Real-time payment systems backed by the supportive regulations, government sponsorship and enabling technical infrastructure, can catapult countries into the digital economy.
To test this hypothesis, we recently chose to take a deep dive into Indian market, with a particular focus on Unified Payment Interface (UPI), which in many ways has become cornerstone of payments ecosystem in India. Leading a panel discussion convened by EPA Asia on this subject, I was joined by three industry colleagues from India – John Alex (National Head, UPI & Strategic Alliances at Bajaj FinServ Direct Ltd), Somya Patnaik (Sr Product Manager, Real Time Payments at ACI Worldwide) and Bhagyesh Vyas (VP, Digital Banking, Bank of Baroda Shared Services). Together, the panelists brought multidimensional perspectives to the discussion, primarily-Business, Platform and Operational.
UPI is a real-time payment system developed by National Payments Corporation of India (NPCI) facilitating inter-bank transactions. The interface is regulated by the Reserve Bank of India (RBI) and works by instantly transferring funds between two bank accounts on a mobile platform. UPI, through its Application Programming Interfaces (APIs) can interface with IMPS (Immediate Mobile Payment Services), which is one of the three key payment systems active in India, the other two being National Electronic Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS). UPI was launched in April 2016 by RBI governor Raghuram Rajan. It aims at achieving 50 billion transactions by 2024 and is well on its way to exceed that target. In February 2020 alone, UPI processed 1.32 Billion transactions, highest ever in a month since its launch. In full year 2019, it surpassed Debit (card) transactions in India, a significant milestone. So what’s driving this impressive growth of UPI in India? Does our original hypothesis relating to real-time payments hold true for Indian UPI? Are there any imminent threats? What do industry participants think of it in India? Can broader Asia Pacific markets take a leaf from India’s UPI book?
The discussion with the panelists allowed us to get answers to these key questions, amongst others and help form a well-informed perspective. UPIs key strength in its ability to address the key issues of cost prohibitive electronic payments prior to it and (lack of) their large scale adoption, enabled by government sponsorship for UPI and importantly the user experience (ease of use), made it a sure-fire hit in India, a country of circa 1.3 billion people. The recent (Jan 2020) Indian government directive of zero Merchant Discount Rate (MDR) for UPI QR transactions is likely to catapult its transactional growth to the next level. The panel also believed that UPI’s four party model (relative to 2 or 3 party models elsewhere) and potential to enable interoperability amongst mobile wallets in India, over and above bank account led model at launch, also helped it to gain the requisite momentum. Importantly, UPI recognised ‘transfer heavy’ nature of payment dynamics in India, a country where over 90% credit (card) transactions and close to 100% debit (card) transactions are domestic.
As such, NPCI chose to indigenously develop standards for UPI to support local ‘transfer heavy’ payment dynamics. Noting that most Real-time payment systems across Asia Pacific leverage ‘data heavy’ ISO20022 standards (for the right reasons), for example- to enable cross border transactions requiring enhanced data for KYC, AML compliance etc. Whilst UPI has been a massive success in India in terms of adoption, the panel also believed that it faces several challenges in terms of its sustainability into the future and taking it to the next level. Its ability to track and contain fraudulent transactions, no visibility of revenue lines for the participants, dependence on select few Payment Service Providers (PSPs) and Third Party Application Providers(TPAPs) surfaced as key barriers to sustainable success of UPI, if not addressed timely. The imminent threat from new payment technologies from emerging and traditional payment players cannot be ignored either. From a commercial perspective, the only upside UPI currently provides the participants is – data, only limited by participant’s ability to harness its potential as the ‘new gold’. In my view, ability of payment companies to make sense of big data, synthesise it into valuable insights and monetise it as a sustainable significant hard dollar revenue stream, whilst is evolving but remains a gap. Especially with local payment players in India. As such, absence of transactional revenue steam is a big demotivator for participants, and would have been a big stumbling block in absence of government sponsorship. Most participants view it as an acquisition and loyalty play, much like ATM cards used to be back in the day. Customers will gravitate towards the bank which provides UPI powered overlay (app) solutions, given the local customer preference towards paying directly from a bank account, relative to blocking money in a prepaid instrument.
In terms of taking it to the next level, especially enabling cross border transactions, the current indigenous standards which were designed keeping ‘transfer heavy’ domestic Indian market in mind, may become an impediment. UPI may have to adopt ISO20022 standards to advance into its cross border payments journey. That said, in terms of future opportunities, ‘There’s still room for growth’ in terms of UPI’s expansion in domestic market, as per Soumya Patnaik, especially as it relates to overlay services. In John Alex’s view –‘Single time mandate, Signed intent & QR, Invoice in a box and Recurring Payments/Loan repayments’ are the opportunities which would help greater uptake of UPI in the Indian market. According to Bhagyesh Vyas- ‘How can players leverage UPI to enhance their ecosystem/business?’, the answer will determine their ability to differentiate their payments offering. As an example, GAFA (Google, Apple, Facebook, Amazon) have chosen to experiment their payments offering in India, ahead of other global markets.
It’ll be fair to conclude that India’s UPI case study has the potential to be leveraged by many Asia Pacific markets, as they either embark or advance on their real-time payments journey. UPI case study provides valuable best practices for the markets which are leading their real-time payments journey with cash displacement as their primary agenda. These markets can benefit from UPI’s low cost and nimble model to scale real-time payments in domestic market. It equally presents an opportunity for mature markets to advance their cashless economy agenda to the next level. That said, UPI’s ability to tackle cross border payments remains an opportunity to develop, something mature markets can proactively weave into their planning, to be proactively prepared. For example- New Payments Platform Australia, which has proactively embraced ISO20022 standards. Finally, our hypothesis around the value of supportive regulations, government sponsorship and enabling technical infrastructure is well substantiated by India’s UPI case study. These enablers are clearly catapulting the Indian market into a digital economy.
References: Reserve Bank of India, National Payments Corporation of India, Views expressed by the panelists John Alex (National Head, UPI & Strategic Alliances at Bajaj FinServ Direct Ltd), Somya Patnaik (Sr Product Manager, Real Time Payments at ACI Worldwide) and Bhagyesh Vyas (VP, Digital Banking, Bank of Baroda Shared Services), Market research by writer.