Unified Payment Interface—Taking India to the next generation in payments

Abstract

Unified Payments Interface (UPI) is India’s fastest-growing payment system which makes users mobile as a single platform to send and receive money anytime and anywhere. It is built on top of IMPS, an existing mode used for instant money transfers. UPI is governed by the National Payment Corporation of India (NPCI), which monitors and promotes the UPI payment system. This case study on the payment platform will give detailed information about UPI, its initiatives like UPI123 and “UPI Chalega” and its progress. The case study also expounds on the growth of UPI, the challenges that are prevalent in UPI payments, and the analysis of data published by NPCI on UPI payments.

Keywords

Unified payment interface UPI payment system NPCI IMPS

Introduction

Demonetization was announced in India on 8 November 2016, by our Prime Minister Narendra Modi, with the message that currency notes of Rs 500 and Rs. 1000 values are invalid. The intent was to curb black money, benami transactions, and corruption. The attachment of cash in citizens was deranged overnight, and people started looking for alternative ways of transactions for doing their business and daily activities without hindrance. On the same year, a few months back, NPCI (National Payment Corporation of India), on 11 April 2016, to be precise, launched Unified Payment Interface (UPI). As it was in its nascent stages, it was not so famous, could not get people’s attention, and the applications for UPI needed to be fully ready. Instead, citizens relied on mobile wallets like Phonepe, Paytm, and Airtel, credit/debit cards, or online transactions. The story does not end there. Fast forward 3 years, and UPI has become the most sorted payment method during the COVID-19 lockdown. The fear of carrying cash due to the virus threat boosted the usage. Various UPI applications for mobile handsets and banks’ support made UPI the top payment method.

As per the update in the Business Line magazine (Vinayak AJ, 2020), the total amount transacted with UPI was Rs. 43.45 lakh crore between 2016 and 2020. In 6 months between March and August 2020, the transactions were Rs. 14.26 lakh crore. This is nearly one-third (32.82%) of the total amount transacted on UPI during the last 4 years. Considering the volume, the number of transactions in the UPI applications also increased after the COVID-19 pandemic. Of the total 2,552 crore transactions on the UPI applications between August 2016 and August 2020, nearly 793.40 crore transactions (31.08%) were between March and August 2020. According to Macquarie Report, about 10% of all retail payments happen through the UPI platform (BQ Prime, 2021). The payments via UPI for FY 21 are about Rs. 41 lakh crore, which is almost 2.8 times higher than debit and credit card transactions at point-of-sale terminals. Also, this is 20 times more than the value of payments done via wallets or other prepaid instruments. A perusal of the NPCI data revealed that UPI transactions related to groceries and supermarkets, restaurants, eateries, drug and department stores, bakeries, and gaming, emerged as high transacting categories. These categories see low average spent size but high repeatability.

About UPI

The Unified Payment System in India allows the linking of the user’s bank accounts to mobile applications of any bank or third-party player. This ensures seamless fund transfers between two banks instantly. Also, UPI allows consumers to pay directly from their bank account to different third parties online, making payments much more manageable than other payment modes like credit cards. UPI Id is used as a single identity that is linked to users' bank accounts, which can be used for transferring money online. It uses an open-source Application Programming Interface (API) built above the IMPS (Immediate Payment System) (Varahasimhan, 2022). It provides a standard set of APIs for transactions on the UPI platform, which is entirely interoperable with all banks and other payment systems, making it an open system. With UPI, users can pay directly from a bank account to any third party, offline and online, without the trouble of typing card details, IFSC code, or passwords.

Why UPI?

UPI impacts not only the payment setup but also helps improve the management of banks and other participants in the ecosystem, focusing on economic growth. Safe and convenient money transfers help citizens buy and sell goods and services using mobile with a few clicks, thereby enabling the economy’s growth (Srivastava and Nair, 2022). Non-Resident Indians from 10 countries can access the UPI payments applications with their domestic account and international phone number. The participating countries are Australia, Canada, Hong Kong, Oman, Quarter, Saudi Arabia, Singapore, United Arab Emirates, United Kingdom, and the United States of America. However, UPI users must ensure that the accounts are fulfilling the Foreign Exchange Management Act to avail of the service. This is effective from 30 April 2023 (Ghosh, 2023). Also, according to the article in India briefing (Bhardwaj, 2023), the UPI payments facility will soon be extended to all foreign travelers from G20 countries for making any payments. They can use UPI when they travel to India.

Features of UPI

The UPI-enabled application allows users to manage multiple bank accounts in one application. Once registered via the UPI app, users can also check bank balances apart from the transaction history. Further, it enables contactless or remote payments and transfers even without knowing bank account details with just the phone no. of the users. Several types of payments can be made using UPI, such as utility bills, over-the-counter payments, or QR code (Quick Response code) based payments. It provides a two-factor authentication in a single click, in compliance with regulatory guidelines.

UPI gives a virtual address for incremental security so that users need not enter sensitive information like debit or credit card no, or Card Verification Value (CVV code). As a unique feature, UPI also allows users to share the bill after payment with friends Figures 1 and 2.

Growth of UPI in India

NPCI publishes monthly statistics on UPI transactions and performance. Currently, there are 399 active banks/entities that have enabled UPI. A steady growth, both in terms of volume as well as participating banks/entities in UPI, is observed Figure 3.

Based on the data, we see that in the last year, there has been a steady increase in the no. of participating banks for UPI, and it has moved from 316 to 399 (26% growth. Also, there was a substantial increase in the volume of transactions done via UPI; volume increased from 558 crores to 869 crores, a 56% increase.

App-wise market share

NPCI also publishes the UPI app-wise statistics on transactions. If we analyze the data published by NPCI, the top four of five UPI apps are not provided by the banks but created by companies that started as wallet services and effectively used UPI technology for their transactions Figure 4.

If we zoom into the top player Phonepe, it has processed around 351.91 crores transactions worth INR 6.20 lakh crores during Feb 2023. In terms of transaction value, PhonePe clinched 46.1% of the total market share in Feb 2023. Google Pay and Paytm hold second and third positions in terms of volume and value of transactions. Cumulatively, PhonePe, Google Pay, and Paytm account for 95.6% of the total UPI transactions, and the trio together captured more than 94% of the transaction value market as of Feb’23.

The advantage of the apps like Phonepe and Google Pay is that they work with multiple banks, and transactions can be done seamlessly from any linked bank account of users to any other banks/merchants. The much-promoted Government backed BHIM ((Bharat Interface for Money) and WhatsApp apps are still not widely popular and did not make it to the top 10 list.

Recent developments on UPI

Restriction on market cap for UPI apps

To restrict the market from being dominated by the top three players, NPCI announced a standard operating system to employ a market limit of 30% on third-party UPI applications, including PhonePe and Google Pay. The deadline for adherence is Dec 2024, but an interesting fact is that it does not apply to Paytm and Reliance’s Jio as they hold payment banking licenses, and they do not fall under the third-party apps category.

Interchange fee for UPI

Another latest update on UPI is that effective April 2023, the NPCI has informed that an interchange fee of up to 1.1% is being imposed on merchant UPI transactions. This fee is only for merchant UPI transactions and not for regular UPI payments done peer-to-peer. The charges are similar to the charges levied on credit card swipes at the point of sale. The interchange fee is proposed to change based on the categories of merchants. It ranges from 0.5% to 1.1%, and a limit is applied to specific categories. A recent press release by NPCI informed that the introduced interchange fee applies to merchant transactions made through prepaid payment instruments (PPI) effective April'23. The charges are applicable if the transaction is more than 2,000. NPCI also clarified that no charges would be applied to day-to-day UPI payments, termed “bank account-to-bank account-based UPI payments.”

UPI 123PAY—the next wave in UPI transactions

As per the NPCI website (UPI 123PAY product booklet), UPI 123PAY is a new feature that allows users to do any transaction based on four technology options and is helpful for rural users who do not have smartphones and use feature phones. It includes calling via IVR (Interactive Voice Response) number, missed call-based payments, digital solutions in feature phones, and proximity sound-based payments.

IVR

UPI payment is made by calling the pre-notified IVR numbers, which make users call a secured predetermined number from their mobile phones. The user then completes the UPI onboarding procedures to make payments without an internet connection. The IVR is enabled with multiple language choices, and users can use the services in any selected language. IDFC First Bank, City Union Bank, and NSDL Payments banks currently provide IVR payments.

Missed call

Missed call-based payments permit users to handle their bank account and perform regular transactions such as fund transfers, purchases, utility bill payments, etc., by giving a missed call to the number provided at the merchant’s location. During bill settlement, the merchant will create a token with the customer’s mobile number and the bill amount of the item. The customer can then give a missed call to the number given by the merchant, and instantly, the customer will get a call from a predefined number requesting to verify the purchase by giving the UPI PIN. This solution is created by Missed Call Pay, with the Bank of India as the partner bank.

Digital solution in UPI App

Gupshup developed this solution in partnership with Airtel Payments Bank. To use this feature, the interested solution providers must partner with the feature phone mobile manufacturers (OEM-Original Equipment Manufacturer) to enable a native payment app developed in embedded C language (or as supported). The UPI apps in feature phone look and feel comparable to the smartphone-based apps. Nevertheless, there are certain limitations of the feature phone.

Proximity sound-based technology and Voice-Based Payments

This feature is the proximity sound-based payment, created in partnership with Tonetag and supported by NSDL Payments Bank. The technology uses sound waves for contactless and proximity data communication on any device. Customers can use tap the phone and make UPI payments to merchants. The user calls the IVR number and chooses the Pay to Merchant option. They tap their mobile phone on the merchant device (POD—Proof of Delivery) and press the hash key, which makes the POD give a unique tone. The customer then enters the amount to pay, followed by their UPI PIN (Personal Identification Number) to complete the transaction. The POD acknowledges the transaction, and the customer receives acknowledgment through the IVR call.

BHIM—UPI app of NPCI

BHIM (Bharat Interface for Money) is a mobile application created and promoted by the National Payments Corporation of India (NPCI) for the Unified Payments Interface (UPI). The name of the father of the Indian constitution Dr Bhimrao Ambedkar also inspired the app’s name. Launched on 30 December 2016, it is envisioned to enable digital payments from banks and promote cashless operations. The BHIM application supports all Indian banks and helps money transfer between 170 member banks of any two parties. BHIM app has a unique feature that allows users to make payments using Aadhaar Card, and the beneficiary’s Aadhaar number can be used for making payments. The only requirement is for the beneficiary’s Aadhaar to be linked with the bank account.

BHIM is still not very popular in India and has many teething issues which need to be solved by NPCI. The significant challenges faced are concerning the speed of the BHIM app compared to other apps like Google Pay or Phonepe; Also, frequent SIM (Subscriber Identity Module) card verifications failure, a longer time for confirmation on payment, and poor display modes are reported by users.

UPI Chalega campaign

UPI Chalega is a campaign program started by NPCI to create awareness of UPI Payments, clarify the doubts of its users, promote digital payments, and give all updates about UPI like “Dispute Redressal Mechanism” with member banks, UPI Apps, and UPI partners. It focuses on creating a habitual change in users to use UPI regularly (Puri, 2020). The target population is middle and lower-income Indian smartphone users to guide them on using UPI through various scenarios of UPI payment as an alternative to cash or other payment modes. The campaign focuses on users of all age groups and intends to promote the safe use of UPI. UPI Chalega campaign focuses on creating awareness among customers about UPI for their daily expenditures like local Kirana shops, fuel refills, utility payments, hotels, online payments, etc.

Ogilvy Mather (O&M) campaign creative agency was behind this advertisement, and they created a normal citizen character named “Mrs Rao,” the ambassador of UPI. Mrs Rao appears in each advertisement with a specific solution for the transaction problems and introduces UPI payment as the answer to the problem. There are 45-plus videos currently available on the NPCI website and also promoted via YouTube and other TV channels.

Challenges faced by users on UPI

Although we see a growth in UPI usage in villages and small towns, there are connectivity issues and usage awareness which prevent the rural population of India from adapting to UPI. Although cash transactions have come down drastically, there are still sections of people, especially the older population, who prefer cash over UPI. The UPI Chalega campaign is more focused on Hindi speaking community. There is a vast population, especially in South India, who do not appreciate it, so the promotion should focus more on Pan India with multi-language communication.

The message of ease of use as it is via mobile phone and payments on the go is not fully appreciated or reached a section of society that is a potential opportunity for UPI enhancement. The penetration of UPI in villages and small towns need further research with a focus on any pain points in UPI usage.

Questions

1. Explore any similar payment system existing outside India which is comparable to UPI and list the similarities and differentiators.

2. With the perspective of financial inclusion, please describe suggested ways and promotion to be done by NPCI to increase UPI payment usage in villages and small towns.

3. Suggest ideas for the “UPI Chalega” campaign after watching the available videos on the NPCL website to cover Pan-India.

4. Describe the mechanisms to be implemented by NPCI to promote BHIM app usage.

Footnotes

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

Kavitha Shanmugam

Author biographies

Arthi MC is a Research Scholar at the College of Management at SRM Institute of Science and Technology, Kattankulathur campus pursuing doctoral studies in Mobile Banking.

Kavitha Shanmugam is an Associate Professor in the College of Management at SRM Institute of Science and Technology, Kattankulathur campus. Her main research areas are corporate social responsibility, financial markets, and ESG.

References

Bhardwaj

(2023). India’s UPI Interface to Become Accessible to More Users. [online] https://www.india-briefing.com/news/global-acceptance-of-indias-digital-payment-systems-europe-latest-to-join-26183.html/#:∼:text=Inbound_foreign_travelers_from_G20_countries_can_use_UPI_payments,%2Dmerchant_or_P2M_transactions (Accessed 09 April 2023).

BQ Prime Article (2021). UPI Now Forms 10% of Retail Payments. Says Macquarie Report. [online] https://www.bqprime.com/business/upi-now-forms-10-of-retail-payments-says-macquarie-report (Accessed 09 April 2023).

Ghosh

(2023). NRIs from 10 Countries Can Use UPI with Domestic Accounts, Int’l Phone Numbers. mint. [online] https://www.livemint.com/industry/banking/nris-from-10-countries-can-use-upi-with-domestic-accounts-int-l-phone-numbers-11673458317062.html (Accessed 09 April 2023).

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Puri

(2020). UPI Chalega” – A UPI Awareness. Campaign Presented by NPCI in Association with the Payment Ecosystem Player. [online] https://www.agencyreporter.com/upi-chalega-a-upi-awareness-campaign-presented-by-npci/(Accessed 09 April 2023).

Srivastava

Nair

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Varahasimhan

(2022). UPI: The Dawn of Digital Fintech Nirvana. The Hindu, [online] https://www.thehindu.com/business/upi-the-dawn-of-digital-fintech-nirvana/article65599052.ece (Accessed 09 April 2023).

Vinayak

(2020). Covid Effect: UPI Transactions up Significantly Post-lockdown. The Hindu, Business Line, [online]. https://www.thehindubusinessline.com/money-and-banking/covid-effect-upi-transactions-up-significantly-post-lockdown/article62199163.ece (Accessed 09 April 2023).