India has come a long way in online payments in a very short period of time. With the launch of NEFT and IMPS, cash transfers between accounts has been made electronic, paperless and instant.

NPCI (National Payments Corporation of India) has recently launched UPI (Unified Payments Interface) as a new way to transfer money in India. This blog post’s content is based on a recent webinar conducted by Razorpay. You can watch the webinar below or at this youtube link.

UPI holds the potential to change the face of online payments in India, but there is still a lot of confusion around what UPI is supposed to be. Hopefully, by the end of this blog post, you will have a better and clear idea of what the buzz around UPI is all about.

What UPI is

  1. UPI is a way to transfer moneyThe easiest way to think of UPI is that it is a payment method to transfer money between 2 parties. It is similar to NEFT or RTGS transfers in that way. Even though it is being promoted as a “Payment Interface” and an API, it is easier to think of it as a way to transfer money.
  2. UPI is interoperable between banksThis is really important. By standardizing UPI as the “money-transfer-API”, NPCI is forcing banks to improve their interoperability. This will let customers manage their bank accounts on multiple banks over a single banking application (from any of the banks). Huge deal going ahead.
  3. UPI is running on top of the existing IMPS Infrastructure*The asterisk is because IMPS is being used “as of now”. This might change in the future as the scope of UPI is increased.
  4. UPI is betting heavily on smartphones in IndiaSmartphone penetration in India is on the rise. UPI is heavily betting on smartphones, which means it will require mobile banking applications as a basic minimum. We also have NUUP/*99#, the national based-payments infrastructure run by NPCI and it is somewhat interoperable with UPI. However, to leverage the entire suite of UPI, we’ll need to get smartphones in everyone’s hands.

What UPI is not

  • UPI is not going to be immediately available everywhereUPI is currently in beta, with access restricted to certain parties. Even after this period ends, there will be very few parties actually talking to UPI. However, every bank will have its own timeline on their UPI integrated applications going live. Expect to see it getting announced by banks somewhere in Summer this year.
  • UPI is not a mobile wallet killer (yet)This is probably the most talked-about question, and the answer is not very clear as of now. As with every new technology, the answer depends on the adoption. UPI does have some barriers to entry, such as smartphone penetration and even things like availability of apps in Indic languages. Mobile Wallets have flourished in India because they have allowed customers to spend money online far more easily compared to other payment methods. UPI is far more easier to use for the end-customer while also having the advantage of being interoperable. (You can’t check your Paytm balance from your MobiKwik app, but you can do that with UPI).However, UPI is still not there. This is an early avatar, and it will require a lot of polish before people will start trusting UPI as the payment method for everyone. Meanwhile we’ll still have to rely on payments being made of Credit Cards and the plethora of netbanking options we currently have.
  • UPI is not going to replace Net BankingThe simple reason being: UPI does one thing and it does it well (money transfers). Netbanking applications provided by banks do far more things. For eg, you can apply for health insurance on your bank portal. UPI gives you the most useful feature from there, in a far more accessible manner.
  • UPI is not a magic bullet for payment processingBelieve this from someone who works at a fintech company. Payments are hard. Online payments, even more so. UPI might solve some of the problems and solve them really well, but it will take a lot of time and nurturing before UPI can be anywhere close to a single solution. For instance, you can’t ask someone with a non-participating bank account (such as a foreign bank, or a small co-operative bank) to transfer funds using UPI. There is no escrow mechanism in UPI, and rightly so, because it doesn’t belong in such a service. However, there are use-cases for escrow payments that will still require banks or other companies to build on top of UPI, perhaps.

What UPI means for everyone?

  1. Customers can now transfer money far more easily using their phonesFor a start, as a customer you get to do away with the netbanking websites and bank-specific mobile applications and get a common interface on a single app (which is still provided by any of your banks) to make fund transfers. However, the implementation of these apps is still left to the banks, and they can still add layers of complexity on top of this. For eg, UPI spec recommends an “Add beneficiary details” step before every payment, even on mobile applications as a phishing prevention measure. However, it should lead to a better “common” experience for the end-customer, in general.
  2. Merchants can now collect money from their customers easilyA small-time merchant benefits greatly from UPI and can send invoices to their customers from the mobile app. Even small-time kirana stores can start accepting large payments from their regular customers over UPI. All the merchant needs to ask for is your mobile number and send you a “collect” request, which will appear as an option in the mobile app.
  3. Enterprises have to handle the hassle of another payment methodThis is where it gets complicated. For larger merchants, it gets unwieldy to use a mobile app to ask customers for payments. However, since customers are already paying them via other methods, this is an extra payment method that they need to integrate and test. Even then, every merchant would need to get vetted by NPCI before being granted access to UPI.
  4. Banks can now compete with wallets in mobile paymentsBanks have a silver-lining: If they work hard enough on their mobile app experience, they can gain back the market they have lost to mobile wallets.
  5. Wallets have to convince NPCI to add them to UPIWallets are currently not in scope as a provider in UPI. This is more of of a consequence of the decision to use IMPS rather than NPCI ignoring wallets. However, this might change in the future, as wallets might be included in the scope. Expect this to be big news if/when it happens.

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UPI – Future of Indian Payments?

The success of UPI depends on whether it sees mass adoption. And the people who can ensure that are right here in this webinar. NPCI has taken a huge leap by releasing UPI and working on it. Now it is upto companies, developers, merchants, and even customers to make sure that it sees its full potential. Go ask your bank when are they integrating with UPI, and when can you start using it.

No other country in the world can boast of a payment solution as well designed as UPI. However, we need co-operation from all parties, including the Banks, to make UPI the success that it can be.

In case you have any queries regarding UPI, you can reach out to us at contact@razorpay.com