How far UPI can reach in India: After 1 billion transactions, this is next

India boasts around 570 million internet users, ranked only behind China, but this is growing at a rate of 13% annually.

Since the first real-time payment transaction was initiated at an ATM in 1977, technology has now made 24*7*365 banking and transacting a reality on a global scale. Now, in India, the real innovation that has dramatically changed the payment landscape is the introduction of UPI (Unified Payments Interface). India is betting big on UPI – and the enthusiasm is justified now that we see how the ‘pipes’ are fitting together. It’s the interoperability – bank to bank, social media to social media – that makes UPI the most promising real-time payments system in the world, and one that other countries are watching closely.

UPI’s popularity has grown exponentially; transactions via UPI could surpass cards within a couple of years based on current growth estimates. From 21 banks in 2016 to more than 140 currently, UPI amassed 1.22 billion transactions in November 2019. Transaction volumes have risen from Rs 3.1 crore in August 2016 to Rs 1.89 trillion in October 2019. So, what factors have contributed to this runaway success, but more importantly how will India’s payments ecosystem need to adapt for UPI to deliver on its promise?

For starters, the explosion in India’s smartphone and internet penetration – India boasts around 570 million internet users, ranked only behind China, but this is growing at a rate of 13 percent annually. Rapidly increasing internet and smartphone penetration has been a huge fillip to India’s digital payments landscape, reflected in recent rapid growth.

While the initial growth phase has been impressive, National Payments Corporation of India (NPCI), which is the umbrella organization for payments and the central infrastructure brought into existence by the Reserve Bank of India (RBI) and Indian Banks Association (IBA), has forecast that by 2023 the annual number of UPI transactions could reach 60 billion. That’s nearly a twenty-fold increase in the number of transactions today.

UPI evolution and the next phase of growth

UPI’s ‘growth spurt’ has really been driven by ease of use, owing to a combination of consumer-facing fintechs and an active push by the Indian government. The real catalysts for peer-to-peer (P2P) UPI payments growth have been Google, PhonePe, Paytm and Amazon Pay, with WhatsApp currently in beta stage.

However, the peer-to-merchant (P2M) channel is now gaining momentum, as SMEs start to understand the benefits of digital payment acceptance. With the launch of UPI 2.0 last year, the platform is attracting a healthy share of merchants into its fold and helping with the digitisation of the entire payments ecosystem by enabling low-value, high-frequency transactions.

In fact, if the Reserve Bank of India (RBI) does introduce recurring payment functionality, as it has indicated, this will be a gamechanger for P2M UPI payments. With consumers able to use UPI for regular remittances like loan repayments, insurance premium payments, and bill settlements, we’ll see an exponential rise in transaction volumes, as well as increased utility.

However, the recent surprise proposal by the Government to scrap Merchant Discount Rate (MDR is a fee that the merchants pay to the bank that provides them the infrastructure for accepting payments) has left the industry divided. While the aim is to deepen digital payments and encourage merchant onboarding, the burden of the MDR waiver will be borne by banking partners (Merchant Acquirers / Acquiring Banks) of digital payment companies, leaving the banks less incentivised to promote digital payment services.

UPI could rapidly become a preferred payment option for merchants, with its relatively cheap infrastructure requirements, government-mandated fee incentives, and widespread consumer adoption, but a sustainable boom in digital payments requires a focus on the entire value chain; from banks to digital payments service providers, merchants, and most importantly the consumers. All must benefit in equal measure.

Success at scale

Such rapid growth and policy changes in India’s payments landscape creates a huge opportunity for fintechs, but the pace of growth presents a very specific challenge: scalability. Fintechs that deliver digital overlay services for UPI payments needs to operate platforms that are not only agile and responsive to change but can ‘scale up’ as transaction volumes grow. These digital overlays are ancillary digital services for consumers, merchants, banks and corporates that add value to the standard real-time payments, for example, mobile payment applications and merchant portals. This is one of the reasons that global payments giants with expertise in managing high volumes need to partner closely with fintechs.

Increasing UPI transaction volumes highlight another key non-functional requirement: availability. A solution that has all the bells and whistles is no good if it has stability issues and goes down during peak transaction times.

This is where ACI is succeeding in the India market – we work with 18 of the 20 largest banks in the world including India’s largest financial institutions – and have a proven pedigree when it comes to supporting national real-time payments schemes from the United Kingdom to Malaysia. Interestingly, with the global fintech and payments ecosystem carefully watching to see how UPI develops in the Indian market, there is also an opportunity to bring UPI and its digital overlay services to the world. An Indian fintech that has found success nationally by harnessing UPI’s growth may find international relevance by working alongside payment companies that already have a global footprint. This last point is brought into sharp focus by the recent news around the launch of UPI payments in the Singapore market.

In safe hands… or not?

With UPI’s seemingly easy interface, its promotion of ‘ease of doing business’ and growth trajectory, it’s hard to ignore the growing threat from fraudsters. Looking for any weakness in a system that can be exploited, cybercriminals may turn to ‘social engineering’ – think of it as hacking the person rather than hacking the system – to gather sensitive details.

There are already numerous reports about such frauds happening via online marketplaces. To curb this, it is important that the entire industry moves forward on multiple fronts: proactive consumer education about payments security, sharing of personal details and common scams, as well as cross-industry collaboration to identify fraud trends, build a consortium and develop machine learning and AI capabilities that keep pace with evolving fraud threats. NPCI is also working closely with the banking fraternity in improvising and strengthening security measures around UPI.

Will UPI emerge a clear winner?

Consumers typically use more than one payment method – choosing the one that is best fit for purpose. This can involve a mix of credit cards, debit cards, cash, and online (digital) transactions. That payment mix changes for each consumer over time as merchant payment acceptance, behaviours and technology evolve. Don’t forget that some of our payment technology is thousands of years old – we still carry coins in our pockets along with sophisticated, payment-capable smartphones.

This is to say that while we won’t see any payment method disappear in the short term, banks will seek out providers that offer the best end-to-end solutions covering retail banking, merchant payments, bill payments… and of course UPI. The pipes are in place – now it’s up to us as an industry to turn on the tap and see how we can help UPI reach its full potential.

Craig Ramsey is Head of Real-Time Payments, ACI Worldwide. Views expressed are the author’s personal.