UPI: the dawn of digital fintech nirvana

If you own a smartphone, you have most likely made UPI-based payments using BHIM or another mobile application. Unified Payments Interface or UPI processed transactions worth 10 41 520 crore in India in May this year alone. More than 40% of all digital retail payments (non-cash and non-paper payments) in India are now made through UPI.

UPI works

UPI was launched in 2016 and is operated by the National Payments Corporation of India (NPCI). NPCI was formed in 2009 as an initiative of the Reserve Bank of India (RBI) and the Indian Banks’ Association (IBA) with the aim of creating a robust payment and settlement infrastructure. UPI operates on top of the Immediate Payment Service (IMPS) created by NPCI for instant money transfers.

UPI-based payments work broadly through three steps. First, one’s bank account is assigned a virtual payment address (VPA). A VPA eliminates the risk of mentioning account details in each transaction. It can be created in a few minutes using a UPI app. The only condition is that your bank account is linked to a mobile number. Second, a payment service provider (usually a bank) handles the back-and-forth transactions of this VPA (and thus of the underlying bank account), and finally the UPI software orchestrates the fund movement from a customer’s VPA to a target VPA and completes the transaction .

This transaction is different from paying with a debit or credit card, as it does not involve a sales discount rate (MDR). MDR is a fee that the recipient bank requires from the seller. For UPI transactions, there is no MDR (as in the case of the Indian Government’s Rupay card which also does not have an MDR), and there is therefore no price to be paid by the seller.

A ubiquitous payment system

The popularity of UPI is clear – from small road shops to large brands, many sellers accept UPI-based payments. The main reason for this penetration is that UPI accepts transactions as small as one rupee, and for sellers the absence of MDR that they have to pay to their banks is a significant incentive to accept UPI payments. Only your smartphone is the only device needed to complete a transaction, making the process as easy as it can be, instead of using devices like Point-of-Sale card sweepers. If there is no extra price to be paid by the customer or seller, how does NPCI handle the cost of operating the infrastructure for UPI? Is it sustainable in the long run to continue without MDR to finance the infrastructure? The answer may be that cost savings from the reduction in problems and fixed costs for banks (by supporting UPI) will be used to bear the costs of operating UPI in the long run.

The ecosystem in which UPI thrives is not to be missed: the presence of high-speed Internet in many parts of the country, technologies that power a smartphone, cloud computing and modern software technology that fulfill a transaction in a few seconds. The security of a UPI transaction is linked to the user’s authentication with the mobile phone – there is a mobile personal identification number (MPIN) for the UPI application and there is an extra layer of security when the bank’s online transaction PIN is entered as part of each UPI. -transaction. If you block a mobile number, for example, due to theft, UPI transactions on that mobile number will also be stopped.

Continuous innovation

NPCI has introduced several new innovations in recent years: recurring payments for monthly bills, international payments, connecting UPI to credit cards, 123PAY which allows people without smartphones, but with just regular mobile phones, to use UPI using lost calls, so that one-time payment by letting a salesperson generate a QR code (Quick Response) that is valid for the specific transaction and many more features. The dynamic QR code is a big boost for security and trust because there is no risk that someone has tampered with a static QR code (a static QR code is what is very common now, and we see it on the wall in many stores). The seller generates a QR code that is specific to the transaction amount, and the customer pays through UPI by scanning the QR code.

UPI is a phenomenal Indian technological success story. In 2019, Google asked the US Federal Reserve to develop a solution similar to India’s UPI, referring to the well-thought-out planning, design and implementation behind it.

UPI brings us one step closer to the age of the digital fintech nirvana.

From the beginning of civilization man has always accumulated and hoarded; However, UPI makes it possible to move around with an empty pocket that locks a smartphone; This means that we do not learn to carry a wallet, but can be confident that we can pay whenever we want.

The author is a senior employee at a software product MNC in Chennai