UPI (Unified Payments Interface) set a record in October 2020 with over 2.07 Billion transactions worth more than 3.86 Trillion Rupees. For a 4-year-old system, which took 3 years to reach 1 Billion transactions, it merely took another year to reach the next Billion, primarily fueled by COVID-19. It is a revolutionary achievement of indigenous technology to redefine digital payments in a country like India, where cash was always the king. Demonetization and the subsequent shortage of currency notes skyrocketed the usage and adoption of digital wallets. As wallets were gaining ground, the Government released the plan to implement UPI, and gradually everything changed, to the point that now digital wallets are a dying breed. The success of UPI has been such that Google wrote to the USA Federal Reserve last year to create a similar payment interface – “FedNow” in the USA.
Now for such a successful enterprise, there must be a lot of beneficiaries. Let’s look at a few
- Government
Countries like India have been working for many years to digitize the economy. The efforts towards a cashless economy took a giant leap with the demonetization initiative by the Government of India in 2016. It gave rise to a flurry of digital wallets that made the most of the situation, roping in merchants and citizens quickly. As investments were going on in the digital wallets world, primarily driven by fees from merchants and investments from VCs, the Government of India established the National Payments Corporation of India (NCPI) to create a new money transfer system in India. The result – UPI (Unified Payments Interface), which started a wave of investments from all banks to perform a real-time settlement capability through UPI. The investments in UPI based payment apps were driven by Merchant Discount Rate (MDR) revenue and VC money. In April 2020, the Government of India completely removed MDR, fueling a growth like no other. - Individuals
Transferring money and payments for products and services in India was driven by cash. Cards and bank transfers were used, but not all merchants accepted them, primarily to avoid the cut by payment gateways. With UPI making payments simpler, faster, and now free, everyone is accepting them. This also makes money transfer among individuals’ ways faster – without the hassle of adding an account, waiting for account approval, and then sending the money. - Businesses
Businesses in India have always struggled with money management, primarily because India has always been cash-driven. Small businesses have too much dependence on cash, and they do not have the time or inclination to run to banks for all activities. With UPI, most customer transactions became cashless, and the elimination of MDR suddenly pushed everyone towards UPI. - Banks
Banks had to spend a lot of time and personnel to get customer cash as well as get them to transact with the money. With UPI, both customers and merchants are driving a lot of their transactions and financial interactions through banks. - Foreign Entities
The most surprising gainers from the UPI initiative have been foreign payment providers built on top of UPI, namely Google Pay, PhonePe, Paytm, and WhatsApp Pay. Due to the removal of MDR, the revenue of startups invested in UPI has dried up. At the same time, banks have no incentive to promote or innovate their apps providing UPI services. This has resulted in multinationals with deeper pockets completely run over domestic UPI services apps.
With everything going UPI’s way, it would appear that everything is going great for UPI. However, look closely and you will find interesting statistics about how UPI is being used in the country, and then it won’t be all rosy. The Bharat Interface for Money (BHIM) is the official app by the NCPI to provide services over UPI. Still, BHIM is not the leading app used by Indians, not even in the race by a wide margin. The leading apps have become market leaders by pushing a lot of cash in their marketing and advertising spends, something dramatically missing from BHIM. If UPI has to be successful, it needs more marketing and advertising spend and the trust of people that they just need BHIM, instead of a multitude of other payment apps. Till then, India continues to be driven by cash, getting digitized and cashless one transaction at a time.
