Unified Payments Interface (abbreviated as UPI) is the next-generation payment interface for instant money transfer through a set of APIs built on a unique architecture of seamless end-to-end payment. It is built on IMPS (Immediate Payment Service), a payment system initiated by the NPCI (National Payments Corporation of India) and RBI (Reserve Bank of India) in 2010. In this post, we will discuss about the new payment system and its working model.
UPI is based on IMPS
The Immediate Payments Service (IMPS) is a 24X7 payment settlement service started in 2010 by RBI and NPCI. Unlike RTGS (Real Time Gross Settlement) and NEFT (National Electronic Fund Transfer), the money is transferred from the payer’s account to the payee’s account with few minutes and a settlement time of 2 hours in RTGS and NEFT is skipped. The best part of this system is that it works on Sundays and all public holidays too. NEFT and RTGS can be done only in bank working hours. It is predominately built on the National Payment Switch off the NPCI.
The UPI is based on this innovative digital payment service. As we all know that to make a payment through IMPS or RTGS or NEFT, a basic registration with payee account details like Account No, Bank Name, etc.… must be done before any payment.
But UPI skips all these steps and payment can be done only using the virtual address or Aadhaar or Mobile Number without any pre-registration instantly. This makes it a substitute to any cash-based transaction.
Around 21 banks have tied up with the NPCI to develop the UPI app for hassle-free cross bank transaction without pre-registration using a virtual address (name@bank), Mobile no or Aadhaar No linked to the bank account.
How does the UPI work?
Raghuram Rajan’s tenure gave two amazing financial systems. Regarded to be the person with the best CV in the world, he had given India the concept of Payments Bank and Unified Payments Interface to convert a 95% cash-depended economy into a digital futuristic economy.
If you haven’t read my post about Payments Bank, I strongly recommend you to do so by clicking here.
The transaction would cost anywhere between Rs.0.50 to Rs.0.60(flat rate to be decided at the time of writing) for a transaction as low as Rs.50 to Rs.1 Lac. However, depending on the response, the limit may be increased to IMPS limit of Rs.2 Lac.
Example of working of UPI
Why UPI is a new bid by the RBI to get people to use digital payments?
India accounts to 1/7th population in the world. We are the world’s major population to do more than 95% of the transactions (accounting for 60% of the total value of transactions in India) through cash. On an average only 6 transactions per year per bank account is done digitally/electronically, either through wire transfer (NEFT, RTGS) or ATMs.
In India most of the working class (i.e. Middle class) withdraw their salaries in two or three parts to pay the electricity bills, water bills, etc.… and even in shopping malls where the same debit cards can be used for electronic transaction.
UPI came into prominence because of following reasons….
1. To make a cash-based economy to a futuristic digital economy
- Counterfeit notes are becoming a trend in India. Out of 100 notes 3 notes are counterfeit. A common man gets a counterfeit note and it isn’t transact-able for payment, it is a loss of the hard-earned money for that family. (For example: I earned Rs.1000 today and the note turned counterfeit. If we deposit in the bank, we get around 10 to 25% of the denomination value. That is a loss of Rs.750 to Rs.900)
- Soiled notes are posing a serious threat these days. People (including bank authorities) write on bank notes; due to mishandling the notes tear which isn’t transact-able at major payment points in India.
- Management of money dispensing machines like ATMs or service points like POS is costly thereby availability with retailers is bleak. Secondly low penetration of debit cards still makes situations worse.
2. Rise of mobile wallets in India
- In India, there are many government-approved mobile wallets to enable digital wallets. But the major flaw of the digital wallets is the transfer of money is only on a specific platform (like Paytm) and on some exclusive e-commerce sites and Kirana stores. The Kirana store owners find it difficult to deal with Paytm cash to purchase another product outside the Paytm ecosystem.
- Paytm is expected to touch a $5 billion valuation this year(according to Economic Times), the UPI would be a major blow as the new UPI app allows cross-bank transaction that too amount directly credited into their bank accounts which can be used for various investments and expenditure. Paytm is targeting 100 million active wallet users in 2016 will have to innovate their wallet to stay relevant in the market.
3. UPI can be used for following transactions
- Cash on Delivery: India being a cash-is-king economy was understood by the poster-boys of Indian e-commerce industry (Sachin and Binny Bansal of Flipkart) which made them allow customers to pay in cash when they receive product delivery. Due to low credit card penetration and less activation of Debit Cards and Net-Banking this proved to be the cornerstone feature for their platform’s success. But other players blame them for spoiling the market with COD system (like Amazon and Snapdeal don’t have a logistics system as robust like Flipkart (E-Kart)). UPI is expected to bring curtains to the COD worries not only by Amazon or Snapdeal but also many small e-commerce players like limeroad, lenskart, etc… helping their innovative ideas to grow in the world’s second largest market.
- Paying Utility Bills: Utility bill payments can be done directly without the tension of exact change. In Bangalore, if one rupee is paid less in the bill, it carries-forwarded to the next month with a 2% fine on the balance amount (Min: Rs.10). This reduces the cumbersome of paying utility bills.
- Insurance Premiums, School fees, temple donations, movie and railway tickets can be done through the UPI app.
Few challenges the government will face in making India a digital economy like:
- Only 240 million people have smartphones out of which more than 50% users aren’t exposed to internet usage beyond Whatsapp and Facebook.
- Jan-Dhan Yojana may come handy along with Direct Benefit Transfer but most of these accounts are inactive for years.
- India’s largest bank State Bank of India needs another month to be a part of UPI. This shows that due to lack of interest and no private interest in the UPI system(as they would back wallets due to more control over data and transactions).
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