Unified Payments Interface (UPI) is the new boy in the payments market and has the makings of a blockbuster even before its launch. The biggest draw for UPI is its power to make payments seamless and instantaneous by requiring the payee to only remember a virtual payment address (VPA), much like sending an email. For a very long time, all of us—bankers, regulators and political establishment—have lamented the fact that India is a cash-heavy economy. We tried to change that, but haven’t managed to make a lot of headway. Limited success in the past can be attributed to factors such as low penetration of bank accounts to concerns over safety and security of electronic payments.
The costs of running a cash-based economy
Retail payments in India are dominated by cash. Only 6-7% of transactions here are conducted electronically and the rest are in cash or cheques. It is a misconceived notion that cash is free.
As per data published by the Reserve Bank of India (RBI) in March 2016, cumulatively, Indians made more than 730 million withdrawals from 200,000 ATMs. Even if we take just 5 minutes per withdrawal on an average, we are wasting more than 60 million man-hours a month. The data also reveals that as of 8 July 2016 , the currency with public stands at 16.8 trillion, more than 95% of the total currency in circulation. This implies that almost the entire amount is in daily circulation, which is reflected in the cost, 3,760 crore, just to print the paper notes. Furthermore, banks have added close to 18,000 ATMs in financial year (FY) 2015-16. The cost of maintaining these ATMs along with the capital expenditure (capex) for new ATMs is a whopping 15,800 crore.
On top of these, banks have a network of over 4,132 currency chests and incur costs on transporting cash along with the opportunity cost of idle cash. High cash usage also gives rise to the black money menace. Even by broad estimates, the direct cost of running a cash-based economy is close to 0.25% of India’s gross domestic product (GDP). Thus, there is a massive direct benefit of moving towards cashless transactions in India. But it is the indirect benefits that perhaps carry a greater significance.
What is UPI?
UPI is being launched by National Payments Corp. of India (NPCI) to further RBI’s vision of migrating towards a “less-cash" and more digital society. A set of standard application programming interfaces (APIs) provide an interoperable system for seamless transfers residing on top of the immediate payment service (IMPS) platform. The UPI ecosystem functions with three key players:
*Payment service providers (PSPs) to provide the interface to the payer and the payee. Unlike wallets, the payer and the payee can use two different PSPs.
*Banks to provide the underlying accounts. In some cases, the bank and the PSP may be the same.
*NPCI to act as the central switch by ensuring VPA resolution, effecting credit and debit transactions through IMPS.
How does it work?
UPI, built on IMPS, allows a payment directly and immediately from your bank account. There is no need to pre-load your money in your wallets. It allows payments to different merchants without the hassle of typing one’s card details or net-banking password. Money transfers with this interface are secured with the two-factor authentications as mandated by RBI: your mobile phone handset and the mobile PIN as the second.
Is UPI better than cards?
UPI works on the indigenous idea of VPA, which is something like ‘rajiv@axisbank’. You only give the merchant your VPA who can initiate a payment request against this VPA. They never even get to see the bank account number. The UPI can also be used for shopping online. Instead of entering your debit card details, you’d just enter your UPI ID and get an alert to verify the transaction.
Why a digital solution like UPI may succeed
Two very important developments have the potential to herald a new age of digital payments: the rapidly-growing smartphone penetration and the proliferation of bank accounts.
India has over a billion mobile connections, with around 240 million smartphone users and is expected to grow to 520 million by 2020 (BCG estimates). The National Optical Fiber Network initiative will connect 250,000 gram panchayats across rural India and increase adoption of data services. The Pradhan Mantri Jan Dhan Yojana, through 226 million accounts and 183 million cards (as on 27 July 2016), has provided the infrastructure for universal access to banking. The issuing infrastructure is largely in place and the launch of UPI will provide a significant fillip in the proliferation of low-cost acquisition infrastructure by allowing smartphones to substitute costlier point of sale (PoS) devices.
Banks such as Axis Bank, which have almost half of its branches in semi-urban and rural areas, are witnessing more than 50% of transactions through digital channels and are growing at over 30% every year. This shows that the customer is ready to go digital provided banks offer user-centric solutions.
UPI will usher in low cost, high-volume payments and create a new ecosystem where customers and merchants will come together for faster and simpler electronic payments. It is likely to benefit overall payments ecosystem, as the payments service can be provided by banks to the merchant with an entry level smartphone and there is no need to install a PoS machine. Thus, it is likely to reduce the overall merchant acquisition cost for the banks.
The most important aspect of UPI is its open architecture. The user interface is fully flexible and banks are free to create most intuitive interface. The innovation will also bring all the key stakeholders on a common platform, creating a plethora of services that are unheard of in today’s global payment offerings.
The success of UPI is dependent on the adoption of the platform by all banks. Further, the user needs to have a smartphone to make a transfer and hence the potential user base will be restricted to around 240 million people currently. On the acquiring front, there needs to be an aggressive push from the PSPs to maximise newer merchants to popularise UPI as a payment option. Having said that, in the future, with the way payments industry is shaping up, we are seeing a burst of new technologies in the form of contactless payments, host card emulation technology, and tokenisation that can make payments simple for consumers without compromising security and could compete with UPI.
India continues to have low credit card penetration and low debit card activation leading to a poor reach of electronic payments—still in single digits. With debit cards mostly used at ATMs to withdraw cash, it is clear that they are being used more like a substitute to cash than as a true payment instrument. In this context, there is a strong case for UPI: it could be that master stroke that turns the tide in favour of electronic payments in India.
Rajiv Anand is executive director at Axis Bank Ltd.