Baba’s Explainer – UPI and NPCI Regulation

• Immediate money transfer through mobile device round the clock 24*7 and 365 days.
• Single mobile application for accessing different bank accounts.
• Single Click 2 Factor Authentication – Aligned with the Regulatory guidelines, yet provides for a very strong feature of seamless single click payment.
• Virtual address of the customer for Pull & Push provides for incremental security with the customer not required to enter the details such as Card no, Account number; IFSC etc.
• QR Code
• Best answer to Cash on Delivery hassle, running to an ATM or rendering exact amount.
• Utility Bill Payments, Over the Counter Payments, QR Code (Scan and Pay) based payments.
• Donations, Collections, Disbursements Scalable.
• Raising Complaint from Mobile App directly.

The popularity of UPI is evident — from tiny roadside shops to large brands, many merchants accept UPI-based payments. The primary reasons for this penetration are:

• UPI accepts transactions as small as one rupee and for merchants, the absence of Merchant Discount Rate that they have to pay to their banks that acts as a significant incentive to accept UPI payments.
• The presence of high-speed internet in many parts of the country, technologies that power a smartphone, cloud computing and modern software engineering technologies that fulfil a transaction in a few seconds.

• For Banks

• Single click Two Factor authentication
• Universal Application for transaction
• Leveraging existing infrastructure
• Safer, Secured and Innovative
• Payment basis Single/ Unique Identifier
• Enable seamless merchant transactions

• For Merchants
  • Seamless fund collection from customers – single identifiers
  • No risk of storing customer’s virtual address like in Cards
  • Tap customers not having credit/debit cards
  • Suitable for e-Com & m-Com transaction
  • Resolves the Cash On Delivery collection problem
• For Customers

• Round the clock availability
• Single Application for accessing different bank accounts
• Use of Virtual ID is more secure, no credential sharing
• Single click authentication
• Raise Complaint from Mobile App directly

• UPI is a platform whereas BHIM is a separate mobile wallet app like Paytm, PhonePe, etc. If a person has bank accounts with the different banks then the person will have to use different UPI apps and VPA (Virtual Payment Address).
• On the other hand, BHIM is a unified payment app based on UPI which can be synced to any of the UPI enabled bank accounts.
• The BHIM app is an upgraded version of existing bank UPI apps.
• The biggest advantage of BHIM apps over other payment apps is that transactions happen directly between bank accounts and no charges associated with the transfer.
• Unlike other payment apps, there is no need to recharge BHIM payment apps. There are no commission or hidden charges.

• Convenience to All stakeholders: It created interoperability between all sources and recipients of funds (consumers, businesses, fintechs, wallets, 140 member banks). It allows for instant settlement in fiat money – Convenience to consumers and merchants.
• Promotes Formalisation and Digital Banking: UPI has now become the most dominant way to pay in the offline and online place especially for retail payments, and has thus helped in driving the digital banking.
• Move towards less-cash Economy: UPI manages to materially reduce the need for the public to deal in cash. If the demand for paper currency diminishes, banks would save on the logistics costs involved in safely storing and transporting paper currency and regularly refilling their ATMs.
• Increasing tax revenue: With digitalization, the market’s black money can be diminished, increasing compliance and increasing tax revenue.
• Strengthen Banking Health: UPI’s use prompts bank account holders to hold larger balances in their savings accounts, providing banks with a low-cost source of funds.
• Blunted data monopolies – Big tech payment firms have strong autonomy but weak fiduciary responsibilities over customer data. UPI which is based on open framework thus enables any new startup to easily launch their payment solution.
• Soft Power: It enables India to emerge as frontrunner in fintech & payment solutions across world. In 2020, Google requested the U.S. Federal Reserve to develop a solution similar to India’s UPI citing the thoughtful planning, design and implementation behind it.

• Failure rates: Digital payments are currently characterised by high transaction failure rates due server outage issues.
• A Large Number of people left Behind: With options such as mobile wallets, payment apps and QR code readers available only on smartphones, feature phone users who make up roughly half of India’s mobile subscriber base have been left behind. Since most people lack digital literacy, they are still unable to use the UPI system.
• Concentration risk: Currently, three players — PhonePe (45%), Google Pay (35%), and Paytm (16%) — account for approximately 96 percent of monthly UPI volumes.
  • The National Payments Corporation of India (NPCI) came up with a novel idea in March 2021 to save the unified payments interface (UPI) from concentration risk.
  • The guidelines mandated each UPI third-party app to adhere to a 30 percent transaction volume cap by December 31, 2022, to avoid the concentration of UPI volumes in the hands of a few players.

• NPCI deadline of imposing cap has been postponed several times since. In a recently issued circular, it extended the deadline yet again until December 31, 2024.
• In 2021, the NPCI believed that WhatsApp Pay will take off, and will naturally balance out the app share. Sadly that never happened, and even after a year and a half it is struggling to make a dent whatsoever.
• PhonePe and GPay formally submitted the request to the NPCI on delaying the implementation because both were worried about the user experience in their app. Apparently, according to some media reports, MEITY and the RBI were not in favour of this either which helped the cause.
• UPI is still onboarding new users. The new users coming to UPI now are not very tech savvy hence putting them through this loop of trying multiple apps would have dented UPI’s popularity and ease of usage.
• Technology improvement at third party application providers (TPAP) is leading to lesser large scale outages allaying the fear of systematic risk.
• The NPCI doesn’t have enough teeth to rein in the TPAPs. They aren’t a regulator, but a mere service provider/switch or a facilitator.
• Credit cards on UPI has been allowed recently (only RuPay for now), and the next 12 months would be critical for its adoption, with hopes of Visa and Mastercard join the bandwagon. Any disincentive for the TPAPs at this stage would make this offering dead on arrival.
  • There are over 40 million active credit card users online and bringing it on the UPI platform may bring in savvier users to these apps. If their first experience isn’t seamless then they are likely to switch back to using cards in its plastic form.
• UPI usage is still dominated by Top 30 million consumers, and forcing them to look for alternate app mid-month once their favourite app has capped out was illogical.

• The move comes as a shot in the arm for PhonePe and Google Pay, which collectively control more than 80 per cent of UPI’s market share.
• For platforms like Paytm and WhatsApp Pay, however, the extension could be seen as a natural loss.
• At PhonePe’s scale, to reduce its UPI market share to 30 per cent, the firm would be forced to deny UPI payment services to crores of Indians, and that would be totally detrimental to PhonePe and for overall digital payments growth in the economy.
• Extension of deadline also acknowledges that the burden is on other existing and new UPI players to invest more time, effort and money to increase their own UPI market share.

• While this has been deferred by two years, nothing much would change from the current scenario unless we see another dominating app, like WhatsApp, taking off in payments; the likelihood of that at the current stage looks very difficult.
• Also, it’s a very long period in the fast-changing fintech industry so we are not sure what future dynamics would be at play. The New Umbrella Entity (NUE), which was positioned as a UPI competitor, has been delayed by the RBI, but it may take birth during these three years.
• The NUE is an attempt by the RBI to create a new retail payment system for India comprising of but not limited to the ATMs, White Label PoS; Aadhaar-based payments, and remittance services.