Just before his interview with Technical Monitor, Nitin Chittal was driving around Mumbai when he noticed his car had a puncture. He pulled over onto the highway, where an independent peddler quickly fixed the vehicle. The transaction came to about 300 less than 3. Digital payments consultant Chittal paid using a QR code. I had no cash, he says. I just paid with UPI.
The Indian state-backed Unified Payments Interface (UPI), first launched in 2016, is a platform for fast and free account-to-account transfers, facilitated by QR codes or virtual IDs. Created by the National Payments Corporation of India (NPCI), UPI connects more than 300 banks and enables seamless financial transactions through mobile applications such as Google Pay, Amazon Pay, PhonePe and Paytm.
The UPI scan-and-pay system can be used for everything from luxury shopping to buying fresh fruit or cigarettes from street vendors. This is the kind of small transaction that Tej Shah, a fund manager at asset manager Marcellus, often makes, not least when he buys a warm cup of chai from a small stall outside his office in Mumbai. Shah now uses the app almost instinctively. I have no physical cash in my wallet for days on end, he says.
In total, UPI currently serves around 260 million users across India, helping the immense country embrace cashless payments and bringing huge numbers of citizens into the formal economy. It is a model that India is keen to promote abroad, marketing the benefits of its digital infrastructure model to countries facing similar challenges in promoting financial inclusion. But it’s not without its drawbacks. Accused by some of being used as a tool by the Indian government to squeeze domestic fintech suppliers at the expense of foreign competition, UPI has also proven to be a tempting target for fraudsters.
India’s digital revolution
UPI has rapidly transformed Indian commerce, especially in the larger cities. India was a cash economy, Chittal says. While the total volume of cash transactions hasn’t shrunk by much, he says, the pie has increased and UPI has helped meet India’s economic growth. Digital payments have grown rapidly, with UPI accounting for 84% of digital payments in India in 2022 according to a report by Worldline.
In May 2023, UPI hit a new record, logging 9.41 billion unique transactions in just one month. This amounted to 14.3 trillion Indian rupees, about 136 billion according to the National Payments Council of India.
The rapid rise of smartphones and falling mobile data costs have been key in easing access to financial services like UPI, Shah explains. The transition away from cash has been further accelerated by Covid-19, Chittal adds. With banks closed and vendors eager to avoid contamination, digital payments have quickly caught on. As of June 2022, more than 50 million independent merchants were using UPI, a number that has likely only increased, Chittal says.
UPI’s biggest achievement, explains digital payments strategist Ram Rastogi, has been bringing basic banking services to the most remote part of the country at a very reasonable cost. India is home to more than 600,000 villages, many of which have populations of less than 5,000. They have no local banking services, adds Rastogi. They must [travel] at least 10-15 km to reach the nearest bank branch. UPI, he says, has done away with much of that slogan.
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But, just like any traditional financial structure, systems like UPI are vulnerable to fraud and manipulation. According to India’s Finance Ministry, more than 95,000 UPI-related scams were reported between March 2022 and March 2023.
Most of these scams aren’t all that different from traditional phishing scams. Criminals often call and text potential victims to try to get them to reveal sensitive information, such as their UPI PIN. Chittal recalls several recent incidents where scammers tricked customers into signing up for fake rewards programs using UPI, manipulating the required QR codes into thinking users were signing up to receive, rather than send, money.
The Reserve Bank of India (RBI) is not blind to these risks. It has begun issuing regular guidelines for reporting and addressing common forms of fraud, and targets educational initiatives to ensure safe adoption of UPI among new users, including those with limited technology experience.
Go global
These cases are sad, according to Shah, but they also represent an inevitable risk in the launch of any national digital payment system. It’s always there, no matter what kind of infrastructure we build, he says.
But it’s not just scammers that India needs to worry about. There have also been pushbacks from wealthy international players. Mastercard, for example, has complained to the US government that, in its push for digital payments, the Modis government had taken a number of protectionist measures to the detriment of global companies. Cryptocurrency supporters are also upset. Local stakeholders, including the Bharat Web3 Association, are urging the government to reinstate UPI access for cryptocurrency-related businesses, which would have been banned in 2022.
This hasn’t stopped other nations from consulting India on the UPI with the aim of both replicating its success and expanding its reach. In July 2022, IT Minister Ashwini Vaishnav said India was in talks with 30 countries over the system, including Bahrain, Thailand, Mauritius and Indonesia, and had signed Memorandums of Understanding (MoU) with France, the Emirates UAE and Singapore to allow Indians to use UPI abroad. In fact, UPI has been integrated with Singapore’s PayNow digital payments system since February, allowing the country’s migrant workers to send remittances home for a relatively low 3 percent fee.
UPI’s biggest selling point internationally is that it could both accelerate and reduce the cost of cross-border transactions to and from India, the world’s leading remittance market, Zennon Kapron, founder and director of consulting firm Kapronasia, said written in Forbes.
It’s not just Singapore. PhonePe, a leading provider to UPI, announced in early February that it would expand support for international payments to the UAE, Singapore, Mauritius, Nepal and Bhutan. Additionally, NPCI is in initial discussions with some Gulf countries to develop cross-border remittances using UPI, which will primarily be bank-to-bank transfers, Chief Executive Dilip Asbe said. mint. Looking ahead, India wants UPI to become a simple and accessible payment option for its citizens and expats abroad, just like the Chinese payment platform Alipay is widely accepted outside of China.
Other countries, meanwhile, are keen to replicate the opportunities promised by UPI for their own citizens. Brazil launched its own imitator, Pix, in November 2020. In 2022, Nepal became the first foreign country to officially implement UPI for domestic transactions. Whether the system will achieve widespread adoption among the country’s 30 million citizens remains to be seen, but its evolution could be a measure of the feasibility of replicating UPI’s domestic success in an overseas market.
Shah is confident that Brazil and Nepal won’t be the last countries to draw inspiration from India. The benefits of digital systems like UPI, he says, will be felt most in emerging economies with high growth and low penetration of financial services. People in richer countries, after all, already have access to secure and efficient payment systems.
This type of system is very useful for countries where there is no existing system, where there is no baggage of a [] existing regulatory framework, says Shah. Chittal agrees, pointing out that systems like UPI could be particularly beneficial for countries with large and disparate rural populations, which lack the infrastructure needed for other types of payments, such as ATMs.
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