that is now leading the
segment as 10 more countries add to the list of countries that use UPI.
With no peer competitor, UPI has thrived thanks to its convenience and ease of
use. UPI is linked to an existing bank account and is compatible with bank apps
or third-party apps like Paytm, BharatPay, or phone pay. Though many UPI
users access the platform through their smartphones, with the launch of UPI
123, it can be used offline too. All that is required is a working feature phone.
The astounding success and popularity of UPI have been possible due to the
Reserve Bank of India’s vision, NPCI, and several fintech companies that
leveraged UPI’s technology to build their apps over it.
UPI has crossed a big milestone by crossing the $1-trillion mark in transactional
value, It has set an example for the whole world. The pandemic acted as a
catalyst in the last two years. Both the volume and value of UPI transactions
have doubled in a year, which is testimony to its success in India. It is also
indicative of India’s receptiveness to digital financial interventions and sets a
firm foundation for further similar initiatives.
UPI in Singapore and UAE The Singapore and UAE market has already been
tapped into by RuPay cards and UPI can be used for transactions across
various points of interest, including airport terminals. People traveling to
Singapore and UAE can use UPI as it is expected to solve the scarcity of
payment options due to currency conversion issues and the non-availability of
international credit or debit cards hence breaking transaction barriers.
Global partnerships and similar models The NIPL and NPCI have already
established partnerships with institutions like the Royal Monetary Authority
(RMA) of Bhutan and Network for Electronic Transfers (NETS), Singapore, for
QR-based payments through UPI.14 • These partnerships will allow
international traveler to use RuPay and UPI for transactions. • Products like
FedNow by the Federal Reserve have taken inspiration from UPI for its real-time
payments.15 The robustness of UPI in providing an interbank, open, and real-
time system that is secure and fast will help it in becoming a global player and
bringing more technological innovation into the payments space. It will help the
NIPL in becoming a major player and partner with financial institutions in
developing payments infrastructure, faster payment modes and real-time QR-
based payment systems across these international markets. NIPL will aim at
building strong relationships with various countries and helping them build card
schemes and real-time payment systems. This might also help businesses to
leverage India’s built platform for cross-border payments and enable
international travelers to use domestic cards outside India.
What sets UPI above its competitors?
1. Ease Of Transaction: This is the No.1 reason for UPI’s success. With UPI
people don’t have to remember long bank account numbers or the Indian
Financial System Code (IFSC) or Mobile Money Identifier (MMID) or any other
detail. Simply remembering the name of the person and their linked phone
number is enough. Users also need not download multiple apps since UPI
works regardless of the payment service provider (PSP) app the merchant or
their friends have.
Acceptance at a huge number of merchant locations with easy, rapid, and
frictionless payments, including the use of QR codes, is another critical aspect
in UPI’s massive size. The growth is bound to accelerate further through NPCI’s
new innovative features like AutoPay and Prepaid vouchers.
2. Speed: Earlier, before UPI was introduced (in 2016), the options available to
transfer money were Net banking or mobile banking or through the bank
branch. While the payment methods were easy, they took considerable time
and involved many formalities or processes. One had to enter the customer ID,
mobile banking ID, password, details of the transaction and the MMID if
applicable, and then the IMPS transaction would be registered. In contrast, the
UPI process is shorter—you just need to set a login PIN (app-specific) and a
UPI PIN (interoperable).
3. Easier Refunds For Failed Transactions: For transaction failures, NPCI has
devised a system through which a failed transaction is automatically reversed if
money has been deducted but not credited to the recipient within one hour.
While the refund in such cases takes a maximum of one hour, users can contact
their bank in the rare cases when this does not happen.
4. Authentication: The UPI transaction PIN is the same regardless the UPI
PSP app. This means that once the PIN is set while setting up UPI for the bank
account, it remains the same regardless of the app that the user has, i.e.
Google Pay, PhonePe, Bhim or others. This has eliminated the need to
remember the PINs for separate apps.
5. Works With Any Device: The UPI service can be accessed in more than one
way and even by people who do not use a smartphone. The RBI recently
launched the UPI 123 service, which works fully offline. All one needs is a
phone with calling functionality.
What Makes UPI Work Smoothly
UPI is structured on 4 pillars or four intermediaries
Remitter Bank: This is the bank of the person who is initiating the money-
sending transaction
Remitter PSP: The payment service provider is the UPI app that the person
who initiates the transaction uses
Beneficiary Bank: The bank of the person receiving the money from the
remitter
Beneficiary PSP: The recipient’s UPI app.
What led to the wider use of UPI and digital means of
transactions.
Pandemic: The report noted that Covid-19 forced people to transact
via digital means, and hence, as a result, the UPI’s demographic
appeal further widened to now include a larger number of older people
who were previously sceptical about using it.
Demand: The report noted that UPI and IMPS is now more embedded
into the Indian financial and banking ecosystem, courtesy the many
different banking and finance applications using it.
Innovation: Several newer use cases of UPI were enabled through
technological innovations of the market participants, noted the report.
QR code payments, card-less cash withdrawal using UPI, e-RUPI, UPI
service rolling out in the United Arab Emirates and Singapore, and
other such innovations.
WHY IS AMERICA BEHIND INDIA IN INNOVATIVE FINANCIAL
TRANSACTIONS
The United States, the epicenter of financial innovation and growth, has long
been the undisputed global leader in finance. The leadership position may,
however, see a swift change in the near future, given the tectonic shifts being
witnessed in recent years led by India’s innovative Unified Payments Interface
(UPI). It’s a stupendous success story that is revolutionising the payments
industry in the country.
On the global landscape, no other country has managed to accomplish as much
as India has as achieved with UPI. This begs the question, why is the rest of the
world lagging behind? Especially the US, the world leader in finance. We
compared India’s instant payment options UPI with the US’ nearest options
(FedNow and existing card systems).
The FedNow system created by and routed through the Federal Reserve works
like the real-time gross settlement system in India and is considerably different
from the UPI, which routes itself through a separate non-profit body, the
National Payments Corporation of India. However, it is the closest the US has
come to achieving instant remote transactions. The disparities between UPI
and FedNow illustrate the backwardness of the US system as compared to
India.
Another advantage that UPI possesses over FedNow is the visible transaction
fee. UPI famously has no transaction fees and a Zero MDR (merchant discount
rate) policy. This helps cut down transaction costs. On the other hand, FedNow
encourages banks to collect more transaction fees. This implies a larger profit
margin for banks, at the cost of consumers, to incentivise banks to participate
in the FedNow framework and secure their interest above the interest of the
consumer, whereas UPI’s removal of transaction fees is an indicator of its
consumer-centric approach.
People in India are very price sensitive, one major reason for the establishment
of UPI was no hidden charges.
Cards are expensive for consumers, with credit card companies charging as
much as 3.5 percent per transaction, and people facing enormous interest
rates, with no price regulations imposed on them by the government. This is
reflective of the larger degree of bargaining power that the private sector
possesses in the banking industry in the US versus India because the Indian
government regulates and sets a basic price in the Indian market.
UPI has disrupted the existing status quo of the payments industry in favour of
consumers and the economy and played the role of a public good by removing
transaction fees, having a zero-MDR policy, and diluting the control of bank
portals over transactions.
This has caused the share of credit and debit card companies control over
transaction systems to shrink in India, providing a low-cost, convenient option
to the consumer and opening up the space for other fin-tech innovations.
The biggest drawback of FedNow and the card network with respect to UPI is
the transactions are not seamless and cost-effectively. This requires
cooperation between all the agents of the transaction. The RBI in India has
been able to bring together many private agents to the same framework and
streamline communication to help UPI’s growth.
FedNow, however, limits itself to only one small aspect of the entire transaction
and leaves the rest of the transaction to the private sector’s discretion.
Similarly, in the case of cards, FedNow can only access the account in the
issuing bank and does not create any pathway of communication between
different banks. Thus, each bank retains its customer base and doesn’t have to
cooperate with other banks. A lack of centralised action holds FedNow and
card systems back from being able to consolidate a large and diverse payments
sector with conflicting interests.
Change is inevitable and it is time the US adopts consumer-centric solutions
like UPI to maintain its hegemony because Credit cards and Debit cards will be
on the verge of extension because of the new technologies coming up. With
interest rates as high as 3.5 percent, people would opt for no interest rate
options.
Conclusion
The report also forecast that the share of all transactions occurring via real-
time instrument was expected to increase to 70.7 percent in 2026 from the
present 31.3 percent. The report predicted that in 2026, business and
consumer level benefits due to India’s real-time instant payment were expected
to reach $92.4 billion, adding, that it will have an impact of $54.9 billion or 1.12
percent in India’s GDP.
UPI has disrupted the existing status quo of the payments industry in favour of
consumers and the economy and played the role of a public good by removing
transaction fees, having a zero-MDR policy, and diluting the control of bank
portals over transactions. Whereas the epicenter of financial innovation US is
struggling because of its methods of financial transactions and of higher
interest rates.