India’s digital payments revolution

The use of cash in Indian consumer payment culture poses a stiff challenge to the Government of India’s plan to transition to a “less-cash” society.

This month, we spent a week in India working on a joint Better Than Cash Alliance and PwC research project, and two things really struck us. First, the rapid proliferation of smartphones and internet and second, how Indian consumers are quickly changing the way they pay for goods and services. To fast track this “less-cash” society and take digital payments to the next level, the National Payments Corporation of India (NPCI) recently launched a unique payment system that requires just a single identifier for transactions. The Unified Payment Interface (UPI) is a breakthrough that could usher in a digital payment revolution and, hopefully, be a stepping stone towards an interoperable digital payments ecosystem.

UPI can be thought of as a digital framework in which all financial instruments can be given a unique identity which can then be used to quickly and easily carry out online payments. Using the Immediate Payment Service (IMPS) framework, UPI enables seamless payments across various banks, businesses, merchants and customers through a single interface and without sharing any confidential data.

Through the use of mobile phones, UPI provides the ability to send ‘collect’ requests to others with ‘pay by’ dates to allow payment requests to be “snoozed” and paid later. It also allows the use of Aadhar (India’s biometric ID number, mobile phones, and account numbers) in a unified and secure way. Virtual payment addresses keep personal information safe if a merchant’s account is hacked, as their database will only have a list of virtual addresses. The platform is also standardized across banks, which means that transfers can be initiated on the go in a seamless way.

What are the Goals of UPI?

In 2009 NPCI set up a goal to consolidate and integrate the country’s multiple systems with varying service levels into a nation-wide uniform and standard business process for all retail payment systems. The other objective was to facilitate an affordable payment mechanism to enable financial inclusion across the country. In this regards NPCI’s key drivers were:

• Simplicity: Paying and receiving payments should be as easy as swiping an app menu or making a phone call.
• Innovation: UPI should be minimal, functional, and layerable so that innovations on both the payee and payer side can evolve without having to change the whole interface.
• Adoption: UPI should be scalable to a billion users and support large scale adoption. This should allow gradual adoption across smartphones and feature phones and provide full interoperability across all payment players, phones, and use cases.
• Security: UPI provides end-to-end strong security and data protection. Considering the implications of “self-service” mobile apps, data capturing must be strongly encrypted.
  500 million Is the estimated number of smartphone users in India over the next 5 years SHARE

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• Cost: India has now toppled the US to become the second-largest market after China with numbers expected to grow to 500 million in the next 5 years. UPI offers a mechanism to take full advantage of this technology while driving costs down and allowing the banks and other Payment service providers (PSPs) to focus on their core business.

The success of UPI will depend on mass adoption within the digital payments ecosystem by businesses, developers, merchants, and customers. We hope that there will be rapid adoption of the UPI so that it successfully drives a “less-cash” society in India.

This is a joint post by Camilo Tellez-Merchan, Head of Research and Innovation, Better than Cash Alliance and Vivek Belgavi, Partner, FinTech Leader, PwC India