Atom Payment Gateway: Current Status of UPI, India's Payment System

As the Unified Payments Interface of India (UPI) continues to evolve, the six-year-old real-time payment system is poised to disrupt the country's massive ecosystem of credit and debit cards, remittances and even cash payments.

Sunil Vikal, 36, has two QR codes - Paytm and PhonePe - attached to his vegetable stall in a Mumbai suburb; they are randomly distributed among the scattered potatoes and onions, ready to be scanned at a moment's notice. Even in the hustle and bustle of the market, Vikal's ears are always alert to the Paytm speaker next to his cash box, which often plays a voice notification of "payment successful". Sometimes, customers see the familiar 'payment complete' message flashing on their mobile phone screens. The speaker costs him Rs 125 a month and saves him the trouble of having to produce false receipts to confirm payments. However, Vikal doesn't mind the expense.

These QR codes use UPI technology to transfer money to Vikal's bank account in seconds.UPI facilitates seamless transfers between different banks and payment networks. Today, 80% of Vikar's daily sales are done through QR codes. He also uses UPI for payments at wholesale markets.Vikal jokes, "I now call the bank for a loan (and now, the bank also calls me to offer a loan)."

Millions of merchants are currently using UPI for payments. It's unimaginable not to see a QR code on a street vendor selling biryani, a barber or a cigarette seller. According to consulting firm BCG, the latest statistics show that more than 30 million merchants are already using QR codes. Remarkably, despite decades of existence, the number of credit and debit card payment points is only 6 million units. "The JD has now become a giant," says Ramesh Narasimhan, CEO of payment solutions provider Worldline India.

Dilip Asbe, MD and CEO of NPCI (National Payments Corporation of India), which created the UPI technology, said, "One billion transactions per day is possible." Currently, UPI records 220 million transactions per day.UPI, which instantly verifies and authorises money transfers, set an all-time record of 6 billion transactions in July 2022, which was the highest since its launch in 2016. To put this in perspective, the number of UPI transactions per month is more than five times the number of mobile connections in the country.NPCI data shows that in the month of July alone, transactions through UPI totalled Rs 1,062,000 crore, which is almost equal to the total amount of non-performing loans that have been written off by Bank of India in the last five years. In just six years, UPI has accounted for 161 TP3T of total retail payments. in the process, it is taking market share from other payment modes. For example, the market share of NEFT (National Electronic Funds Transfer) has declined from 601 TP3T five years ago to 541 TP3T now.

India's digital payments market, including retail payments, SME-to-business payments and government payments, is expected to more than double from the current $30 trillion (Rs 226 trillion) to $100 trillion (nearly Rs 800 trillion) by 2026, according to a recent report by Boston Consulting Group.Dilip Asbe, MD and CEO of NPCI, said: "One billion transactions per day is possible." Currently, UPI records 220 million transactions per day and the next target is to quadruple it. New use cases such as credit card-UPI connectivity, international money transfers and penetration into smaller geographies will drive the next wave of exponential growth. "Our competitor is cash," laughs Ritesh Shukla, CEO of NPCI International Payments Limited (NIPL). "There's still a lot of bitcoin for us to handle, not just in India but globally."

UPI is actually encouraging micropayments. As the Reserve Bank of India has increased the maximum daily transaction limit to Rs 2 lakh, the average transaction amount has jumped from Rs 1,000 to Rs 1,600. (However, many banks have set the daily limit lower to protect customers from fraud.) Rishi Gupta, MD and CEO of Fino Payments Bank, said, "UPI has dramatically changed the payment behaviour of consumers." This change is being driven by third-party global apps such as Google Pay and PhonePe. According to the NPCI, by January next year, the two banks will have to reduce their respective market share in terms of value of transactions to 301 TP3 T. This is to avoid concentration of payment transactions on a few platforms. However, there are still some doubts about how this plan will be implemented.

Our competition is cash. There's a lot more for us to deal with.

UPI is now poised for the next phase of growth. In March this year, UPI was introduced to feature phones, a huge market of about 400 million mobile phones. Simply dial an IVR (Interactive Voice Response), connect your bank account to UPI and add the payee's phone number to make the payment.Deven Narayana, CEO of NTT Data Payment Services India, says this will change the way payments are made in small areas.

UPI is also gradually eroding the market share of NEFT, which is run by the Reserve Bank of India (RBI) and is the leader in retail e-payments in India. Last year, NPCI launched UPI 2.0, which allows customers to enable recurring electronic authorisations for everything from electricity bill payments to insurance premiums. This new feature will gradually begin to erode NEFT payments, which are delayed by half an hour.NEFT, internet banking and credit cards are still used by corporates, high net worth individuals (HNIs) and others for large transactions, but this too is expected to change. "UPI breaks all barriers with its sheer convenience. It is just a matter of time," predicts Narasimhan of Worldline India.

Almost half of NEFT transactions are high-value, especially business-to-business, government-to-business, and government-to-government transactions, according to estimates from the Boston Consulting Group.Neralla, of NTT Data Payment Services, said, "Large corporate accounts are not yet enabled on UPI." Businesses are not yet using mobile phones for payments. "UPI's trajectory is supported by infrastructure," said Rahul Chari, co-founder and CTO of PhonePe. "Different models will definitely emerge soon." Chari believes UPI allows individuals to link their mobile numbers to their savings or current accounts for one-to-one transfers. As authorisation models for 'many-to-one' use and corporate accounts evolve, new applications will emerge, even for 'one-to-many' authorisation, Chari believes: "I think mimicking some of these models based on UPI is still in our future." I think mimicking some of these models based on UPI is still in our future."

"UPI is not competing with other payment systems," said Deepak Sharma, president and chief digital officer of kotak Mahindra Bank. "Despite how people describe UPI, it is clearly becoming the most popular way to replace cash-dominated transactions." Chari added: "The future before us is the possibility of UPI penetrating all types of payments, including corporate payments between SMEs and professionals such as doctors and chartered accountants."

An analysis of UPI payments shows that peer-to-peer (P2P) payments now account for nearly 80% of the total value of transactions, while person-to-market (P2M) payments account for the rest. This is partly due to the burgeoning cashback culture, which encourages people to download payment apps. The P2M story will unfold in the next phase of growth. Merchants have always felt that POS is eroding their margins," he says. The QR code system is very beneficial for them," said Kirtan Patel, CEO of Mswipe Technologies.

According to estimates from the Boston Consulting Group, the largest contribution to the growth of digital payments over the next five years will come from merchant payments, whose value is projected to grow from 20% today to approximately 65% by 2026.UPI is also rapidly replacing cash payments in brick-and-mortar shops.PhonePe's Chari said, "QR code placement is very beautiful and it follows the principles of simplicity and low cost, which benefits both the merchant and the customer."

The Unified Payments Interface has dramatically changed consumer payment behaviour. The use of bitcoin will continue to grow due to new use cases for credit cards, money transfers and other payment methods.

The main reason for the rapid adoption of UPI payments is the zero Merchant Discount Rate (MDR) and cashback offered by third party players. So far, UPI and RuPay debit cards do not charge any MDR fees as the government provides marginal subsidies to compensate for the low value (up to Rs 2,000) of RuPay debit card and UPI P2M transactions. However, the demand for charging a reasonable MDR on UPI is increasing. One suggestion is to charge 20-30 paisa per transaction for P2M transactions or only for large merchants. For example, for non-RuPay RuPay debit cards, merchants are currently being charged between Rs 200 and Rs 1,000 per transaction based on an annual turnover of Rs 2 lakh.

In August this year, the Reserve Bank of India sought user feedback on possible UPI payment charges, but the government was quick to suggest that "cost recovery" be provided in other ways. The government currently subsidises QR code adoption in small areas, which many believe is not enough. In the next phase, the cost of acquiring merchants is expected to increase significantly as users expand to smaller areas.

Currently, UPI stakeholders such as payment aggregators, payment gateway participants, and banks incur costs in terms of staffing, merchant acquisition in remote areas, QR code printing, support services, IT systems, servers and data centres, switching fees, reconciliation, settlement, risk and fraud detection, customer complaints, and refunds. "There's a lot going on here. It's a system that costs money to run," says Pranay Jhaveri, MD and CEO of Euronet Worldwide India and South Asia. Banks receive some subsidies, but ultimately they have to pay more for switching fees, SMS charges, refunds and other technical setup costs. Banks witness huge transaction volumes during festivals, cricket matches and other events and need to invest in infrastructure to cope with these spikes.

UPI is completely secure as it requires a PIN. You will only be scammed if someone sends you a payment request.

Currently, UPI is only linked through a customer's savings or current account. The next immediate extension of this native technology is linking to credit cards, which means making payments using a credit card by scanning a QR code. In June this year, the Reserve Bank of India allowed only government-backed RuPay credit cards to link to UPI. however, there is some MDR for transactions at this stage due to the presence of the QR code recipient, the card issuer, and the card network. at present, the MDR fee is charged from the merchant. The card network (Visa/MasterCard/RuPay) determines the allocation of MDRs across all intermediary chains: the POS acquirer, the issuer and the card network.

The MDR of RuPay and other credit cards currently ranges from TP3T 1.51 to TP3T.Meanwhile, the NPCI and the banks are finalising the MDR of the UPI-RuPay credit card link, which will be an experiment of this kind. Currently, RuPay credit cards account for one-fifth of the market share, with the rest being held by global card networks such as Visa and Mastercard.The MDR of non-RuPay credit cards offered by POS is currently between TP3T and TP3T of the value of the transaction.There is, however, a view that UPI credit cards with high MDRs will continue to be available because credit transactions are inherently very different from debit transactions are very different in nature. At most, it may be lowered by a few basis points.

Clearly, the linkage of UPI with credit cards will create credit expansion. So far, a limited number of costly POS machines has been one of the main reasons for slow credit card growth in the country. "There are millions more merchants who don't have POS, but they have QR codes. The entire credit market will open up in India," believes Mandar Agashe, Founder and MD, Sarvatra Technologies.UPI-Credit Card Link will introduce new lines of credit for small merchants. "You can issue a virtual card with a low credit limit. You can also offer a higher credit limit on someone's plastic card if they have a very good credit profile. All these are new applications that UPI will develop rather than erode existing ones," believes Kotak's Sharma.

Currently, UPI stakeholders incur costs in areas such as personnel and support services. It is a system that costs money to run.

India has a large credit gap, with a credit to GDP ratio of just 521 TP3T, compared to 2,161 TP3T in the U.S. and 1,821 TP3T in neighbouring China.By July 2022, India's total credit card balances will be just Rs 70,000 crore. "There will be a surge in new credit issuance. We are very keen to play the role of an ecosystem player to open up this opportunity for our partners," Chari said. Experts say many "buy now, pay later" products will face a huge challenge if credit cards can be used at the time of purchase.

Obviously, major network companies like Visa and Mastercard may connect their credit cards to UPI at some point in the future. they may also consider reviving the Bharat QR Code, which was developed in conjunction with NPCI but never really caught on. Currently, 5 million merchants have adopted Bharat QR Code while 172 million merchants have adopted UPI QR Code, indicating a lower level of acceptance. The process of using the Bharat QR Code is complicated for customers, requiring them to access their bank's Bharat QR Code mobile banking app, connect their debit or credit card, and then scan the QR code. There are too many hurdles for customers to overcome in order to make payments.

Most Western countries that rely on bank cards lack real-time payments. This is where NIPL has placed its bet. Two years ago, as a wholly owned subsidiary of NPCI, NIPL launched India's domestic card programme (RuPay) and mobile payment solutions (UPI) in the global marketplace.NIPL is helping other countries to build payment ecosystems, including P2P, P2M and cross-border payments. "Why reinvent the wheel? We have done it successfully in India and we want to share it with the world," says NIPL's Shukla. Nepal, India's neighbour, is a prime example of NIPL building a modern digital infrastructure for another country.

Last July, NPCI's global subsidiary signed an agreement with the Central Bank of Bhutan to enable UPI-powered BHIM applications. Bhutan will be the first QR deployment country to adopt UPI standards. In August this year, NIPL also signed an MoU with PayXpert, a popular payment solution provider in the UK, to provide UPI-based QR code solutions for PayXpert's in-store payments on all Android POS devices in the UK.

Mashreq Bank in the UAE has also started accepting UPI.In the P2M space, Indian travellers and tourists in the UAE can now make payments using BHIM UPI at 10,000 shops and merchant outlets through NEOPAY, the payment subsidiary of Mashreq Bank.In November, NIPL has also partnered with the UAE's largest business acquirer, Network International to help Indian tourists travelling in the UAE by enabling them to make seamless payments with retail partner merchants such as jewellers, supermarkets and duty free shops through UPI-based mobile apps.

By the end of this year, five of Southeast Asia's giants - Malaysia, Singapore, Indonesia, Thailand and the Philippines - are expected to sign a contract to integrate their respective QR code payment systems. This will pave the way for merchants in the region to be able to make QR code payments.Shukla said, "It's ideal for us to connect with their pipeline and start routing transactions through their infrastructure so we can add value for them."

Another positive factor in favour of UPI's expansion is remittances. India is one of the largest recipients of cross-border remittances, receiving more than $80 billion annually and sending about $20 billion abroad. The remittance market is dominated by banks, money transfer operators (MTOs) and foreign exchange dealers. According to market research, 32 million Indians live abroad. This number is equivalent to the combined population of Saudi Arabia, Malaysia and Australia.Shukla said, "Wherever there is a large number of Indians, we work with payment companies in the remittance space."

The current inward remittance infrastructure includes the Rupee Withdrawal Arrangement (RWA), where Indian banks are linked to globally licensed institutions that hold foreign currency vostro accounts on their behalf. Similarly, there is the Money Transfer Service Scheme (MTSS) for foreign tourists travelling or residing in India. The main payment track or conduit is a global network known as SWIFT (Society for Worldwide Interbank Financial Telecommunication), which is used for transferring funds.

"NPCI is endeavouring to make UPI a money transfer track," said Raj K, founder and CEO of cross-border fintech company FairexPay. "But adoption is slow, mainly due to local regulations and global processes and policies for money transfers." But one day, low-cost, high-cost real-time settlement will become a global staple. That's where UPI will be the adoption framework. "We have identified the key players. We are working in different markets and at different stages of development. We are discussing commercial and technical issues in a number of markets and technologies," Shukla said.

For example, NIPL has entered into an agreement with Western Union, a global leader in cross-border payments, to enable real-time bank account transfers.NIPL has also done strategically important things. It has tied up with PayNow, a popular payments ecosystem in Singapore. As a result, these two fast payment ecosystems will enable real-time fund transfers between the two countries.Shukla said, "Once this is done, a template can be created and then go into other markets and start deploying it." NIPL's cross-border payments initiative is a work in progress and has great potential to make payment transfers easier, faster and reduce the high cost of remittances.

The biggest obstacle to the adoption of UPI is fraud or error in real-time payments.Chari of PhonePe said, "Real-time payments are very vulnerable to social engineering fraud." Agashe of Sarvatra Technologies said, "The PIN requirement makes UPI payments completely secure." As UPI moves into smaller areas, Euronet's Jhaveri says awareness is more important than ever.

Another huge challenge is to reduce the huge amount of cash that still exists in the system.PhonePe's Chari argues that calculating digital payments from GDP is not the right way to do it. The expert explains that GDP is actually the sum of the totals.