India’s transition to a digital payments’ powerhouse is remarkable. Factors like interoperable, low-cost payment rails, widespread smartphone use, affordable internet, regulatory support for financial inclusion, universal digital identification, and innovative fintech solutions have created a vibrant digital payments ecosystem. The Unified Payments Interface (UPI) is central to this transformation. UPI, integrated into daily life with QR codes for transactions, makes even small purchases digital. Transactions between INR 50 and INR 150 are routine.
With around 400 million users and 90 million merchants, UPI’s transaction volume is staggering. By 2025, person-to-merchant transactions are expected to constitute 75 percent of all the UPIs, underscoring the significant behavioral shift in what was once a predominantly cash-driven economy.
Beyond Transfers: UPI Evolution
UPI has evolved from a simple transfer tool to a versatile platform offering diverse payment services. This evolution, driven by banks, payment processors, fintech firms, and other stakeholders, enhances customer propositions and promotes financial deepening.
- Credit Democratization
Integrating credit cards with UPI is a major innovation. With over 101 million credit cards in circulation according to RBI data (March 2024), India’s credit card market boasts significant room for further growth. Companies like NPST, partnering with institutions like Jupiter Cards, are capitalizing on this potential.
This integration could increase credit card acceptance, providing a seamless digital credit card experience and opening millions of UPI QR payment terminals to credit cards. The National Payments Corporation of India (NPCI) introduced pre-approved credit lines via UPI in September 2023, streamlining credit access.
- MSME Credit Access
Credit access for MSMEs, crucial to India’s economy, remains a challenge. According to a EY report, MSMEs constitute about 30 percent of India’s GDP and over 40 percent of its exports. The credit gap for MSMEs is estimated at US$250 to US$300 billion. Digital infrastructure, centred around digital identity and payments, enables MSMEs to use transaction data as collateral, improving credit access.
Reaching Rural Consumers
While UPI is known for its smartphone app, reaching India’s vast rural population with limited smartphone access is crucial for financial inclusion. Here’s why UPI offers solutions beyond smartphones:
- Digital Divide in Rural India: Over 300 million people in India lack smartphones, according to a 2023 report by the CMIE (Centre for Monitoring Indian Economy), excluding them from the benefits of digital payments.
- Offline Payments Bridge the Gap: Allows users to conduct transactions without an internet connection, which is crucial for rural areas with limited or unreliable internet access.
- Missed Call Services: Users initiate a UPI payment by giving a missed call to a designated number, triggering the transaction without needing internet or complex apps, providing a familiar and secure method for basic phone users.
- UPI Lite: Utilizes Near Field Communication (NFC) technology, enabling users to tap their feature phone on a special reader at stores to make contactless payments. Although NFC infrastructure is still developing in India, it holds promise for the future of digital payments in rural areas, especially for smaller transactions.
Financial Inclusion and Global Standing
The surge in digital transactions boosts financial inclusion and elevates India’s global payments standing. UPI transactions make up 40% of digital payments, making India the world’s fastest-growing payments economy.
The Benefits of Financial Inclusion
- Carrying cash is risky, especially in remote areas. UPI offers a safer way to manage money without physical cash.
- UPI transactions are quick and hassle-free, eliminating the need for exact change or concerns about fake bills.
- Digital payments provide access to online shopping, bill payments, and other financial services not readily available in rural areas.
- Financial inclusion through digital payments allows rural communities to participate in the digital economy, boosting economic growth and development.
UPI: From Simple Transfers to Shaping India’s Digital Future
Robust Infrastructure for UPI – UPI interface currently processes 13.3 billion transactions-a-month scale. Ensuring robust and secure infrastructure is critical. Collaboration between financial institutions, merchant aggregators, and fintech companies using SaaS models offers scalability and efficiency in managing UPI transactions.
Fintech Opportunities – Presently, a small number of key players process 80% of UPI transactions. but new fintech players can introduce apps with differentiated propositions, challenging incumbents.
AIOps for Seamless Transactions – With over 2,348 transactions processed per second, a seamless experience is essential. AIOps (Artificial Intelligence for IT Operations) offers proactive remediation, predicting performance issues and ensuring high-quality service.
Investing in Trust-Tech – Investments in Trust-Tech focused on dispute resolution and risk mitigation are expanding. NPCI mandates online dispute resolution systems for PSPs and TPAPs, enhancing customer experience. Intelligent identity verification and risk assessment tools help distinguish between trusted and fraudulent transactions.
In summary, UPI’s evolution, from a simple transfer tool to a versatile payment platform, is driving financial inclusion, credit democratization, and rural adoption. Its international potential, robust infrastructure, fintech opportunities, AIOps integration, and Trust-Tech investments are shaping the future of digital payments in India
