India already has a diverse and complex payments system, which is moving away from paper-based clearing (cheques etc.) to digital.
The last 3 years’ trends clearly show the direction of the market ― less and less paper, and more and more electronic payments ― with all electronic categories growing both in volume and value terms. The electronic clearing comprising of Electronic Clearing System (ECS), National Electronic Funds Transfer (NEFT) and Immediate Payments Service (IMPS) are growing at the highest rate. With this, and the new Payment Banks, there will be ever-increasing focus on electronic payments in India. These will be accessible to a large section of society at remarkably low cost. Since June 2015, electronic transactions of NEFT has surpassed paper-based, in volume terms. Even in value terms, NEFT has overtaken paper-based since September 2015, highlighting a clear trend towards adoption of electronic payments.
However, India remains a largely a cash economy, with 95% retail payments made in cash. But change is in the air as part of the vision of the Reserve Bank of India (RBI) “To proactively encourage electronic payment systems for ushering in a less-cash society in India”. The Government of India is similarly determined to reduce the country’s dependence on cash. Key to this is the Unified Payments Interface (UPI), which is set to go “live” in April this year – tests are already close to completion.
The UPI is being developed by the National Payments Corporation of India (NPCI) which already operates the RuPay payments infrastructure as a lower cost rival to Visa and MasterCard to permit banks to interconnect and transfer funds. The NPCI was established by the RBI and Indian Banks’ Association (IBA) in April 2009 to consolidate and integrate India’s myriad of payment systems and thus create national, standardised business processes for all retail payment systems.
The UPI will provide a single, digital interface across all systems for smart phones (but not feature phones) linked to bank accounts. It provides users the ability to make payments using 1-click 2-factor authentication all using just a personal phone without having any acquiring (swiping) devices or having any physical tokens (see diagram below).
To do this, the UPI provides a unique digital identifier for every bank account in the country (almost like an email address – but could be the user’s Aadhaar [national ID] or an assigned name), which can then be used to send money using India’s existing IMPS. This allows users to transfer money 24/7 and instantaneously to any other account in the country without requiring a digital wallet or credit/debit card.
As a result, users of the UPI can make payments simply by providing their address without having ever provided account details or authentication credentials on 3rd party applications or websites. The UPI also offers users (individuals or business entities) the ability to send payment or “collect” requests to others with a “pay by” date. Users can also delay payment requests and for later payment before the collection expiry date without having to block the money in their accounts. Thus users can use their mobile phone to “pay” someone (push) as well as “collect” from someone (pull). Users can also pre-authorise recurring payments (for school fees, subscriptions, utility bills etc.) with a one-time secure authentication and rule based access.
Each transaction is expected to incur a cost of less than Rs.0.45 (0.67 US cent), but may well fall to as low as Rs.0.25 (0.38 US cent). Most payments providers are expected to absorb this in preference to passing it on to the merchant or customer.
At present NPCI is limiting access to UPI to banks, but ultimately, it is to be hoped that it will evolve to a truly universal payments system that integrates all Payment System Players (PSPs). However, there is a suspicion that the IBA is not (for obvious reasons) entirely keen on this.
What are the likely impacts of such a comprehensive payments system? UPI offers a fully interoperable system incorporating all payment players without silos and closed systems, allowing users to transact from/to any bank. In the long-term, it is likely to result in the phasing out of debit/credit cards and point of sale devices (except perhaps in places where many foreigners frequent). Similarly, mobile wallets are likely to be challenged by the rollout of UPI. India’s 14 million merchants will be able to accept digital payments with ease. It has the potential to make every merchant (or indeed individual) a cash in/out agent, and to accelerate the rollout of a “cash-lite” India.
However, because it is currently at least, dependent on smart phones, there are legitimate worries that the very poor who cannot afford the devices or the data packages will be further excluded from India’s increasingly sophisticated digital financial services infrastructure. Care must be taken to ensure that the extraordinary digital revolution underway in is truly inclusive – this will not happen without focus and attention from policy-makers and regulator.
By Graham A. N. Wright