UPI 2.0

A new batch of innovations from NPCI sets the stage for scaling and internationalising the homegrown payments system. EPISODE #93

Dear Reader,

A very Happy Monday to you.

Last week RBI Governor Shaktikanta Das launched RuPay Credit Card, UPI LITE, and Bharat BillPay Cross-Border Bill Payments at the Global Fintech Fest held in Mumbai. Interestingly all three innovations are powered by the National Payments Corporation of India (NPCI), the umbrella organisation for all retail payments in the country.

The runaway success of the Unified Payments Interface (UPI) lends belief that fresh disruption in payments may be on the cards. More importantly, NPCI is slowly and steadily expanding its portfolio of products, especially its ability to take digital transactions to those at the bottom of the pyramid and to Gen-Z.

So this week I explore UPI 2.0 and what it means for India’s financial innovation ambitions as well as securing an indigenously powered payments system—handing the country a strategic advantage in a conflict ridden world.

The cover picture this week is of the charismatic Olympic silver medalist Mirabai Saikhom Chanu winning the gold medal in the 49 kg weightlifting category at the ongoing National Games in Ahmedabad. It is sourced from the official website.

A big shoutout to Gautam, Premasundaran, Aashish and Vandana for your informed responses, kind appreciation and amplification of last week’s column. Gratitude also to all those who responded on Twitter and Linkedin. Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.

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FINANCIAL INCLUSION

Last week the Reserve Bank of India (RBI) Governor Shaktikanta Das launched three new FinTech innovations, RuPay Credit Card, UPI LITE, and Bharat BillPay Cross-Border Bill Payments, at the Global Fintech Fest 2022 held in Mumbai.

Interestingly all three are innovations powered by the National Payments Corporation of India (NPCI). It is the umbrella organisation for all retail payments in the country.

Most of us associate it with Unified Payments Interface (UPI). And rightly so. After a wobbly launch in 2016, digital payments using the UPI framework have taken off.

UPI is nothing but public digital rails (or a Digital Public Good) that allow all FinTechs to build on top of it, enabling easy entry, inter-operability and discovery, thereby democratising the business of payments. And all of this in real time.

But with these three latest innovations, NPCI is signalling a pivot. Not only is it expanding its portfolio of offerings (which by the way is already very impressive: check out this link), it is pressing the accelerator on its intent to reach digital payments to those at the bottom of the pyramid and Gen-Z and expanding its global footprint by permitting limited cross-border transactions.

This has the potential to raise the game on digital payments to the next level. Especially in extending its application to a new generation of users. Something that is hugely significant.

Remember India is beset with massive under-penetrated markets especially with respect to financial services. FinTech, developed using DPGs like UPI, can turn this into an enormous opportunity.

UPI’s Success

If NPCI has one calling card that is ubiquitous it has to be UPI. It was also among the first batch of Digital Public Goods that came out of India’s digital commons. The open digital architecture provided public digital rails which enabled interoperability of all wallets—this completely flipped the game from one of building for captive audiences to creating cutting edge innovations to gain eyeballs.

As the graphic capturing volume of transactions using UPI shows, growth since the launch has been nothing but impressive. And as the network effect kicked-in this growth turned exponential.

In 2021-22 total transactions more than doubled to 45.97 billion. This growth accelerated in the first six months ended September; the UPI transactions count is estimated at 37.05 billion—within striking distance of last year’s record, suggesting that the number could cross a record 100 billion by the end of the year.

The expectations are that transactions which average little under 7 billion a month will eventually surge to one billion a day.

Interestingly, 50% of these transactions using UPI are for values less than Rs200! Exactly why the claim that FinTech is enabling financial inclusion is legit.

The UPI framework was also leveraged to launch the eRupee, which combined digital tokens with smart contracts.

Essentially the government wanted to ensure that money forked out under some of its welfare programmes are spent only for that specific purpose. This is opposed to the Direct Benefits Transfer (DBT) scheme, wherein the money is transferred into the account of the beneficiary and she is free to choose how to spend it.

UPI Lite

In January this year the RBI permitted offline digital payments using either cards, wallets or mobile devices, but capped it to Rs200 per transaction and an overall limit of Rs2,000. The idea was to enable digital payments even without Internet or telecom connectivity and instead use the device as a prepaid wallet. It opened the door for the next round of innovation.

Last week NPCI launched UPI Lite on BHIM App. Besides helping overcome the digital divide for those at the bottom of the pyramid who may not have access to Internet all the time, UPI Lite, if you keep in mind that 50% of the average 7 billion transactions are of less than Rs200, will also reduce the transaction load on the core banking system.

Eight banks, including Canara Bank, HDFC Bank, Indian Bank, Kotak Mahindra Bank, Punjab National Bank, State Bank of India Union Bank of India and Utkarsh Small Finance Bank, are live with the feature.

Checkout the short clip below:

UPI-RuPay

For NPCI RuPay credit card (a challenger to Visa and Mastercard) nhas always been its flagship product. No coincidence then that the first innovation launched last week was the UPI-RuPay credit card. It combines the benefit of UPI’s seamless real time payment capability with the functionality of a credit card.

So a customer can eschew the usual steps associated with a credit card transaction. Instead, they can merely scan the QR code and execute the transaction after giving their consent. And at the same time they enjoy the month’s period of credit.

The customer’s UPI ID serves as the virtual link with the RuPay credit cards, thereby securing the transaction. For now customers of Punjab National Bank, Union Bank of India and Indian Bank can avail of this facility with the BHIM app.

It could potentially transform the business of credit cards by scaling it several times from the current level of around 50 million

Check out the short clip below:

Cross Border Payments

To its credit NPCI has been trying to push for a global footprint. The challenges were two-fold.

One, cross-border payments are complex as it involves the interplay of sovereign regulations. Second, NPCI was handicapped by the fact that technologically it has been way ahead of the curve with UPI; in the sense that few countries possess a real time payments system.

Yet this internationalisation of the UPI packs big potential. Every transaction entails an instant conversion of currencies, settlement of charges—not only simplifying the transaction but also enabling a real time settlement.

Now NPCI has taken the first step in this direction by offering this in a limited way to the nearly 30 million expat Indians. Last week it extended the facility of Bharat BillPay to cross-border bill payments to these expats.

Accordingly, non-resident Indians (NRIs) can pay the utility, water, and telephone-related bill payments either on behalf of their families or for maintaining a home in India. Federal Bank with United Arab Emirate’s Lulu Exchange will be the first to go live with this facility.

Check out the short clip below:

Conclusion

The big takeaways from the three launches undertaken by NPCI last week are two-fold.

First, it reinforces India’s attempt to be self-sufficient with respect to its national payments system. Failure to do so would leave India vulnerable, especially in times of an unexpected conflict with another country. Most recently breakout of the Russia-Ukraine war caused Visa, Mastercard to shut down their payments backbone in Russia.

Second, the growing global footprint of NPCI will ensure that the indigenously created real time payments system finds new homes in other countries. Not only will it bolster the self-reliance in the payments systems of these countries it will also guarantee seamless cross-border payments between them and India.

What they call a win-win situation.

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Recommended Viewing

Sharing the latest post of Capital Calculus on StratNews Global.

This time the focus is the Open Network for Digital Commerce (ONDC). Coincidentally, the day after the show premiered last Thursday, ONDC scaled from pilot to a calibrated roll-out in Bangalore. In that sense the eighth episode in which I interviewed T Koshy was well timed.

ONDC seeks to revisit the way sellers and buyers connect with each other in digital commerce. At the moment, these cohorts engage on platforms—which are closed and dominated by few. It promises to be a public network that will connect the existing platforms—very similar to the way UPI connected wallets.

It will be the most audacious bet by India’s unique digital commons. Koshy very patiently explains how ONDC will work and most importantly, make the big incumbents, Amazon and Flipkart, part of the solution. It is a masterclass on disruption.

ICYMI (in case you missed it), I am sharing the link below:

Going by the comments and exchanges on YouTube it is apparent that the episode resonated with viewers. Thank you and all of those who liked the show. Hope you enjoyed it too.

Till we meet again next week. Stay safe.