In continuation to my previous post “Money 3.0 | The Era of a Cashless Future | Apple, Google, Samsung, Flipkart, Amazon & Snapdeal making inroads to FinTech”, we are finally seeing the tide turn away from Cash towards Digital money.
Yesterday April 11, RBI Governor Raghuram Rajan and Infosys co-founder Nandan Nilekani, adviser to the National Payments Corporation of India [NPCI] launched the NPCI’s most ambitious project, a new Electronic Fund Transfer protocol, Unified Payments Interface (UPI) wherein 29 banks would be enabled with this interface under the 1st phase; and then gradually other banks would be brought into the system.
UPI is expected to bring about a significant shift in the way mobile banking transactions are conducted. It is a single interface across all NPCI systems, allowing customer to instantaneously transfer funds across different banks with the use of single identification and password. UPI is an additional layer of software that connects various components of the payments system. Also, a bank’s mobile app does not transact with other bank’s apps. UPI will address these shortcomings.
The UPI method could change the micro-payment landscape in the country. According to a report, 95% of consumer transactions in volume terms and 65% in value terms are in cash. This is much higher than the 40-50 percent transaction in volumes and 10-20% in value terms for advanced economies. Therefore, the government and the Reserve Bank of India have been working on ways to reduce cash in the economy. Mobile banking has surged in India in recent months as banks have pushed both retail and corporate customers to adopt platforms designed to transact on the phone. In the September-December quarter, the value of mobile banking transactions surged 82% over the same period last year. Considering the number of smart phones in the country is estimated to go up from 150-200 million to 500 million, Mobile Money Transfer is expected to get a boost.
The goal is to bring banking and financial services to 1.2 billion citizens, many of them poor and disadvantaged, in one fell swoop. The network was created by India’s retail banks and backed by India’s central bank—and they’re confident it will work because it’s built on top of an even more audacious project: India’s biometrics-enabled national ID system, called Aadhaar. UPI would signal a new dawn of cashless world in India. As less cash would be transacted and exchange, experts claim that corruption will decrease, and more people would be included within the banking and tax net.
Demystifying the ‘Unified Payment Interface’ Solution
The UPI can be thought of like an email ID for your money. It will be a single identifier that your bank uses to transfer money and make payments using the Immediate Payments Service (IMPS) – which lets you transfer money immediately and works 24×7.
Example: Today, for a quick online payment,
- Enter your Credit / Debit card number, Name, Expiry date and Verification codes
- Sign-in with your Net-banking account and go through a similarly tedious process
- Use a Digital wallet such as MobiKwik or Paytm
- Add the Payee first (account number, account type, and IFSC code), then make the Transfer
- Know the other person’s Mobile Money Identifier (MMID) and Phone number
- Even if you have all these details, typing it all in, particularly on a phone, is a painful process
The idea behind the UPI is to do away with all of this – hypothetically, it could be as simple as, Deepanshu Agarwal having the UPI of ‘Dagarwal’. But perhaps an Aadhaar-like unique code or your email address or mobile number or virtual payments address will be your UPI. It would be the only information you need to transfer money.
- Enter your UPI details
- Get a billing request on your phone (which you can accept or reject right away)
- Enter your password on Mobile to complete the transaction.
- The money would be instantly transferred [IMPS] from your Bank account, directly to the Seller’s account
- There would be a Digital record of Transactions
It relies on two factors for authentication – you would need both a phone with a registered application, and your password, to accept a payment – this means it’s a secure method of payments too. Since it does not rely on people having debit or credit cards at all, and simplifies net-banking instead, the UPI could open up online payments for a huge number of people.
Today, Online / Mobile fund transfers require the receiver to share a lot of personal information with the sender. The simplicity behind the architecture and framework of UPI is amazing to say the least – it enables seamless payments across various banks, businesses, merchants, traders, person-person without sharing any confidential financial data. The platform allows you to use Aadhaar number, mobile number, and account number in a unified way, while not giving it away during the payment process. You could just create a ‘virtual payment addresses’ that are aliases to your bank accounts. Say you want to settle your bill with the cab driver at the end of the journey:
- Give your virtual address
- Driver requests money from it
- You get a message on your mobile phone asking for authentication
- Once you authenticate the transaction by entering your password, it will be complete
This process doesn’t require you to share bank details with either the driver or the cab service provider. In case a merchant’s database is hacked, then the hacker can only access virtual addresses and the sensitive details like bank account number, person details etc. will not be compromised ensuring complete safety and security.
UPI will make the payment system inter-operable. Hence, you will be able to use the products of any bank, even if you are not a customer, which has entered into an agreement to use the UPI platform. Users of SBI can easily send money to an HDFC Bank Account holder. The protocol would enable multiple bank accounts linked to a single mobile banking app, and money can be both received and requested through the same interface. Moreover, Payments can be made by only knowing the Mobile or Aadhaar number. The platform will help eliminate the requirement of receiver’s bank account & IFSC code.
Hence, if you hire a cab or eat at a restaurant, all you need to do is share that identifier to get the payments done: no OTP required, no transfer of funds. Only one password would be required, which can be authenticated via mobile phone. Hence, dependency on a particular Mobile wallet or a Bank account will vanish with UPI, and every citizen of India would be able to use and utilize the wonders of Mobile Payments.
This system will allow for a one-click, two-factor authentication on mobile phones across bank accounts, without having any acquiring (swiping) devices or having any physical tokens. It is expected to make online payments much easier without the need of a digital wallet, credit or debit card. Since UPI runs on Immediate Payment Service [IMPS] platform, the service will be available real-time and 24×7.
The Key Drivers
- A standardized, innovative, adoptable, secure and cost-effective interface
- Use a personal mobile phone to “pay” someone (push) as well as “collect” from someone (pull)
- User can pre-authorize multiple recurring payments similar to ECS (utilities, school fees, subscriptions, etc.) with a one-time secure authentication and rule based access
- It makes possible paying and receiving payments as easy as swiping a phone book entry and making a call on mobile phone
- Ability for sending collect requests to others (person to person or entity to person) with “pay by” date to allow payment requests to be “snoozed” and paid later before expiry date
- Everyone who has an account should be able to send and receive money from their mobile phone with just an identifier without having any other bank/account details
- The unified layer should allow application providers to take advantage of enhancements in mobile devices, provide integrated payments on new consumer devices, provide innovative user interface features, take advantage of newer authentication services, etc.
- It allows banks and other payment players to focus on core business and allow half a billion phones to be the primary payment device in conjunction with other 3rd party authentication
- For a country like India, where an average citizen spends only $1.8 per day, UPI can be a masterstroke to encourage micro-spending using mobile
Nandan Nilekani, Co-founder Infosys & Advisor to NPCI — “The robust system (of UPI) will help India leapfrog the desktop and the credit-card economy to become a mobile-first economy, accelerating e-commerce and driving a host of financial services.”
AP Hota, Managing Director and CEO of NPCI — “Our focus is in line with RBI’s vision of migrating towards a less-cash and more digital society. NPCI has always been at the forefront to innovate and introduce new products and services at par with global standards.”
Binny Bansal, CEO Flipkart — “UPI has the potential of transforming the entire payments ecosystem in the country”. Sensing this, India’s top online retailer Flipkart recently acquired UPI-based payments company PhonePe.
Vijay Shekhar Sharma, CEO Paytm — “UPI will bring easier and cost effective methods to load money in Paytm”.
Govind Rajan, CEO FreeCharge — “We don’t want people to keep money in the wallet, we want them to use us as a processor. That will happen because of the security and speed we can provide, so the more options there are for people the better. We’re not competing with other wallets or digital systems – right now, the challenge is to take on cash. As UPI comes into being we are confident that on the rails of UPI, we will be able to enable a faster and more secure transaction across merchants.”
Bipin Preet Singh, Founder and CEO MobiKwik — “The Unified Payments Interface augurs well for us. MobiKwik already has millions of users paying their bills using the wallet. The convenience, security, and speed that we offer to users keeps bringing them back to the platform. With the Unified Payments Interface in place, our expectation is that we would unlock a new channel for growth and reach would enlarge”.
Sharad Sharma, Co-founder iSpirt — “We need startups to realize that the existing infrastructure has not been given away. They can come onto the UPI platform through partnering with PSP banks. For wallets, this could be a beginning to build on a better platform dealing with the problem of cashless payments better.”
Chanda Kochhar, Managing Director & CEO of ICICI Bank — “UPI will revolutionize payment systems and payment habits in our country.”
Vinod Khosla, billionaire investor and co-founder of Sun Microsystems — “The interface will bring banking to the unbanked.”
Rajnit Jain, CMD of RS Software, The Company which built the UPI software — “The launch of UPI in India will be a great opportunity for the company that will revolutionize India. The company will continue to build various applications for the software. There are several more features in the works for UPI — whether it is for disputes, whether it is for chargebacks or for reverse transactions.”
Raj Jain, Chairman & Managing Director of RS Software (India) Ltd — “The launch of the Unified payment interface (UPI) will go down in history as amongst the most important initiatives to transform India. This is an unprecedented moment for India and we are humbled to be part of this revolutionary initiative, and actually getting the opportunity to build this for NPCI and our country. UPI brings immeasurable opportunities for all in India. Aadhaar and UPI now come together and help the individual to conduct commerce anytime anywhere. This Innovation will bring the consumer, the merchant and the banks on a common platform, creating a plethora of services that are unheard of in today’s global payment offerings.”
How do customers access UPI services? Banks or other parties will have to create mobile apps to provide services that are currently not possible.
How can you make payments? For starters, the customer needs to have a bank account to make payments. That done, she will need to download an app on her smartphone. She can start making payments. It is as simple as sending a text message.
How is it different from the apps that banks provide? Every bank requires you to download its app. So, if you have two bank accounts, you will find yourself needing two apps on your smartphone. But, with this interface, the customer needs to download only one app. The UPI interface will network all the banks together and make it possible for the customer to make transactions using a single app.
Why the fuss around Mobile Wallet? One of the limiting factors to adoption of Mobile Wallets has been that you still need to use a credit or debit card, or Net-banking, to transfer cash to the wallet in the first place, with limits on how much money can be stored and transacted per month. The UPI could make it easier to refill your virtual wallet and use it – but it could also become easier to directly transact with a seller. Moreover, UPI don’t allow wallet-to-wallet interoperability. In that case, would people still require digital wallets? Therefore all Indian online wallet companies, including Paytm, Mobikwik and FreeCharge, are aiming to integrate their services with this protocol, so that their business is not rendered redundant with the changes.
Systems used? Unified layer uses existing systems such as IMPS, AEPS, to ensure settlement across accounts. The usages of existing systems ensure reliability of payment transactions across various channels.
Challenges? Electronic payments via cards are supported by agreements with merchants, fraud analytics, and dispute resolution mechanisms. It’s not clear who will do these functions for UPI-based payments.
PM Modi’s Digital India vision was all about connecting India using Digital platform so that technology can be the fulcrum using which development & progress can be spread all over the nation. UPI is expected to be fourth layer of the India Stack:
- Aadhaar for eKYC
- Digi Lockers for storing documents
- Digital Signatures for obtaining customers’ consent
- UPI for payments
As of now, there are 250 million Aadhaar payment bank accounts, which collectively make 1.2 billion transactions a year across 77,000 micro ATMs. This reach and expansion can be leveraged for UPI. Now with NPCI opening the API to developers for their hackathon it will be interesting to see how startups leverage the power of the platform. The UPI App is expected to be launched for the public in August this year.
Note: NPCI is a primary body governing all retail payment systems in India.
Feel free to add your views!