The Unified Payments Interface crossed a billion transactions a month in 2019, and is now up to 1.3 billion transactions a month. In the three years since its launch, the UPI has become one of the fastest-growing payment platforms in the world and has attracted attention from global policy-makers. It is now regarded as an important institutional and public policy innovation.
Innovation, simplicity, inclusion
The first business process innovation was that the entity collecting permission for debiting a user’s account was decoupled from the account holder’s bank. The business process rule in banking is that, “Your account shall not be debited without your permission.” In the past, this meant that the user had to submit debit instructions directly to the bank, either by signing a cheque or via Internet banking system.
With the Unified Payments Interface (UPI), third-party apps were allowed to collect the debit instructions and submit them to the account holder’s bank, using the secure backend systems managed by the National Payments Corporation of India (NPCI). This deliberate decoupling has led to competition and innovation with specialised apps like PhonePe, PayTM, Google Pay, Amazon Pay and others competing to be the customer’s favourite payments app. All of them work on the payment rails of the UPI.
UPI has also made payments simpler by removing the need to enter lengthy bank account numbers and IFS codes. To make a UPI payment, the user has to know only the recipient’s virtual payment address (VPA), which is a simple combination of username and bank name that looks similar to abc@xyzbank. It is a modern, mobile-first system that does away with the need for physical cards. In a country like India, with its low literacy levels, this kind of simplicity is essential for financial inclusion.
Enhanced role for public sector
UPI and its parent organisation, the NPCI, are also significant institutional innovations. Noted economist Marianna Mazzucato, the founder/director of the Institute for Innovation and Public Purpose at University College London, has argued against the idea of the state as a collection of static bureaucratic organisations needed only to ‘fix’ market failures, leaving dynamic entrepreneurship and innovation to the private sector. She has instead worked to reshape the narrative of the state’s role in the economy to one of “creating and shaping new markets.”
In their excellent working paper on the NPCI, William Cook and Anand Raman of the Consultative Group to Assist the Poor (CGAP) sketch out the history of NPCI, and how Indian regulators actively shaped its formation. In 1996, Y.V. Reddy (then deputy governor of the Reserve Bank of India, and later its governor) asked, “How far are we from global standards?” In the early 2000s, when India’s GDP grew at 7.3 per cent, the country’s payment systems were not keeping pace. The RBI’s Vision Document for 2005-2008 scanned 14 leading markets and found that very few central banks operate retail payment systems. The Payment and Settlement Systems Act, 2007 allowed the RBI to authorise a company or a corporation to operate or regulate the clearing houses of banks, provided that at least 51 per cent of such an organisation is held by public sector banks.
All of this paved the way for the creation of NPCI. The body was set up as a non-profit company that would answer to the RBI, but be operationally independent. The decision to file as a non-profit underscored the NPCI’s utility nature from the outset. The non-profit company status also allowed the NPCI to be an agile organisation that could hire the best talent available in the market.
The success of UPI
Globally, payment systems have been privately owned duopolies because of the very nature of the business. Due to network effects, merchants and customers gravitate to the largest payment platforms, resulting in a few large players dominating the market. UPI was set up as a comparatively open, interoperable payment platform. Any bank can plug into the NPCI’s backend system and offer UPI as a service to their own customers, or to third party payment apps like Google Pay and PhonePe. For customers, this means that they have a choice of more than a hundred UPI apps to choose from.
UPI is also a policy innovation because it was designed to be interoperable from Day One. In many countries, payment networks have grown rapidly and regulators have tried to enable interoperability in hindsight. For example, it is only after the rapid growth of Alipay and WeChat that China has made them connect to Wang’lian, a public clearing and settlement institution for online payments. The interoperability of the UPI platform means that, once a user has downloaded and signed up on UPI, s/he can instantaneously send money to anyone else on the UPI system. It must be noted that very few countries, including the US, have a national payment network that enables instant settlement.
Three years ago, even the banks that are shareholders in the NPCI did not give it much odds of success. The rapid growth of UPI has silenced naysayers and proven that India can build a world-class payments infrastructure from scratch.
Venkatesh Hariharan is Senior Fellow, IDFC Institute. Views are personal.
This is the third in an IDFC Institute-ThePrint partnership series, part of the Data Governance Network’s work on data governance policies and infrastructure in India.