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The Unified Payments Interface (UPI), the instant payment system at the centre of India’s digital finance revolution, has positioned the country as a global leader and has the potential to expand internationally.
UPI was developed by the National Payments Corporation of India (NPCI) in 2016. The system facilitates inter-bank peer-to-peer and consumer-to-merchant transactions via virtual payment addresses (VPAs) on mobile devices to transfer funds in real time.
Users can access multiple bank accounts through a single mobile app. They can simply scan a QR code or enter a PIN and make payments to any recipient in any denomination, without incurring credit card network fees. Transactions are secured with two-factor authentication (2FA) and encryption.
UPI accounts for 46 percent of the world’s total real-time digital transactions, President Droupadi Murmu said in an address to parliament on January 31. The system handled a record 12bn transactions last month, with a record transaction volume equivalent to $216.52bn.
"Digital India has made life and business much easier in India … . Even developed countries do not have a digital system like India has," Murmu said.
UPI builds on India’s digitalisation shift
The groundwork for UPI’s success was laid with the introduction of the Aadhaar ID system in 2009, which has provided almost all of India’s 1.4bn residents with a unique identity number and biometric card that has allowed them to open bank accounts under its Jan Dhan financial inclusion programme.
The government has encouraged the digitalisation of payments to limit the grey economy, increase financial inclusion and reduce illicit activities such as money laundering.
The adoption of UPI was accelerated by disruptions to cash circulation in the country, which prompted the switch to mobile digital payments. The number of UPI transactions multiplied threefold in the year following the demonetisation of certain rupee banknotes in 2016, representing the largest proportion of the country’s digital payment growth. UPI accounted for 75 percent of retail transactions in 2022-2023.
New features continue to be added to the platform, including credit card transactions, credit lines pre-sanctioned by lenders and UPI Lite, which permits a higher value limit for offline transactions using near field communication (NFC) technology and allows customers to use it for transactions on point of service (POS) devices.
The instant payment capabilities, the ability to apply it to a variety of applications and its smooth user experience have driven UPI’s popularity. It has made banking more convenient for millions of unbanked Indians and made it easier to disburse loan payments to stimulate small business growth.
The Indian government has integrated UPI into public services, making it easier for citizens to receive financial support payments directly into their bank accounts.
The system has also made it easier for international companies to conduct business in India, as they previously had to have a local business entity and adhere to onerous transaction reporting requirements to accept payments.
UPI is an attractive payment method for overseas businesses, as digital cross-border payments can be transacted in real time.
UPI’s widespread use has drawn comparisons to that of China’s WeChat payment system, but a key difference is that UPI is open to international visitors to India. Since February 2023, travellers from the G20 countries have been able to use prepaid wallets to make UPI payments.
Other countries are now looking to take lessons from UPI into their own digital payment systems.
Can UPI’s success be replicated abroad?
UPI has already extended to Singapore, Bhutan and the United Arab Emirates (UAE) for travellers from India to use at certain tourist locations. It also has partnerships in France, Belgium, the Netherlands, Luxembourg and Switzerland, Canada, Oman and Qatar.
The use of UPI abroad will depend on overseas merchants incorporating the platform into their payment systems. Collaborating with local payment processors or consolidators could help to accelerate adoption.
Google India Digital Services and NPCI International Payments, an NPCI subsidiary, recently signed a memorandum of understanding to expand the use of UPI beyond India’s borders to the global payments market.
The agreement aims to extend the use of UPI payments to allow travellers to make transactions when they are outside the country, establish digital payment systems based on UPI in other countries and use UPI infrastructure to simplify the remittance process by reducing dependence on traditional money transfer services.
This is designed to accelerate international acceptance of UPI, giving merchants abroad access to Indian consumers who will be able to make digital payments as an alternative to foreign currency, credit or foreign exchange cards. Consumers will be able to use apps from India powered by UPI, including Google Pay.
“UPI has demonstrated to the world the step change that happens in economies with the introduction of interoperable, population-scale digital infrastructure, and each economy that joins such networks will create impact beyond the sum of parts,” said Deeksha Kaushal, director of partnerships at Google Pay India.
UPI’s reach is set to continue expanding internationally. As countries around the world look to increase financial inclusion and roll out central bank digital currencies, they are keen to take lessons from its success.
India’s established digital ID system and large mobile phone user base made it easier for the adoption of mobile payments, providing secure identity verification for e-commerce and cross-border payments.
Other countries looking to integrate UPI, or launch similar digital payment systems, will need to focus on financial inclusion and digital IDs, as well as instant payment capabilities.
India’s “JAM stack” Digital Public Infrastructure (DPI), comprising Jan Dhan bank accounts, Aadhaar digital IDs, and mobile phones, has played a “critical role” in increased ownership of transaction accounts, according to a World Bank report.
However, “other ecosystem variables and policies that build on the availability of DPIs were critical. These included interventions to create a more enabling legal and regulatory framework, national policies to expand account ownership, and leveraging Aadhaar for identity verification.”
