UPI - Bharat's Digital Kohinoor

Hard cash has always been a mainstay in India. The lack of banking facilities in rural areas made it difficult for a large portion of country to access money in any other form. Paradoxically, in urban India, cash’s untraceability was the driver for its widespread circulation. While cash has its benefits, it also poses a serious problem. Mainly, it fosters corruption and keeps a large portion of the economy opaque, untraceable and free from tax. But, despite the obvious problems, society had resigned to this fact as it seemed impossible to change the system. Journeying away from cash required many things to change. Let’s start 15 years ago.

2008 to 2011 - Technology Disrupts Finance

As multiple governments were scratching their head on how to change this, technologies like the internet and mobile phones were starting to disrupt industries. The rise of e-mail, international roaming, SMS messaging changed the way we communicated forever. Websites like Facebook, YouTube and Google were increasing in popularity and changing the way we consumed content.

The finance industry was also getting transformed as technology enabled banks to spread to remote corners of India and provide financial services. Internet banking and payment services like NEFT and IMPS made it possible to send funds across accounts instantly. IMPS, though a fantastic product had limitations. The main problem was that it required you to know the bank account number of the receiver or an MMID both which were issued by the bank and also hard to remember.

All this led to slight increase in digital transactions but it was no where near enough. India still remained largely underbanked and internet penetration remained very low. A study done by the RBI in 2011 revealed that, on an average, an Indian citizen makes only six non-cash transactions in a year. The government realised that just this was not enough to reduce our reliance on cash.

2012 - Birth of an Idea

In 2012, the RBI released a vision statement that indicated development of a safe, efficient, accessible, inclusive, interoperable and authorised payment and settlement system. The National Payments Corporation of India (NPCI) was tasked with its development and the time frame given was 4 years. While the NPCI was busy trying to come up with a solution, other forces, some strategic, some fortunate, were laying the foundation for another tech and banking revolution in India.

2014 - Financial Inclusion

In 2014, the incumbent Central Government launched a drive for financial inclusion called the Jan Dhan Yojana and mandated that banks allow individuals to open accounts with zero balance. This was huge because in the past, banks required you to keep a minimum balance of 5000 rupees in your account. For a lot of people this was difficult to do and thus they were left out of the financial system. With the option of zero balance accounts, any individual was free to maintain a balance they were comfortable with. This spurred people from all walks of life to open bank accounts. As of January 2021, 416.5 million accounts were opened under this scheme!(The strategy the Government used to incentivise people requires its own article)

2016 - Jio Dhan Dhana Dhan

As this initiative was gathering steam, Indian oil conglomerate - Reliance, in 2016, launched the Jio network that brought down internet data prices by a tenth. They also launched a Jio Phone for no cost instantly democratising internet access in small and rural towns. Armed with a sizable war chest, Jio was able to acquire users rapidly and quickly spread to the remotest parts of India. Seeing the prices being offered by Jio, traditional players like Airtel and Vodafone were forced to lower their tariff to retain their customers. This meant that almost everyone in India could afford a basic data pack.

Jan Dhan Yogana and Jio resulted in a larger share of India being banked and greater internet penetration. These two were the catalysts that made what was brewing in NPCI, explosive. It set the stage for one of the most ambitious projects ever launched in the world.

The United Payments Interface, better known as UPI, was launched in 2016 as an additional layer on top of the already efficient IMPS system. To define it simply, UPI is an interface that facilitates the digital transfer of money between users safely and instantly. The reason it’s called an interface is because it provides a platform on which multiple parties like payment gateways, banks, mobile applications can connect securely to provide payment solutions.

The beauty of UPI is that it allows tech companies to build on top of it and provide end users with a smooth UI, something a lot of clunky government applications lack. In order to fully appreciate this technology, it’s essential to understand how this seemingly simple but infinitely complex process works. Let’s dig in.

How UPI Works

There are 4 major participants in this entire process -

1. Users (individuals, shops, companies etc.)

2. Payment service provide ( PhonePe, PayTM, Google Pay)

3. Banks (HDFC, ICICI etc.)

4. NPCI

To explain the transaction flow let’s consider a real life situation. Rahul, on a lazy Sunday afternoon, went to Naturals to get some mango ice-cream. In typical fashion, he forgot his wallet at home. What otherwise would’ve been a catastrophe, made no difference because Rahul paid using his phone through UPI! Rahul used PhonePe as his payment-service-provider (PSP) with HDFC as the registered bank. Naturals was using PayTM as their PSP with ICICI as the registered bank. The transaction went like this -

1 - the transaction was initiated by Rahul

2 - the UPI pin entered

3 - a pay message was sent to PhonePe

4 - the account details linked on Rahul’s PhonePe app were validated

5 - a message to pay was sent to the NPCI stack

6 - if Naturals had a UPI ID that was directly registered with NPCI and not with another payment service provider (PSP) like PayTM, it would translate their encoded account details

7 - since Naturals is registered with PayTM, NPCI sends a message to PayTM for Naturals’ account details (from the UPI ID, NPCI decodes which PSP has issued it)

8 - PayTM revalidates the existence of this account

9 - the account details linked to this ID are fetched and sent back to NPCI

10 - NPCI sends a request to Rahul’s bank, HDFC for payment

11 - based on the transaction amount and details, HDFC validates whether Rahul has an account and if there’s enough balance

12 - once validation is done, Rahul’s account is deducted by the requested amount

13 - a message is sent by HDFC to NPCI once the amount is successfully deducted

14 - on receiving this confirmation, NPCI sends a message to Naturals’ bank, ICICI to receive the money

15 - ICICI validates that Naturals has an account with them

16 - once the amount is reflected in Naturals’ account, ICICI sends a confirmation message to NPCI

17 - NPCI sends a payment received message to PayTM, in-turn seen by Naturals

18 - NPCI sends a payment successfully made message to PhonePe

19 - PhonePe relays the message on its mobile application and is seen by Rahul

This entire process is completed in under 30 seconds. Payments made are instantly reflected in the receiver’s account. Makes you wonder about the scale of technology working in the background which, at times, we take for granted. The in-built 2 factor authentication, first provided by your mobile’s security (face ID, finger-print, lock code) and second by the UPI pin, makes this mode of transaction extremely secure and negates the need for another OTP. The robust and secure underlying infrastructure coupled with the smooth user facing applications designed by tech companies, led to the large-scale adoption of UPI.

Rise of UPI

After a modest start in 2016, UPI has not looked back. At the start of 2017, the number of transactions made using UPI were 4.46 million. Last month, the number of transactions stood at 8,898.14 million , a 199410% increase. Not only has the number increased, the value transacted has seen similar growth. At the start of 2017, the value transacted was 16.96 billion rupees. In March 2023, the value was 14104 billion rupees. A staggering 82529.7% increase. The numbers are mind-boggling. If this product was launched by a start-up, the number of VCs lining up would’ve put the lines outside an Apple Store to shame.

UPI’s growth is being further fuelled by the innovative ways in which the payment solution is being used. A small example - there’s a custom in Indian weddings to give small amounts of cash to the band (dhol wala) that plays while the groom enters. Recently, while attending a friend’s function, I saw a dhol wala had the “pay with UPI” barcode sticker on his drum so he could receive money digitally! This one example speaks volumes about the kind of market penetration UPI has seen. Amongst different digital payment methods like NEFT, UPI, RTGS, IMPS etc., UPI has an 84% market share. A clear winner.

Seeing UPIs success, a lot of foreign countries have tried to replicate its model. India has used this opportunity to strengthen international relations and offered to export this technology and help interested countries develop their infrastructure on top of UPI. This will significantly shorten the time and cost a country would otherwise incur if they build their own infrastructure from scratch. To showcase the power of UPI, during the recently held G20 summit, eligible travellers were issued pre-paid payment instrument (PPI) wallets linked to UPI. This enabled them to pay local merchants through UPI and experience this revolutionary technology for themselves.

India has signed MOUs with 13 countries for the adoption of UPI with Singapore already going live on February 21st, 2023. People living in India and Singapore can now transfer money to each other via UPI using an application like Google Pay. Other countries like UAE, USA, the EU and many more are expected to follow suit making UPI a truly global payment solution!

Apart from the above use cases, NPCI has cleverly integrated UPI with other technologies like RuPay (another NPCI product), India’s answer to VISA and Mastercard. The exorbitant fees charged by both prevented smaller merchants from accepting credit and debit card payments. To counter this and promote digital payments, the Indian Government launched RuPay, a payment gateway at fraction the cost. To draw a comparison, for credit cards, Visa and Mastercard charge anywhere between 2-3% while RuPay charges a fixed rate of 90 paise. For debit cards, RuPay waived off the standard 0.9% and made it completely free. This led to widespread adoption and in 5-6 years the market shared of RuPay cards rose to almost 35%!

The integration of RuPay with UPI will allow users to link their credit card with their UPI application and process payments directly through UPI. This will make acceptance of payments using debit and credit cards more viable for merchants in-turn resulting in the growth of digital payments. (The impact and rise of RuPay deserves an article in itself. This para just shows the potential UPI has when coupled with RuPay)

The NPCI are exploring many such horizontal and vertical opportunities for UPI within the payments ecosystem and are planning to integrate UPI with many other functions like e-commerce, recurring payments and a lot more making it the go-to payment infrastructure for a variety of transactions. This will only mean more volume and value. Despite reaching such heights, it feels like UPIs journey has just started.

The Future

In the past I would’ve been worried for UPI. Like a typical government run initiative, the product would show initial promise and then die a death by thousand red-tape cuts (think BSNL, Air India, the list goes on). However, watching interviews of the current CEO of NPCI and seeing the progress NPCI initiatives have made give me hope. In a recent interview with Shraddha Sharma, the start-up world’s leading journalist, NPCI Managing Director, Dilip Asbe, highlighted the goals NPCI has for UPI. The energy, excitement and passion with which he spoke had shades of when a start-up founder finds product-market fit. That energy is infectious and it attracts talent. Talent that will take this technology to levels we can’t think of right now.

Some of the plans NPCI are already working on are -

1. Local payments using NRI and NRO accounts

NRIs that have such accounts cannot use UPI currently as only normal accounts can be linked. With this, any NRI can pay local bills digitally using UPI.

2. Recurring payments

Pay for your recurring subscriptions easily without having to use your VISA/Mastercard credit card. Apple App Store has already started this and others will soon follow.

3. Cross-border transactions with multiple countries

Peer to peer transfers of money across countries will be enabled through UPI. This is already live in Singapore with more countries expected to join.

4. UPI Lite

UPI Lite is a digital account designed to facilitate low value transactions. The max transaction size is INR 200 with a cumulative limit of INR 2000. This acts as a compressed version of UPI and helps the efficiency of the overall system as it frees UPI from micro-transactions.

This just scratches the surface of UPIs potential. I urge you to watch this YouTube video cause the energy I felt is something I can’t translate or capture in words. This makes me hopeful and all i can say is that, I feel UPI has the potential to be as transformative a technology as VISA, Mastercard, SWIFT and PayPal were to the payments industry. Obviously a lot depends on the execution, but the path taken so far has been reassuring and makes me believe in this possibility.

Conclusion

To conclude, UPI is one tiny yet impactful cog in the larger digital revolution happening across geographies. As the world shifts towards a digital future, the importance of underlying infrastructure supporting this technology keeps increasing. To draw a real-world analogy, without basic infrastructure like roads and electricity, humanity wouldn’t have been able to grow and scale like it did. One of the most important responsibilities of a government is to ensure that taxes collected are used towards building such infrastructure that allows their population to thrive.

With the incoming digital revolution, governments now have an additional responsibility to ensure that the right digital infrastructure is in place, whether it’s providing internet access to remote corners of a country or guardrails to allow the building of ethical AI, or in this case, a secure payment infrastructure to facilitate the digital economy. The importance of this in today’s world is as crucial as providing roads and electricity was 50 years ago. We are on the cusp of change and both governments and private companies have a huge role in shaping the world’s future. With all the doomsday predictions being seen with the rise of AI, UPI has proven that if there is constructive cooperation between the public and private sector, technology can help transform rather than destroy society.

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