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As the UPI juggernaut rolls on‚ the six-year-old real-time payments system is set to disrupt big-ticket credit card‚ debit card and remittance payment ecosystems‚ and even the cash in the system
By: Anand Adhikari
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Thirty-six-year-old Sunil Vitkar’s vegetable cart in a Mumbai suburb has two QR (Quick Response) code stickers—Paytm and PhonePe—printed on white paper. They are randomly placed for scanning in the midst of a scattering of potatoes and onions. Even in a noisy market, his ears are alert to the Paytm sound box near his galla (cash box), which frequently plays the “payment received” voice notification. At times, customers also flash their mobile screens with the now-very-familiar ‘payment successful’ message. The sound box, which saves him from customers showing fake confirmation receipts, costs a monthly rent of Rs 125. But Vitkar doesn’t mind the expense.

The QR code, which uses the UPI (Unified Payments Interface) technology, allows money transfers in seconds to Vitkar’s bank account. UPI enables seamless money transfers between different banks and payment networks. Today, 80 per cent of Vitkar’s daily sales happens through QR codes. He also makes payments via UPI at the mandi, or wholesale market, where he picks up his wares. And they don’t mind it either. Vitkar quips, “Ab to bank wallo ke bhi phone call aate hain loan ke liye (nowadays, banks have also started calling me to offer loans).”

Today, millions of merchants are using UPI for their payments. It’s inconceivable to see a pani puri vendor, barber or cigarette seller without a QR code. At last count, 30 million-plus merchants are using QR codes, according to data from consulting firm BCG. Mind you, there are only 6 million point-of-sale (POS) machines for swiping credit and debit cards, despite decades of presence. “UPI is now a juggernaut in its own right. It’s a train that has left the station,” says Ramesh Narasimhan, CEO of Worldline India, a payments solutions provider.

Dilip Asbe,

Dilip Asbe (pictured above), MD & CEO of NPCI— that created the UPI technology—has stated that “a billion transactions per day” is possible. UPI currently logs 220 million transactions per day

UPI, which instantly authenticates and authorises money transfers, handled a record six billion-plus transactions in July alone, the most since its launch in 2016. For perspective, the number of UPI transactions executed monthly is more than five times the number of mobile connections in the country. Data from National Payments Corporation of India (NPCI) says that the total value of transactions via UPI reached Rs 10.62 lakh crore in July alone, which is close to the total amount of bad loans written off by India’s banks in the past five years. In barely six years, UPI accounts for 16 per cent of all retail payments. In the process, it is taking away market share from other payment forms. For instance, the market share of NEFT (National Electronic Funds Transfer) is down from 60 per cent five years ago to 54 per cent, now.

According to a recent BCG report, India’s digital payments market, which includes retail payments, business-to-business payments by MSMEs, and government payments, is expected to more than triple from the current $3 trillion (Rs 226 lakh crore) to $10 trillion (nearly Rs 800 lakh crore) by 2026. Dilip Asbe, MD & CEO of NPCI—that created the UPI technology—has stated that “a billion transactions per day” is possible. UPI currently logs 220 million transactions per day, with a 4x increase as the next goal. Newer use cases such as credit card-UPI linkages, international remittances and penetration into smaller geographies are poised to drive the next wave of exponential growth. “Our competition is with cash. There is still a lot of it in circulation that we need to get rid of, not only in India, but globally,” says a beaming Ritesh Shukla, CEO of NPCI International Payments Ltd or NIPL.

UPI is actually stirring up small payments, with the average ticket size jumping from Rs 1,000 to Rs 1,600 ever since RBI doubled its maximum transaction limit to Rs 2 lakh daily. (Many banks, however, have set a lower daily limit to protect their customers from fraud.) “UPI has significantly altered consumer behaviour,” says Rishi Gupta, MD & CEO of Fino Payments Bank. This change is being driven by third-party global apps like Google Pay and PhonePe (see Cornering a Lion’s Share). The two have to bring down their market share from 33 per cent and 46 per cent, respectively, in terms of total volume of transactions, to 30 per cent each by January next, as mandated by NPCI guidelines. It is being done to avoid concentration of payments transaction in the hands of a few platforms. But there are lingering doubts about how this will be implemented.

Our competition is with cash. There is still a lot of it in circulation that we need to get rid of. And if we can displace it... whoever is relying on the existing way of doing business will be impacted.

Ritesh Shukla
NPCI International Payments Ltd

UPI is ready for its next growth phase. In March this year, UPI was introduced on feature phones, which is a huge market with about 400 million handsets in play. One just needs to call an IVR (interactive voice response) to link the bank account with UPI, and then make a payment by adding the recipient’s mobile number. Dewang Neralla, CEO of NTT Data Payment Services India, says that it will change the way payments are made in smaller geographies.

UPI is also gradually eating away at the market share of the Reserve Bank of India (RBI)-operated NEFT, which leads the retail electronic payments segment in India. A year ago, NPCI introduced UPI 2.0, where customers are allowed to enable recurring e-mandates for everything from electricity bill payments to insurance premiums. This new addition will slowly start to eat away at NEFT payments, which operates with a half-hour delay. NEFT, net banking and cards continue to be used by enterprises, high net-worth individuals (HNIs), etc. for large-value transactions, but even that is expected to change. “UPI is breaking all barriers because of its sheer convenience. It’s a matter of time,” predicts Narasimhan of Worldline India.

According to BCG estimates, almost half of all NEFT transactions are high-value, especially business to business, government to business, and government to government. “Large corporate accounts have not been enabled on UPI,” says Neralla of NTT Data Payments. Mobile phones are still not used for payments by businesses. “The UPI rails support it infrastructurally. The different models will certainly emerge soon,” says Rahul Chari, Co-founder and CTO of PhonePe. Today, UPI allows one-to-one transfers where an individual’s mobile number is tied to his or her savings account or current account. As authorisation models evolve on top of this for “many-to-one” use and for enterprise accounts, then newer use cases will emerge, with even ‘one-to-many’ authorisations. “I think emulating some of these models on top of UPI is still ahead of us,” believes Chari.

“UPI is not competing against other payment systems. While that is the way it gets portrayed, UPI is clearly becoming the most preferred way to replace cash-dominated transactions,” says Deepak Sharma, President and Chief Digital Officer of Kotak Mahindra Bank. Adds Chari: “What awaits us is the potential of UPI to go deeper into all types of payments, including enterprise payments between small businesses and professional service providers such as doctors and certified accountants.”

An analysis of UPI payments reveals that person-to-person (P2P) payments now account for nearly 80 per cent of total transaction value, whereas person-to-merchant (P2M) payments comprise the balance, partly thanks to the roaring cash-back culture that encouraged people to download payment apps. In the next phase of growth, the P2M story will play out. “The merchant always saw the POS device for cards as something that was eating away at his profits. The QR code system works in their favour,” says Ketan Patel, CEO of Mswipe Technologies.

According to BCG estimates, the big contribution to digital payments’ growth would come from merchant payments in the next five years, jumping from 20 per cent by value to about 65 per cent by 2026. UPI is fast replacing cash in the physical store as well. “QR codes are beautifully placed with the philosophy of simplicity and lower cost for both merchants as well as customers,” says Chari of PhonePe.

Unified Payments Interface has significantly altered the consumer’s payment behaviour. The usage will keep on growing because of newer use cases in credit cards‚ remittances and other payments.

Rishi Gupta
Fino Payments Bank

The biggest reasons for the faster adoption of UPI payments are the zero merchant discount rate (MDR) and cash backs offered by third-party players. So far, the funding from venture capitalists (VCs) and private equity (PE) players have supported the digital payment momentum. Currently, UPI and RuPay debit cards do not attract any MDR charges, as there is a marginal subsidy from the government to compensate the payments players for low value (up to Rs 2,000) P2M transactions of RuPay debit card and UPI. But now, the demand for a reasonable MDR for UPI is gaining ground. One suggestion is to charge only P2M transactions at 20-30 paisa per transaction based on the turnover of a merchant, or only the bigger merchants. For instance, for debit cards other than RuPay, merchants are currently charged a maximum of Rs 200 to Rs 1,000 per card transaction based on their annual turnover cut off of Rs 20 lakh.

In August, the RBI sought feedback from players on a likely charge on UPI payments, but the government was quick to suggest ‘cost recovery’ for players to be met through other means. The government currently provides subsidies for QR code adoption in smaller geographies, which many say is not sufficient. In the next phase, the cost of merchant acquisition is expected to go up dramatically as players expand into smaller geographies.

Currently, UPI stakeholders such as payments aggregators, payment gateway players and banks incur costs in terms of people, acquisition of merchants in remote areas, printing of QR codes, support services, IT systems, server and data centres, interchange fees, reconciliation, settlement, risk and fraud detection, customer complaint, refunds, and so on. “So much goes into it. It’s a system and to run that system, there is a cost,” says Pranay Jhaveri, Managing Director for India & South Asia at Euronet Worldwide. Banks get some subsidy, but end up paying much more for interchange fees, SMS costs, refunds and other technology set-up costs. Banks are witnessing huge transaction volumes during festivals, cricket matches, etc., and for such peak surges, investments are required in infrastructure.

UPI is fully secured because of the PIN-based requirement. You can only be defrauded if someone sends you a payment collection request.

Mandar Agashe
Founder and MD
Sarvatra Technologies

Currently, UPI is only linked via the customer’s savings or current account. The next immediate expansion of the indigenous technology is the link with credit cards, which means paying via credit cards by scanning the QR code. In June, the RBI permitted the linking of only government-backed RuPay credit cards to UPI. But this leg of the transaction requires some MDR because of the presence of a QR code acquirer, credit card issuer, and network. Currently, an MDR charge is recovered from the merchant. The card network (Visa/MasterCard/RuPay) fixes the MDR distribution amongst all the intermediaries in the chain: POS machine acquirer, card issuer, and card network.

Mdr rates currently range from 1.5 to 3.0 per cent for both RuPay and other credit cards. Meanwhile, NPCI and banks are in advanced stages of finalising the MDR for the UPI-RuPay credit card link, which will be the first experiment of its kind. Currently, RuPay credit cards enjoy a one-fifth market share, with global networks like Visa and Mastercard dominating the rest. The MDR for non-RuPay credit cards presented at POS is currently 2-3 per cent of the transaction value. But there is a view emerging that the high MDR on credit via UPI will continue as credit is fundamentally very different from a debit transaction. At best, there could be a few basis points reduction.

Clearly, the UPI-credit card linkages are going to create credit expansion. So far, the limited number of high-cost POS machines has been one of the main reasons for the limited growth of credit cards in the country. “There are also many millions of merchants today who don’t have a POS terminal, but have a QR code. The entire credit market will open up across India,” believes Mandar Agashe, Founder and MD of Sarvatra Technologies. The UPI-credit card linkage will introduce a new credit limit for the smaller ticket size. “You can issue a virtual card with lower limits. And if somebody has a much better credit profile, then you may like to offer a higher credit limit on a plastic card as well. All of these are new use cases that UPI will develop rather than cannibalising the existing segment,” believes Sharma of Kotak.

Currently‚ UPI stakeholders incur costs in terms of people and support services‚ etc. It’s a system and to run it‚ there is a cost.

Pranay Jhaveri
Managing Director-India & South Asia
Euronet Worldwide

People are credit-starved in India with credit-to-GDP at a paltry 52 per cent, whereas the same is 216 per cent for the US and 182 per cent for neighbouring China. In India, the entire credit card outstanding is just Rs 7 lakh crore by July 2022. “There will be a spurt of new credit offerings. We are very eager to play the role of being an ecosystem player that opens up this opportunity for partners,” says Chari. Experts say that if credit is made available at the point of purchase, a lot of the ‘buy now, pay later’ offerings will be significantly challenged.

Clearly, the major networks such as Visa and Mastercard are likely to link their credit cards to UPI at some point in the future. They might also look to resurrect the Bharat QR code, which they had developed in collaboration with NPCI but which never really took off. The adoption by some 5 million merchants of Bharat QR as against 172 million for UPI QR code shows its dismal acceptance. Under Bharat QR code, a cardholder is required to follow a complicated process of going to his bank’s Bharat QR code-enabled mobile banking app, link his debit or credit card, and then scan the QR code. That’s just too many hoops to jump for a customer to make a payment.

Most western countries, which rely solely on card payments, lack real-time payments. That is where NIPL is now placing large bets. Two years ago, NIPL was set up as a wholly owned subsidiary of NPCI to roll out India’s domestic card scheme (RuPay) and mobile payment solution (UPI) in global markets. NIPL is helping countries to build payment ecosystems, including P2P, P2M, and cross-border payments. “Why should one reinvent the wheel? We have done it successfully in India and we want to share it with the world,” says Shukla of NIPL. India’s neighbour Nepal is a prime example of NIPL building a modern digital infrastructure for another country.

In July last year, NPCI’s global subsidiary signed up with Bhutan’s central bank to enable the usage of the UPI-powered BHIM App. Bhutan will be the first nation to adopt UPI standards for its QR deployment. This August, NIPL also signed an MoU with the UK’s payments solutions provider PayXpert to make the UPI-based QR code solution available in the UK on all PayXpert’s Android POS devices for in-store payments.

UPI acceptance has also gone live with the UAE’s Mashreq Bank. In the P2M space, Indian travellers and tourists in the UAE can now make payments through BHIM UPI across 10,000 shops and merchant stores via NEOPAY, the payment subsidiary of Mashreq Bank. In November, NIPL also tied up with the UAE’s largest merchant acquirer—Network International—to help Indian travellers visiting the UAE by allowing them to make payments seamlessly through UPI-based mobile applications in retail merchant partners, such as jewellers, supermarkets, and duty-free shops.

Ramesh Narasimhan
Worldline India

By the end of this year, five Southeast Asian goliaths—Malaysia, Singapore, Indonesia, Thailand, and the Philippines—will sign a contract to combine their respective QR code payment systems. This will pave the way for merchant payments via QR codes throughout the region. “It is really ideal for us to build a pipe with them and start routing the transactions through their infrastructure, so we add value to them,” says Shukla.

The other big positive for UPI expansion is remittances. India is one of the top recipients of cross-border remittances, receiving more than $80 billion annually and sending around $20 billion abroad. The remittance market is dominated by banks, money transfer operators (MTOs), and foreign exchange dealers. There are 32 million Indians who live outside India, according to market studies. That number is comparable to the populations of Saudi Arabia, Malaysia and Australia combined. “Wherever we see a huge concentration of Indians, we are working with the payment players in the remittance space,” says Shukla. The current inward remittance infrastructure includes a ‘Rupee Drawing Arrangement’ where the banks in India tie up with global licensed institutions, which hold a vostro account on their behalf in the foreign currency. Similarly, there are also Money Transfer Service Schemes (MTSS) for remittances for foreign tourists travelling or residing in India. The main payment rails or pipes is something called SWIFT (Society for Worldwide Interbank Financial Telecommunications), a global network used to transfer money.

“NPCI is trying to make UPI the rails for transferring money. But adoption has been slow, mainly because of local regulations, and processes and policies around moving global money,” says Raj K., Founder and CEO of FairexPay, a cross-border fintech firm. But at some point, cost-effective real-time settlements globally will be the order of the day. That’s where UPI would be the framework for adoption. “We have identified payment players. We are working in different markets where the progress is in different stages. There are markets where we are discussing commercial and technical issues,” says Shukla.

For example, NIPL has made a deal with Western Union, a world leader in cross-border payments, so that money can be transferred into bank accounts in real time. NIPL has also done something strategic by connecting with Singapore’s PayNow, which is a popular payments ecosystem there. As a result, the two fast payments ecosystems will enable real-time money transfers between the two countries. “Once you’ve done it, then you can just create a template and go to other markets and start deploying it,” says Shukla. NIPL’s cross-border payments initiative is a work in progress, which has huge potential to not only make payment transfers easier and faster, but also reduce the high cost of remittances.

The most significant barrier to UPI adoption is fraud, or a gaffe in real-time payments. “Real-time payments are prone to social engineering fraud,” says PhonePe’s Chari. The PIN-based requirement makes UPI payments completely safe. “The only place you can be defrauded is if someone sends you a payment collection request,” says Agashe of Sarvatra Technologies. UPI allows bank customers to send money to others as well as receive money. “You never have to input your PIN to collect money,” Agashe explains. As UPI moves into smaller areas, Jhaveri of Euronet says that awareness is more important than ever.

The other big challenge is to reduce the amount of cash in the system, which is still very high (see chart Rolling in Cash). Chari of PhonePe suggests that looking at digital payments from the GDP perspective is not the right way. Experts explain that GDP is actually the sum total of multiple turns that money takes in an economy. “Digital payments aren’t in every transaction that constitute the GDP number,” says Chari. For instance, in the FMCG sector, there are manufacturers, regional distributors, local distributors, super wholesalers and retailers. “The last leg between the retailer and the consumer is getting digitised significantly. If you look at it from that perspective, you will see that the penetration has gone very high,” explains Chari.

But to actually have a genuine impact, one has to start looking at whether the entire supply chain is using digital payments. “Those are the opportunities either on UPI, or building new rails, or having penetration of NEFT in those segments. That’s when you start seeing a significantly higher dent in the cash economy,” says a fintech player.

Newer technologies like blockchain and the central bank digital currency (CBDC) also pose a challenge to UPI. Blockchain solutions for cross-border remittances are still a work in progress. In addition, CBDC is fast gaining adoption with 80-plus countries, including India. In fact, there are close to half a dozen countries already live with CBDC. “Physically, I don’t think you can really eliminate a real currency at any point, but at least it should be a mix of real and digital,” says Raj of FairexPay.

Be it UPI, blockchain or CBDC, the new technology frameworks are going to reduce transaction costs in a big way. “PayPal charges about 8-10 per cent for cross-border transactions, whereas banks levy 5-7 per cent. The money transfer companies demand around 2-4 per cent. In the near future, these charges will definitely average out to less than 1 per cent with new technologies,” says Raj.

The last word is not yet written on the future of payment transfer frameworks. For the time being, the traditional payment methods, from cards to net banking or, for that matter, cash, will also survive and grow, but probably not at the current pace. POS, which many predict will become obsolete with UPI adoption, is rapidly evolving into a software platform. “POS is becoming more than just a point of payment acceptance system. POS is now a point of credit, reward redemption, inventory, invoice management, etc. A lot of value-added services are being added to it. It is no more a hardware device, ” explains Sharma of Kotak Mahindra Bank. Narasimhan of Worldline says India is a large and diverse country. “There are all kinds of people who are comfortable with, or accustomed to, certain ways of making payments,” he says.

As the UPI juggernaut continues to roll, expect a lot of disruption, innovation, as well as challenges to this made-in-India payment system.


Story: Anand Adhikari
Producers: Arnav Das Sharma
Creative Producers: Raj Verma, Nilanjan Das
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UI Developers: Pankaj Negi