ACI Blog

How UPI is Driving India’s Shift from Cash to Digital Payments

But 2016 brought about a major disruption in the Indian payments landscape. With the increasing dependency on cash, and slower migration to electronic payment channels, the Reserve Bank of India (RBI – the country’s primary regulator) wanted to strengthen existing payment and settlement systems while introducing simpler and more secure digital payments that could be easily adopted by the masses. RBI’s Vision 2018 stated that it would take further measures “to encourage greater use of electronic payments by all sections of society to achieve a ’Cashless society’.”

Accelerating electronic and becoming “digital”

With more than 460 million internet users, India is the second largest online market, ranked only behind China. However, despite this large base of internet users, still only 26 percent of the Indian population accessed the internet in 2015. The following year also brought about change with the Jio revolution, which rocked India’s telecom and data market with the launch of Reliance Jio’s 4G services. Jio made fast internet accessible and affordable to all, paving the way for the masses to embrace digital technologies and other smart form factors.

The digital payment revolution and the birth of UPI!

A crucial contributor to the Indian digital payments market was the arrival of India’s real-time payments platform, Unified Payments Interface (UPI). UPI was launched by the National Payments Corporation of India (NPCI), the country’s umbrella organization for payments and the central infrastructure that was created by the Reserve Bank of India (RBI) and Indian Banks Association (IBA). This collaborative effort was focused on making India a cashless economy and driving digital payment inclusion.

UPI is a mobile-based, real-time payment platform that allows users to instantly push (payment) or pull (collection) funds between two bank accounts. It allows users to pay directly from their bank account to any person or merchant without the hassle of typing card details or keying in a bank app or wallet password. Users can simply download any of the UPI apps available on Google Play store or Apple App store (currently there are 100+ UPI apps available) and log in using the mobile number registered with their respective bank. UPI supports both Peer-to-Peer (P2P) and Peer-to-Merchant (P2M) financial transactions, as well as various value-added non-financial transactions like real-time balance check and transaction history, to name a few. Three are three simple steps that consumers need to complete to use UPI:

  1. Downloading a UPI app
  2. Registering the device and linking a bank account
  3. Setting up the UPI PIN, which will be used to authenticate the transactions

UPI is a secured mode of payment that is convenient for users as it operates on a single click, two-factor authentication, which means – in laymen’s terms – that users must authorize the transaction only once by keying the UPI PIN, while their mobile number acts as the second factor of authentication and completes the two-factor authentication process.

What is helping UPI gain traction amongst consumers?

In the real-time payments market, the interoperability of the UPI platform and the simplicity of its design makes it stand out. UPI makes the consumer’s bank account portable, which means users can be a customer of Bank A, but they can link their Bank A account on the UPI app of Bank B, or with fintech apps like Google Pay or Amazon Pay. In the case of multiple bank accounts, users can link all their bank accounts on a single app. This capability makes the platform extremely convenient to operate for the end customer – a bit like a “super wallet” but using bank accounts directly, and not being contingent on a consumer having a debit or credit card.

UPI makes payment extremely simple and secure by using unique identifiers known as Virtual Payment Address (VPA). A VPA allows consumers to identify themselves with someone they want to pay, without providing card or account details, thus lowering fraud risk.

The ‘Super Wallet’ that’s good for business

UPI also makes a merchant’s life simpler, as they can now seamlessly accept payments and facilitate in-app payments as well. With UPI, merchants can use their mobile phones as a payments acceptance tool, which drastically brings down transaction costs, especially when compared to traditional payment modes like Point of Sale (POS) and QR code-based payments. In August 2018, NPCI upgraded UPI to version 2.0; while version 1.0 was launched with the view to creating a successful P2P platform, 2.0 is more merchant-centric, with features like the ability to pre-authorize a transaction with an option to pay later, which is mutually beneficial to both customers and merchants; the ability to link overdraft accounts on UPI, which will fuel more transactions in the ecosystem; and stronger verification, which further reduces fraud.

UPI 4-Party model – something new in the real-time payments market

UPI works on a 4-party model, where the parties are the Remitter Bank, Remitter PSP, Beneficiary Bank and Beneficiary PSP. Remitter and beneficiary banks are the accounts where the actual movement of funds happens while the remitter and beneficiary Payment Service Provider (PSP) are the front end (which in this case is a mobile application) used by the remitter or beneficiary to send or receive the funds. In the UPI ecosystem, although the fund movements happen only between banks, the front end or platform can be provided either by a bank or a non-bank. Other important participants in the ecosystem are NPCI (which, as noted previously, developed and runs the UPI platform), merchants and the end customers.

Unprecedented transaction growth

Launched in August 2016 with approximately 20 banks and processing 93,000 transactions (equating to INR 30 million) in the first month, UPI transactions crossed 800m transactions amounting to INR 1.33 trillion in March 2019 with the support of 139+ banks that are now live on the platform. UPI has an active user base of around 70m users transacting at a frequency of 11-12 times per month.

Fintech’s contribution to the phenomenal growth

In 2017, NPCI opened its doors to the tech giants like Google and WhatsApp to participate in and contribute to the UPI ecosystem, as the regulators and the government realized the need for a robust real-time payments platform in India. This fintech contribution has further bolstered and accelerated UPI adoption among consumers and merchants as well as increased transaction volumes. In March 2019, Google Pay, PhonePe and Paytm each processed 220-225mn transactions out of the nearly 800 million, marking about 80-85 percent of the total UPI transactions. This underlines the importance that the big tech companies are playing in driving the UPI revolution.

Just taking Google Pay as an example, today it is accepted at more than 2,000 online stores and has recently ventured into the offline merchant space in partnership with Pinelabs, a leading POS provider.. Google Pay will now be accepted at more than 330,000 POS terminals managed by Pinelabs across 3,000 Indian cities. Such is the potential all these fintechs have seen in the UPI platform and why they are investing heavily to drive usage. Indian payments are hugely driven by customer rewards, and these players are aggressively promoting cashbacks and rewards to increase customer engagement and stickiness.

What’s next?

Although the past six months have seen merchant transactions pick up, there is still a long way to go in the offline merchant space. Banks are bullish about this opportunity and believe they will achieve success very soon. Apart from physical and eCommerce merchants, UPI is expected to offer additional opportunities in credit, insurance, wealth management and loyalty, among other industries.

Be it person-to-person or person-to-merchant, UPI arrived with the objective of making digital payments simple and accessible to all and it has, to a great extent, been successful in driving India toward a ‘less-cash’ economy. What will be interesting to see is how various participants in the ecosystem contribute and work collaboratively toward making this a payment product that the rest of the globe emulates. One thing is for sure – we have not heard the last of real-time and digital payments capabilities, like UPI. The world of payments is evolving, real-time schemes continue to be rolled out globally and digital transformation has become the norm. And where these two global trends intersect – in India – it makes the world of payments a very exciting place to be – let’s see what the next few years bring in India and beyond!

Discover how to get ahead of the competitive curve in India with our eBook: The Five-Step Guide to Capitalizing on the Evolution of Real-Time Payments in India or find out more about ACI’s strategic investment in India’s Mindgate Solutions:

Principal Product Manager, Real-Time & Digital Payments

Somya is an experienced Product Manager whose expertise in the digital payments domain includes immediate payments, cards, point of sale (POS), mobile wallets, mobile banking and QR code-based payment solutions. As Principal Product Manager at ACI Worldwide, Somya leads the solution strategy and go-to-market for various Real-Time and Digital Payment initiatives within ACI.