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The Universal Payments Interface (UPI) has become a success story for India, but it is financial inclusion that has been the real star of India's payments transformation.
Since 2014, the Indian government has spurred the country into a new era of digitalisation, including moves to increase internet usage and enhance payments choice for consumers.
“India has made tremendous progress in financial inclusion since 2014,” said Sumita Kale, advisor at the Indicus Foundation.
Kale noted the rollout of basic banking accounts with Pradhan Mantri Jan-Dhan Yojana, a scheme created by the government to offer easier access to basic financial services.
But there is work to be done. “India is large, with significant socio-economic and regional diversity. There are always challenges to overcome at the last mile where the customer who is often financially illiterate comes into contact for the first time with the formal financial system.”
There are a number of issues that need to be tackled, including seamless connectivity, legislation for data sharing and effective monitoring and supervision, but the most pressing one is an effective customer grievance redressal mechanism, she said.
This would include clarity on the process to be followed, accountability fixed for grievance management and awareness among customers and stakeholders at every level of the chain. “This is needed for not just basic banking services, but retail digital payments as well as government welfare payouts where there are a number of links in the chain,” she argued.
“We have seen a huge revolution and transformation in the way Indians bank and transact, and yet, the country’s size and heterogeneity call for continuous improvements at a granular level.”
All about UPI
Introduced in 2016, the UPI is an instant real-time payment system that was developed by the National Payments Corporation of India (NPCI) and facilitates interbank peer-to-peer (P2P) and person-to-merchant transactions.
As of November 2021, there were 274 banks on UPI with a monthly volume of 4.18bn transactions and a value of INR7.1trn (US$99bn).
Since May 2021, the platform has had 150m monthly active users in India, with plans to achieve 500m by 2025 and accounts for 55 percent of digital payments in the country.
"UPI is the fastest growing payments instrument in India, and has reached beyond big cities to other cities and many rural areas, particularly the QR code-based options of UPI payments,” said Balakrishnan Mahadevan, a payments professional who has developed retail payments systems in India.
He continued: “It has been very impactful, and isn't just an India leader in payments innovation, but a global one."
UPI’s success has been complemented by the country’s national identification system.
The widespread adoption of the Aadhaar digital identification system, now used by 1.3bn Indians, has been another driver for digital payments adoption.
"Aadhaar has probably been the world's most successful biometric project, and has also meant that anybody can build applications on top of IndiaStack,” said Syed Musheer Ahmed, managing director of FinStep Asia. “It has been a very big boost for tech companies and as ID has been taken care of, it has also fostered the success of the UPI."
This biometric system assigns citizens a unique 12-digit number.
Beyond Aahaar, the infrastructure revolution in India has been hugely beneficial in spurring more digitisation of financial services.
Between 2015 and 2020, for example, internet use increased from 27 percent to 50 percent, and this has come at the same time as cheap broadband access.
"The rise in internet penetration has been a huge influence as it has offered access to smaller towns, and in doing so, provided an element of e-commerce on top,” said Musheer Ahmed. “This has come at the same time as the massive, interoperable rails of the UPI interface.
Demonetisation, which resulted in India voiding 99 percent of its currency in the country, and COVID-19, have also been big factors in moving people towards digital payments, he continued.
“This meant a restriction on money withdrawn from banks as well as the pandemic pushing people towards contactless payments. Now, India is in a place where it has had more success with real-time payments than economies such as China and the US," noted Musheer Ahmed.
However, there is still a long way to go and the country remains cash friendly. The overwhelming majority — almost 90 percent — of transactions in the country involved cash in 2020.
“Although demonetisation, and COVID-19 gave digital payments a nudge, a huge nudge that is, cash is still heavily used going by the cash to GDP ratio and will continue to be prominent,” said Mahadevan.
Cash is here to stay, he said. “As a country, India has barely touched the surface with digital payments if one were to go by the per capita digital payments per year.”
For example, it is well below even the other BRICS nations as per CPMI data, and this is in spite of big achievements such as the UPI.
"India is still a very cash-heavy country, and there will always be pockets where this is the case,” agreed Musheer Ahmed.
There is always going to be fears over scams and many people are still circumspect about digital payments, he argued, adding however that the younger generation is more comfortable using digital payment methods.
There are also signs that the Indian government has opted to facilitate UPI outside the online world to better accommodate its older and more digitally excluded citizens.
“NPCI is looking at 300m active users a month on its UPI platform, but with more than a billion people to cover and rural connectivity in our 600,000 villages being what it is, we need innovative options that scale,” said Kale.
Kale pointed out that the NPCI is testing a new solution: UPI Lite.
This would accommodate offline transactions of low value, to expand inclusion into the hinterland, considering the connectivity challenges that remain.
Is entering the market a challenge?
India's payment market continues to evolve. For example, the government is currently proposing to offer new payments licences to for-profit companies to offer alternative payments processing platforms to NPCI in the country.
Just a few weeks ago, the finance ministry also made headlines with news about central bank digital currency plans.
“The entry point for fintech is low, with a scope across domains such as payments,” said Akhil Rao, director at the Nth Exception.
According to Rao, there is a lot of money looking to be spent. “There is a huge amount of funding from investment houses from the likes of Sequoia and also larger fintechs like Ant Financial to support innovation.”
“Friendly regulatory policies, high mobile penetration and COVID-19 have only sped up the acceptance of the digital payment and we expect the digital payments to cross INR240trn mark,” he said.
There are a lot of opportunities for investment into India, agreed Musheer Ahmed. “We have over 40 new unicorns in 2021 and have also some major multi-billion dollar startup listings.”
The government is aiming for a five trillion economy, he continued. “We’re talking about a population of 1.38bn. The earning potential is high."
And yet, entering the market can be another story. Not only do payments players need to obtain a licence with the Reserve Bank of India (RBI), but they also need enough of an audience, and revenue, as well.
"There is not much money in payments business in India as UPI and Rupay cards don’t provide much revenue for payment companies given the government policies on MDR [merchant discount rate],” said Mahadevan, discussing the rate at which merchants are charged for accepting payments made cards.
However, companies that have adjacent revenue streams can leverage the payment business data, he noted, adding that this has been taken advantage of by some like Google. “Being a private company, they are able to do advertising based on the personal data and payment data that is collected from customers,” he pointed out.
"Entering the market as an outside company can be challenging,” agreed Musheer Ahmed, indicating that it is already quite a concentrated market. “If you are a big tech company, you could have an advantage compared to smaller firms, but even Facebook has had slow progress with WhatsApp pay.”
Other external players like Revolut have also had a hard time trying to establish themselves. "They are currently trying to push themselves as a neobank, but this has been going on for some time and has not been a simple process,” noted Musheer Ahmed
“This lack of 'money in the business' is why you see payments companies moving into areas like BNPL,” said Mahadevan. “To make money, it is best for them to integrate other products and services."
For Musheer Ahmed, the best place currently to be is B2B. B2B is where the main opportunities are for fintech players. Companies like Stripe could do well, for example.”
But the best way is to collaborate with local fintechs and financial institutions to enter the market, he suggested.
