Baba’s Explainer – India’s UPI Push

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Syllabus

GS-3: Indian Economy and issues relating to planning, mobilization, of

resources, growth, development and employment.
GS-3: Science & Technology

Context: On January 10, the National Payments Corporation of India (NPCI) paved the
way for international (phone) numbers to be able to transact using UPI.

A day later, the Union Cabinet chaired by Prime Minister Narendra Modi approved
an incentive scheme for promotion of RuPay debit Cards and low-value BHIM-UPI
transactions (person-to-merchant) in FY 2022-23. The scheme has an outlay of Rs
2,600 crore.
These measures could prove significant for the UPI-based payment ecosystem
which has largely witnessed a sequential rise in the previous calendar year.

What is UPI?
Unified Payments Interface (UPI) is a common platform through which a person
can transfer money from his bank account to any other bank account in the country
instantly using nothing but his/her UPI ID.
It was launched in 2016 as Mobile First digital payments platform
It enables immediate money transfer through mobile device round the clock 24*7
and 365 days based on the Immediate Payment Service (IMPS) platform so as to
make cashless payments faster, easier and smoother.
UPI is completely interoperable and as such, it is unique in the world, where you
have an interoperable system on the ‘send’ and ‘receive’ side
It also caters to the “Peer to Peer” collect request which can be scheduled and
paid as per requirement and convenience.

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 Developed by: National Payments Corporation of India (NPCI) under the
guidance from RBI.
NPCI, an umbrella organisation for operating retail payments and settlement
systems in India, is an initiative of Reserve Bank of India (RBI) and Indian
Banks’ Association (IBA) under the provisions of the Payment and Settlement
Systems Act, 2007.
It is a “Not for Profit” Company under the provisions of Section 25 of
Companies Act 1956 (now Section 8 of Companies Act 2013), with an
intention to provide infrastructure to the entire Banking system in India for
physical as well as electronic payment and settlement systems.
According to the Reserve Bank of India’s Payment Vision 2025, UPI is expected to
register an average annualised growth of 50 per cent

How is it unique?
Immediate money transfer through mobile device round the clock 24*7 and 365
days.
Single mobile application for accessing different bank accounts.
Single Click 2 Factor Authentication – Aligned with the Regulatory guidelines, yet
provides for a very strong feature of seamless single click payment.
Virtual address of the customer for Pull & Push provides for incremental security
with the customer not required to enter the details such as Card no, Account
number; IFSC etc.
QR Code
Best answer to Cash on Delivery hassle, running to an ATM or rendering exact
amount.
Utility Bill Payments, Over the Counter Payments, QR Code (Scan and Pay) based
payments.
Donations, Collections, Disbursements Scalable.
Raising Complaint from Mobile App directly.

The popularity of UPI is evident — from tiny roadside shops to large brands, many
merchants accept UPI-based payments. The primary reasons for this penetration are:

UPI accepts transactions as small as one rupee and for merchants, the absence of
Merchant Discount Rate that they have to pay to their banks that acts as a
significant incentive to accept UPI payments.
The presence of high-speed internet in many parts of the country, technologies that
power a smartphone, cloud computing and modern software engineering
technologies that fulfil a transaction in a few seconds.

What are the benefits of UPI to the Ecosystem participants?

For Banks

Single click Two Factor authentication

Universal Application for transaction
Leveraging existing infrastructure

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 Safer, Secured and Innovative
Payment basis Single/ Unique Identifier
Enable seamless merchant transactions

For Merchants

Seamless fund collection from customers – single identifiers

No risk of storing customer’s virtual address like in Cards
Tap customers not having credit/debit cards
Suitable for e-Com & m-Com transaction
Resolves the Cash On Delivery collection problem

For Customers

Round the clock availability

Single Application for accessing different bank accounts
Use of Virtual ID is more secure, no credential sharing
Single click authentication
Raise Complaint from Mobile App directly

How is UPI placed in our overall payment ecosystem?

As of January 17, 3,192.70 million transactions approximately worth Rs 5.52 lakh
crore have been facilitated using UPI in the ongoing month, as per NPCI data.
As per the DigiDhan dashboard maintained by the Ministry of Electronics and
Information Technology (MeitY), BHIM-UPI accounted for 52% of all digital
payments in FY 2021-22. At present, it stands at 61.38%.
The Bharat Interface for Money (BHIM) is a payment app that lets the user
make digital transactions using the Unified Payments Interface (UPI).

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What is the significance of UPI?
Convenience to All stakeholders: It created interoperability between all sources
and recipients of funds (consumers, businesses, fintechs, wallets, 140 member
banks). It allows for instant settlement in fiat money – Convenience to consumers
and merchants.
Promotes Formalisation and Digital Banking: UPI has now become the most
dominant way to pay in the offline and online place especially for retail payments,
and has thus helped in driving the digital banking.
Move towards less-cash Economy: UPI manages to materially reduce the need
for the public to deal in cash. If the demand for paper currency diminishes, banks
would save on the logistics costs involved in safely storing and transporting paper
currency and regularly refilling their ATMs.
Increasing tax revenue: With digitalization, the market’s black money can be
diminished, increasing compliance and increasing tax revenue.
Strengthen Banking Health: UPI’s use prompts bank account holders to hold
larger balances in their savings accounts, providing banks with a low-cost source of
funds.
Blunted data monopolies – Big tech payment firms have strong autonomy but
weak fiduciary responsibilities over customer data. UPI which is based on open
framework thus enables any new startup to easily launch their payment solution.
Soft Power: It enables India to emerge as frontrunner in fintech & payment
solutions across world. In 2020, Google requested the U.S. Federal Reserve to
develop a solution similar to India’s UPI citing the thoughtful planning, design and
implementation behind it.

What about international on-boarding?

In a nutshell, non-resident accounts such as non-resident external accounts (NRE)
and non-resident ordinary accounts (NRO), having international numbers, will now
be allowed into the UPI payment system.
NPCI had allowed UPI transactions to and from NRO/NRE accounts linked to
Indian numbers back in October 2018.
NRE accounts are those used by non-residents to transfer earnings from foreign
soil to India while NRO accounts are used to manage income earned in India by
non-residents.
At present, users from ten countries will be able to avail the facility— Singapore,
Australia, Canada, Hong Kong, Oman, Qatar, the United States of America, Saudi
Arabia, United Arab Emirates, United Kingdom and Hong Kong. More inclusions are
likely in the future.
All members of the interface, such as banks and payments platforms, have till April
30 to comply with the guidelines.
The development would allow NRIs to use the payment method for making utility bill
payments for their families (or themselves) in India, make purchases from e-
commerce or online platforms and make payments to physical merchants who
accept UPI QR based payments when they travel to India.

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 Currently, all the internal systems as well as ecosystem players such as banks,
NPCI, etc only understand India-based mobile numbers for UPI transactions. With
this enablement, a significant number of systems will need to start understanding
the same. This might also require changes in integration with SMS service
providers and international telecom networks.

What incentives are being offered?

Under the scheme, acquiring banks will be given financial incentives for
promoting point-of-sale and e-commerce transactions using RuPay debit Cards and
low-value BHIM-UPI transactions (person-to-merchant) for the ongoing financial
year.
Acquiring banks are those which install and manage apoint-of-sale terminal
(or the hardware system required to process payments) at retail outlets. The
issuing bank is responsible for issuing the card to the customer.
This scheme has been formulated in compliance with Finance Minister’s FY 2022-
23 budgetary endeavour to continue financial support for digital payments, focusing
on promoting the use of payment platforms that are economical and user-friendly.
The incentive scheme would reduce cash-carrying and storage risk. It would also
eliminate the costs associated with small denomination notes and coins, among
other things.

What is the discussion on Merchant Discount Rate (MDR)?

Merchant Discount Rate (MDR or Merchant Service Fee) is the charge recovered
by the acquirer from the final recipient of the payment, that is, the merchant. It is
collected by the acquirer to compensate the varied service providers and
intermediaries in the payment system.
Presently, there is no MDR levied for RuPay-based debit card and UPI transactions.
Stakeholders are hence concerned over cost recovery for the services they provide.
In August 2022, the Finance Ministry tweeted that it was not planning to levy any
charges for UPI services, adding, “The concerns of the service providers for cost
recovery have to be met through other means.”
The Reserve Bank of India (RBI) expressed concerns about the potential adverse
impact of the zero MDR regime on the growth of the digital payments’ ecosystem.
The National Payments Corporation of India (NPCI)requested the incentivisation of
BHIM-UPI and RuPay debit card transactions to create “cost-effective value
proposition for ecosystem stakeholders, increase merchant acceptance footprints
and faster migration from cash payments to digital payments.”
Ideally innovation needs to be sustained. There could be a staggered approach to
pricing (slab wise/ depending on transaction size) and it could be significantly lower
than MDR.

Main Practice Question: Do you think international on-boarding for UPI is going to
create more challenges than opportunities?

Note: Write answer his question in the comment section.

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