The magic of UPI

India’s indigenous instant real-time mobile-based payment system is less than 4 years old. Yet, it already processes nearly 800 million transactions per month. During the time of lockdown UPI is transforming the way people pay. India is the top remittance recipient country in the world, and UPI can have long term impacts on the way Indians receive remittances.

Origins

In 2008 the Reserve Bank of India (RBI) along with the Indian Banks’ Association (IBA) founded the National Payments Corporation of India (NPCI). It was setup as a not-for-profit organization owned by a consortium of the biggest Indian banks. The consortium consists of both nationalized and private banks. The NPCI board has nominees from each of the banks, as well as the RBI. The NPCI developed the Unified Payments Interface (UPI) as a means of transferring funds between banks using mobile devices. UPI was first launched in 2016.

Features

Prior to UPI many of the participating banks promoted their own apps. After 2016 all of these apps were made compatible with UPI. Users can map any of the UPI apps to their bank accounts and mobile phone numbers with a simple KYC verification. Multiple apps can be mapped to the same account. UPI apps can also combine multiple bank accounts into a unified payment solution. After verification a user never has to type the account details into the UPI app again. UPI allows sending and requesting peer-to-peer money transfers by simply using phone numbers. In addition UPI supports transfers to non-UPI users using their bank account information. UPI apps can scan QR codes to make payments at merchant outlets. They can be used for online shopping, as well as to pay utility bills. In some Indian states utility companies charge a premium on all modes of payment except UPI. Almost 150 banks in India now support UPI transactions. This includes several banks which don’t offer their own apps, and rely on third party software to facilitate UPI payments.

UPI and Aadhaar

Aadhaar is India’s identity verification system. It is also the world’s largest. Aadhaar incorporates demographic data such as address proofs along with biometric data including retinal and fingerprint scans. Upon verification each applicant is given a unique 12-digit alpha-numeric Aadhaar number. The Supreme Court of India ruled that Aadhaar is voluntary, not mandatory. Yet, every bank in India mandates account holders to link their bank accounts and Aadhaar numbers. Moreover, telecom service providers and ISPs mandate customers to provide Aadhaar numbers before they can use internet or mobile phone connections. Thus UPI transactions can be tracked with the most sophisticated and comprehensive identity verification system in the world.

Popularity

UPI is 24*7, real-time and mobile-only. It has in-built security via one time password (OTP) verification. A user making a UPI payment does not need to share any personal info with the recipient. The sender gets instant confirmation of the bank debit. There is no additional fee for using UPI. It is widely accepted at both brick and mortar merchants and online retailers. UPI works everywhere in India with mobile connectivity, which is a significantly wider area than the span of conventional banking services. UPI is ideal for cash-on-delivery kind of situations, which are immensely popular in India. Facebook and Google are among the many big brands that already have a major presence on the UPI payments landscape.

Because of the exceptional convenience of UPI its use has exploded. In early 2019 UPI transactions exceeded the equivalent of $1.3 trillion monthly. The average value of a transaction is about $22. The use of ATMs has significantly reduced since the launch of UPI. During the lockdown following the coronavirus outbreak the RBI, India’s Prime Minister, banks, utility companies, and merchants have all been heavily promoting digital payments. NPCI has gone to great lengths to ensure that the UPI infrastructure stays online despite the reduced physical presence of their employees. There is an ongoing drive to encourage employers to use UPI to pay staff.

UPI and remittances

Millions of nonresident Indians (NRIs) send money online to support their families back in India. It is now possible for NRIs to send remittances via UPI. For this to happen, the money transfer operator (MTO) must support UPI payments. The MTOs customers can then send remittances to the UPI ID (mobile number) of the recipient, instead of typing-in all of their bank info. UPI-powered remittances can offer many advantages including more convenience and speed. The possibility of using UPI internationally also has other implications. For example Indians will be able to pay overseas merchants via UPI while traveling abroad. NPCI is already seeking collaborations to make this possible in the UAE, Singapore, and elsewhere. Meanwhile the use and popularity of UPI continue to grow, as do the possibilities.