Understanding UPI
The Unified Payments Interface (UPI) is an innovative and user-friendly real-time payment technology system developed by the National Payments Corporation of India (NPCI). Its primary objective is to simplify interbank transactions and foster the widespread adoption of digital payments across the nation. With a staggering billion transactions per month, UPI has emerged as one of India's most favored payment options.
By seamlessly integrating multiple bank accounts into a single mobile application, UPI facilitates swift and secure money transfers between accounts, streamlines financial transfers, and enables merchant payments from a centralized platform. UPI also empowers users to effortlessly respond to and fulfill "peer-to-peer" and "peer-to-merchant" collection requests.
Launched in 2016 with the participation of 21 banks, the UPI ecosystem has experienced remarkable growth. As of July 2023, it encompasses an extensive network of 473 banks, enabling a substantial transaction volume of INR 9,964.61 million and a total transaction value of INR 15,33,645.20 Crores. In 2022 alone, UPI facilitated an impressive 2,348 transactions per second, with the total transaction value for the year accounting for approximately 86% of India's GDP.
Although the UPI system has been established for some time, the USA has recently embraced a comparable technology with the launch of FedNow in July 2023. Despite their technological similarities, UPI and FedNow exhibit variations in their operational procedures. For instance, UPI can be accessed through third-party apps of the customer's choice, whereas FedNow is exclusively accessible through banks and credit unions. Additionally, UPI offers free usage, whereas there could potentially be charges associated with using FedNow. Furthermore, UPI accommodates non-smartphone users, but the same might not hold true for FedNow.
Benefits of Using UPI
The Unified Payments Interface (UPI) offers customers a range of advantages, including:
Convenience: UPI enables customers to instantly transfer funds and make payments at any time, from any location, using their mobile phones.
Security: UPI ensures transaction security through two-factor authentication and the use of unique virtual payment addresses (VPAs).
Cost-effectiveness: Compared to alternative payment options such as credit cards or debit cards, UPI transactions generally incur no fees or transaction costs.
Interoperability: UPI allows customers to access multiple bank accounts through a single mobile app, simplifying financial management.
User-friendly: UPI provides a user-friendly interface, eliminating the need for customers to memorize complex bank account details or IFSC codes.
Quick Refunds: Businesses utilizing UPI can expedite and streamline the refund process, offering client’s prompt returns.
Process flow of UPI
*PSP : Payment Service Provider (Example – Google Pay, Paytm, PhonePe, Bhim, etc.)
*VPA : Virtual Payment Address (Example – abc@bankname)
Here's a step-by-step explanation of how UPI works:
Registration: To register, users must download a UPI-compatible mobile application from one of their banks or other third-party payment service providers. To complete the registration procedure, they must connect their bank accounts to the UPI app.
Create a UPI ID: Following successful registration, users can make their own UPI IDs, often referred to as Virtual Payment Addresses (VPAs). By acting as a virtual identity, the VPA eliminates the requirement to provide confidential bank account information when conducting transactions.
Initiating a Transaction: The user must start a transaction to send money via UPI. This can be accomplished by choosing the option to send money or make a payment within the UPI-compatible app.
Enter Beneficiary Details: The user must either enter or choose the recipient’s VPA from their existing contacts. As an alternative, the beneficiary's information can be completed automatically by scanning a UPI QR code.
Transaction Verification: After providing the recipient's information, the user enters the transfer amount at their discretion, a comment or description for the transaction.
UPI PIN Authentication: The user is prompted to enter a UPI Personal Identification Number (UPI PIN) to authenticate the transaction. The user then enters a four- to six-digit UPI PIN during the registration procedure, which is a secure code.
Transaction Authorization: After the UPI PIN has been correctly entered, the UPI app interacts in real-time with the user's bank to verify the transaction information and authorize the transfer of funds.
Immediate Fund Transfer: Using the National Electronic Funds Transfer (NEFT) or Immediate Payment Service (IMPS) systems, funds are instantly transferred from the user's bank account to the recipient's bank account following successful authentication and permission.
Transaction Confirmation: Sender and recipient both receive immediate notifications that the transaction has been successfully completed.
It's also vital to remember that UPI enables extra features aside from inter-person money transfers, such as bill payment, merchant payment, and requesting contacts for money.
By offering a single and interoperable platform that facilitates seamless financial transfers between multiple institutions, UPI has made digital transactions simpler. Its high growth and popularity in India's digital payment ecosystem can be attributed to its simplicity of use, real-time transactions, and strong security features.
How is UPI different from other technologies like Zelle or Venmo
Geographical Focus: UPI is a payment system developed and used primarily in India, whereas Zelle and Venmo are popular payment platforms in the United States. UPI has a scope to go global and has already started being accepted by many countries internationally.
Interbank Transfers: UPI allows users to transfer funds between different banks seamlessly, promoting interoperability across various banking institutions in India. Zelle, on the other hand, operates within the banking networks of participating US financial institutions, facilitating transfers between users within those networks. Venmo, similarly, operates within its own network and digital wallet.
Payment Settlement: UPI transactions are settled in real-time, meaning funds are transferred instantly between bank accounts. Zelle and Venmo also provide quick transfers, typically settling within minutes or a few hours, but the funds may take a couple of business days to reflect in the recipient's bank account.
Integration: UPI is integrated into various banking apps and third-party payment service providers in India, allowing users to access UPI functionality through their existing banking apps. Zelle, on the other hand, is typically integrated into the mobile banking apps of participating US banks while Venmo operates as a standalone app.
Use Cases: UPI is widely used for person-to-person payments, bill payments, and merchant transactions in India. Zelle and Venmo are primarily used for person-to-person payments between individuals in the United States, allowing users to split bills, send money to friends and family, and make payments to participating merchants.
Funding Sources: UPI transactions are funded directly from the user's linked bank account. Zelle and Venmo offer multiple funding options, including linked bank accounts, credit or debit cards, and stored balances within their platforms.
Transaction Limits: UPI has relatively higher transaction limits compared to Zelle and Venmo. UPI allows for larger transactions to accommodate business payments and high-value transfers, whereas Zelle and Venmo typically have lower limits, often geared towards person-to-person payments.
Adoption of UPI across different economies of the world
The UPI payment system was created especially for India, but other nations can benefit from its success and customize it to fit their own economic environments. Countries across the world can adopt UPI in the following ways:
Collaborate with the financial industry: Governments and financial authorities should work together with the banking and financial sectors to create a payment system that is specifically suited to the demands of their respective economies.
Payment system simplification: To promote broader usage, nations can improve the usability and accessibility of their current payment systems.
Integration with prominent digital platforms: To make it simple for consumers to make payments, payment systems should be integrated with social networking and e-commerce websites.
Education and public awareness: People need to be made aware of the advantages of digital payments and how to use them safely.
Interoperability: Payment systems should be interoperable, allowing users to access multiple bank accounts through a single mobile app or platform.
Adopting open banking: By allowing consumers to link their bank accounts with third-party providers, open banking paves the way for the payment system to become more flexible and innovative.
Conclusion
India's digital payment systems, such as UPI, have been rapidly gaining global recognition, leading to an increased interest from other nations seeking to adopt them and reduce the cost of cross-border transactions. Notably, Singapore and India have successfully integrated their peer-to-peer payment systems, facilitating instantaneous money transfers. Furthermore, UPI payments will be extended to inbound foreign travelers from G20 countries, enabling them to make seamless merchant payments.
In a significant development, non-resident Indians in selected international countries can now engage in transactions on UPI platforms without the need for an Indian mobile number. Indian digital payment systems have made their presence felt in several countries, including France, UAE, Saudi Arabia, Switzerland, and others. To foster the adoption of UPI for digital payments, India has signed Memorandums of Understanding (MoUs) with 13 countries, demonstrating their keen interest in leveraging the UPI interface.
These global partnerships have been established through the efforts of the National Payments Corporation of India's wholly owned subsidiary, NIPL (NPCI International Payments Limited), which aims to create a vast acceptance network for RuPay and UPI. NIPL was established in April 2020 as part of the National Payments Corporation of India.
Moreover, India has announced UPI access for non-resident Indians (NRIs) in 10 foreign countries, allowing them to link their Indian bank accounts to foreign mobile numbers. Additionally, select international airports in India will offer UPI facilities for foreign travelers as an initial step.
About BIP.Monticello
BIP.Monticello Consulting Group is a global management consulting firm supporting the financial services industry through its deep knowledge and expertise in digital transformation, change management, and financial services advisory. Our proven understanding of the competitive forces reshaping business models in capital markets and digital banking helps our clients drive innovative change programs to be more competitive and gain market share in new and existing businesses.