In 2016 the National Payments Corporation of India (NPCI) announced the launch of the United Payments Interface (UPI), catapulting India into the age of digital payments.
UPI is India’s homegrown real-time mobile payments system. It was intended to continue the journey of financial inclusion that had begun with the goal of providing every Indian citizen with a bank account, now enabling them to take part in a digital economy that was rapidly becoming smartphone-enabled.
UPI was designed to enable interoperability between money custodians, payment rails and front-end payment applications. In just 5 years, it has grown from an ambitious idea to becoming the world’s 5th largest payment network by volume, behind only Visa, Alipay, WeChat Pay, and MasterCard.
At its core, UPI is a payments markup language that runs on a central switch operated by a bank-owned non-profit known as the National Payments Corporation of India (NPCI). In simple terms, there is one NPCI server which all the licensed banks are connected to. This server sends messages to and fro between all the banks, with NPCI as the middleman.
One can think of the system as a three-tiered cake. At the base of this cake are the public rails provided by NPCI, which handles the routing of payments messages. Atop this lies the second tier, consisting of regulated banks - they are responsible for holding user funds and updating account balances. Presently, 200 of India’s top banks are connected to the UPI system. The third and final tier is the fintech layer, through which payment apps and fintechs can gain access to the system underneath.
Today there are 200 banks plugged into the UPI system, which means that a would-be payments provider or fintech app only needs to use one set of APIs to get access to all of the consumer and business bank accounts in India.
There are a number of reasons why UPI has so rapidly gained ground share in India’s payment ecosystem. This is primarily down to the superiority of the end user experience when compared with digital wallets, card networks or traditional bank transfers. As an interoperable payment rail, UPI obviates the need to fund any kind of intermediary wallet as users can make real time payments directly in and out of their bank accounts, at essentially no cost. UPI also makes use of a separate UPI PIN as a means of second factor authentication, and a Virtual Payment Address (VPA) in addition to typical identifiers like bank account numbers or debit card CVV’s making for a more flexible and secure payment experience when compared with alternatives. Lastly UPI apps allow consumers to make payments via QR codes as well, thus allowing any UPI-enabled application to account for all the online and offline payment requirements that an Indian user may have.
In addition to empowering every Indian with a smartphone to participate and transact in the digital economy, UPI has also laid the foundation for a number of innovations in India’s payments artillery.
For example, in July 2020 the NPCI unveiled an extension to the UPI product mandate called ‘UPI Autopay’ that enabled the use of event-based triggers while setting up recurring payments like rental payments or subscription services. In short, any UPI-enabled payment app could now provide its users with the ability to ascribe standing instructions (time, day, regularity etc) for their recurring payments.
UPI Autopay also paves the way for the eventual introduction of event-based triggers for UPI payments, as outlined in the seminal UK Sinha RBI Report on MSMEs (2019). This means that individuals and MSMEs would be able to ascribe specific conditions under which payments are to be made (like the meeting of a specific threshold or occurrence of a particular event. Both time-based and event-based triggers represent an important step forward in the programmability of payments in India, something that so far has been an innovation restricted to the emerging domain of crypto assets and smart contracts.
More recently, the NPCI announced the launch of a new digital payment mode on UPI called e-RUPI, which functions as an electronic voucher system that can be utilised by any mobile phone user in India. The goal of e-RUPI is to provide an improvement over existing prepaid payment modes. It is intended to be a single-use digital payment solution (represented by an SMS-string or QR code) that is specific to a person and purpose for use cases such as donations, gift vouchers or even Covid vaccine subsidies.