UPI: Paradigm Shifting Made In India Innovation Now Ready For Global Stage
Unified Payment Interface is a digital innovation with an instant payment option developed indigenously by the National Payments Corporation of India (NPCI) and launched in 2016 in India.
NPCI is a not-for-profit initiative of the Reserve Bank of India (RBI) in collaboration with the Indian Banks Associations (IBA) under the provisions of the Payment and Settlement Systems Act, 2007. This new venture has created a robust as well as scalable infrastructure and platform for electronic payment and settlement systems with tremendous possibilities for innovation. It also allows Fintech firms to integrate with it and provide value-added services.
UPI has provided Indians with a platform for the real-time transfer of funds as well as an easy and effective tool for digitisation of the payment services. It operates on top of the Immediate Payment Services (IMPS), which was created by the NPCI for instant fund transfers. The system allows the user to operate multiple bank accounts across any participating bank for transferring funds and making payments to merchants through a single mobile application. The interface seamlessly allows a flow of funds from various participants including the payer/payee Payment Service Provider (PSP), remitter/beneficiary bank, NPCI, the user (bank account holder) and merchants.
UPI works use a technological process known as Open API (application programming interface). The starting point of the process is the creation of a UPI 'handle' by a bank account holder/ user that is also known as a Virtual Payment Address (VPA). VPA can be created in a matter of minutes and eliminates the risk of mentioning account/card, IFSC, and other details in every transaction.
The only pre-requisite for creating a UPI handle is that one’s bank account has to be linked to a mobile number. The next stage is that the Payment Service Provider (PSP) takes care of the transaction between the sender and receiver of funds. The transaction flows from the sender’s VPA to the receiver’s VPA linked with the underlying bank account. Finally, the UPI software coordinates the fund movement from a user’s/payer’s VPA to a target/payee’s VPA and completes the transaction. This transaction is different from paying with a debit card or credit card as it does not involve a Merchant Discount Rate (MDR). The MDR is a fee that the recipient bank collects from the merchant.
The popularity of UPI is evident, as it is accepted by tiny roadside shops to large brands as well as by small retailers to wholesale merchants.
The numbers speak for themselves. In the last 4 years from October 2018 to September 2022, the number of banks live on UPI has increased from 128 to 358. And the volume of the transaction has risen from 482 million to 6,781 million and transactions from Rs 74,978 crore to Rs 11,16,438 crore. This is significant proof of the success and growth of the UPI story.
The main reason for this penetration is that UPI accepts transactions as small as a rupee. The incentive for merchants is on account of the absence of MDR to be paid to the banks vis-à-vis card transactions and end-to-end transact ability on smartphones, wherein only a single device is required to complete a transaction, thereby making the process simplistic.
The ecosystem in which UPI thrives is also key to its success - such as the presence of high-speed internet in many parts of the country, technologies that power a smartphone, cloud computing and modern software engineering technologies that fulfil a transaction in a few seconds. The security of a UPI transaction is tied to the user’s authentication with a mobile phone – there is a mobile personal identification number (MPIN) for the UPI application and there is one more layer of security when the bank’s online transaction PIN is to be keyed in as part of every UPI transaction. If you block a mobile number due to theft, for example, then UPI transactions on that mobile number will also be halted.
The NPCI has come up with multiple new innovations over the past few years: recurring payments for monthly bills, International payments, linking UPI to credit cards, 123pay, which allows people without smartphones but with only ordinary mobile phones to use UPI using missed calls, allowing one- time payment by letting a merchant generates a QR (quick response) code that is valid for just that specific transaction and many more features. The dynamic QR code is a great boost to security and trust because there is no risk of someone tampering with a static QR code. The merchant generates a QR code specific to that transaction amount and the customer pays through UPI by scanning the QR code.
The evidence of the popularity of UPI can also be seen with its usage being spread to our neighbouring countries like Nepal and Bhutan. NPCI has partnered with entities in the USA, Japan, Singapore and Dubai to broaden base transactions abroad.
UPI is unique as it -
* allows real-time transfer of money any time/ any day of the month and year by using a single mobile application for accessing different bank accounts
* supported by the security feature of single-click 2-Factor Authentication – aligned with the regulatory guidelines as well as virtual address allowing incremental security as the customer is not required to share account details.
* payment to merchants with a single account or through Apps and thereby not relying on cash arrangement/ ATM
* has the facility to raise grievances from the mobile App Directly
The UPI is a phenomenal Indian technological success story. The interface in a short period has facilitated Indians to move from a cash-based economy to a digital economy. It has been interesting to see that mobile has taken the place of a wallet/chequebook and is slowly taking over the use of cards in transactions. The pandemic has taught us that the future is digital and the contribution of UPI to the cause is phenomenal.
The author is a practising chartered accountant and an independent director on many large public companies whose views and ideas have been instrumental in framing policy
