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India’s Unified Payments Interface: Breaking the Billion Barrier

Indias Unified Payments Interface

September brought about quite a stir in the Indian payments ecosystem, with three years passing since the launch of UPI (Unified Payments Interface), and the realization that UPI is closing in on a significant milestone: one billion transactions per month. In September 2019, UPI clocked 955 million transactions, amounting to 1.61 trillion rupees (INR), demonstrating the extent to which Indian consumers have exuberantly welcomed real-time payments.

The continued success of UPI has required a collaborative effort across the ecosystem, from the government to the central bank, from the largest public-sector banks to private institutions, emerging fintechs and, of course, consumers themselves. Every participant has played a crucial role in driving the adoption that is pushing towards the 1 billion milestone, as UPI technology delivers the convenience sought by consumers.

Fintech payment service providers including Google Pay, PhonePe and PayTM continue to lead from the front, accounting for 90 percent of the transaction volume. The increasing volume concentrated in just a handful of providers is leading to renewed focus from regulators, in order to ensure that UPI’s growth trajectory is not only maintained, but that the democratization of payments that it promises can be delivered upon.

Now the UPI ball is in the merchants’ court

While it can be difficult to clearly separate between peer-to-peer (P2P) and peer-to-merchant (P2M) transaction volumes on the UPI platform, P2M transactions are trailing… and the gap is significant. In part, this is because the initial focus for UPI was in P2P – building consumer awareness and encouraging new behaviors around digital payments.

However, to bridge this gap and move UPI “up stream,” regulators are now aggressively pushing merchant-friendly features and mandates. The major drivers for merchants to shift from their traditional modes of payments acceptance (primarily cash) to new modes such as UPI, QR codes, etc. are seamless infrastructure, cost efficiency and improved customer service.

NPCI (National Payments Corporation of India) is striving to make the UPI infrastructure frictionless for merchants through the introduction of new functionality. Digital overlay service providers, such as Mindgate Solutions, are helping to translate new UPI platform upgrades into tangible new features for users, while regulations around fees and other charges are targeted at boosting the number of merchant transactions by making payments acceptance more appealing for merchants.

As per the latest directive from the regulator, merchants will no longer pay any merchant discount rate (MDR) on UPI transactions that are below INR 100, when done through QR code scan and pay. Furthermore, the MDR (fee that the merchants pay to the bank that provides them the infrastructure for accepting payments) has been revised to 0.30 percent of the transaction amount with a maximum cap of INR 100 per transaction. Although the average ticket size (ATS) of UPI payments is slightly more than INR 1600 (close to USD $22), a large proportion of UPI transactions are low ticket size, and the MDR regulation will hugely benefit small merchant and mom and pop stores – kirana stores – that are a cornerstone of the Indian retail sector.

Lower merchant fees will encourage merchants to adopt digital modes of payment that are also cost-efficient in terms of acceptance infrastructure. In addition, the Indian government supports various incentive schemes for customers and merchants who pay – or collect – using digital payments (especially UPI). One such incentive coming in 2020 will be a tax benefit to merchants who use UPI for payments acceptance. Another significant driver of merchant transactions will be expanding acceptance infrastructure across all categories of merchants; large, small, online, offline… and getting them all onto the UPI bandwagon. Collectively, these measures are quickly making UPI a more merchant-friendly proposition.

Fintech disruption and capping the UPI market

The rapid growth of UPI transaction volumes means that all the fintech giants are leaving no stone unturned in making user experience flawless – something that will capture them a larger market share. However, NPCI, which is the umbrella organization for payments and the central infrastructure that manages the UPI platform, indicated in September that it may cap the UPI market share to a maximum of 33 percent per entity, effective April 2020. Although the transition takes place over a period of 3 years – 50 percent in the first year, 40 percent in the second year and 33 percent from the third year onwards; this is a massive change and it’s expected to impact the non-banking payment service providers who have run the show for the last twelve months.

While Google Pay and PhonePe are currently battling it out to occupy the top spot, they each clock in with more than 35 percent of the total UPI transaction volume, so each will now have to contend with more limited scale. Market dynamics are expected to change though when WhatsApp, with an active user base of more than 400 million in India, moves beyond pilot phase and launches complete UPI services. Is such an announcement ahead of the impending WhatsApp launch merely coincidental? It will be interesting to see how this is accepted by the ecosystem. While it brings some new opportunities for the banks, how this will be perceived by the end users is quite debatable.

Ultimately, consumer adoption of UPI is to a large extent spurred by the innovative mobile applications provided by these fintechs, which is where the user experience really takes place. One big question is whether capping the market share of the frontrunners that have driven the consumer shift toward digital payments will actually restrict customer usage, or whether it will give the banks an equal opportunity to engage end users.

While the fintechs revisit their business strategy, some see this decision as a way of preventing concentrated risk and enhancing the security of the UPI infrastructure. NPCI has also announced any non-banking PSP app processing more than 5 percent of the UPI transaction volume shall mandatorily move to a multi-bank model, with a minimum of three (and up to 10) sponsor banks. Consequently, many fintech apps are now partnering with a single or a couple of top banks, and moving to a multi-bank model will substantially level out the risk.

With these recent announcements, and monthly transaction volumes nearing the billion mark, it will be crucial for the large fintech players to continue to innovate, while keeping a tab on market share and ensuring seamless customer payments through alternative channels, if required.

India’s money in 2020… and beyond

UPI as a digital payments product is ever-evolving, and in the short space of time has continued to delight with new and enhanced functionalities, as well as mandates that benefit the whole ecosystem. UPI mandates, or circulars/enhancements as we know them, are steered by the banks, together with NPCI, RBI (central bank) and the government – and all the upgrades encapsulate market requirements.

With India’s Festival Season now in full swing, I believe that October is the month that UPI will blow by the billion monthly transactions milestone, and that will only add to the massive market anticipation around UPI. Although NPCI has officially announced few of the upcoming mandates, there are other developments to watch carefully for in 2020.

Recurring payments has been a significant ask from the banks as well as NPCI itself, but this is pending approval from the central bank, which cites security concerns. Although UPI 2.0 introduced one-time mandates, a recurring payments feature would enable consumers to make recurring payments, including monthly bill payments, EMI (loan repayments), credit card payments, insurance premiums and so on. The regulators need to be fully convinced of the robustness of the UPI platform infrastructure before they remove the 2-factor authentication (2FA) requirement for subsequent recurring payments. Whenever it does launch, recurring payments will bring umpteen use cases for banks and financial institutions.

The linkage of credit cards on the UPI platform is also a highly anticipated development in this space. Currently, a user must key in their debit card details to fetch the bank account details and complete initial registration on the UPI platform. At some point in 2020, NPCI is expected to allow consumers to link their credit cards to start making UPI payments. This will bring in additional transaction volume of considerable size from those customers who today use credit cards consistently for all their payments.

In India, less than 50 million credit cards account for more transactions – both in terms of volume and value – than over 800 million debit cards that are in circulation. In fact, the average ticket size of both these instruments varies significantly, too, with credit being much higher. Getting this consumer segment – credit card users who seek to benefit from the credit cycle, reward points, offers and cashbacks, EMI facilities, complimentary benefits, etc. – on-board UPI would massively boost transaction volumes. In the meantime, UPI does support high value transactions, up to a daily limit of INR 100,000 / USD $1,400 (INR 200,000 for certain use cases.

From zero to a billion in such a short timespan illustrates the progress UPI has made – and is expected to achieve in the next few years. UPI continues to be a trendsetter in the global payments landscape, and both mature and emerging markets will be watching carefully how the UPI story develops.

BCG’s report “Indian Banking in the Next 5 Years” predicts that UPI will capture a digital payments market share of 59 percent between 2022-2025. More importantly, UPI’s vision and strategy are closely aligned with Reserve Bank of India’s “Vision 2021released earlier this year that talks about emphasizing exceptional customer experience, enabling and empowering the ecosystem. NPCI, meanwhile, is leveraging technology successfully to bridge the gaps in consumer and merchant use cases, making UPI a successful case study in global payments.

The Five Step Guide to Capitalizing on the Evolution of Realtime Payments in India

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