Will Unified Payment Interface (UPI) bring financial inclusion in India?

Technology will play a key role in bringing financial inclusion to India. Mobile phone penetration is growing. With an estimated 700+ million mobile phone installed base, every family will likely have a mobile phone or at least access to one in the next year. In the absence of suitable financial services infrastructure, mobile phones will be the interface of financial inclusion.

The Government of India (GoI) recently announced UPI (Unified Payment Interface), which allows users to send and receive money from one bank to another using a UPI address. These addresses can be an Aadhaar number, a mobile number, or an email address linked to a bank account. The UPI money transfer process doesn’t require any bank account details or IFSC code of banks and it works seamlessly across bank platforms on a real time basis, even during holidays.

How UPI will bring Financial Inclusion ?

After launching in 2016, UPI has been adopted by 35 national banks in India. To increase the mobile base transaction process further, the GoI launched a UPI-based BHIM (Bharat Interface for Money) mobile app in Dec 2016. Within the short period of three weeks, transactions through UPI have doubled to reach around 180,000 per day as at in mid-January 2017. This initial growth is primarily urban-centric and tech-enthusiast driven.

Modes of digital payments like credit and debit cards have not substantially penetrated India so far. More recently, we have seen mobile wallets proliferation as well. The current digital wallet ecosystem is populated by several players from different verticals, offering overlapping solutions. The introduction of BHIM apps from government created a new competitive dynamic in an already overcrowded space. Key players with investment backup have been able to capture early market share within the growing user base. A snapshot of some of the key players are as follows:

Most players have concentrated in urban areas with only a few offering services at the grassroots level. The following chart represents the current standing of mobile payments ecosystems in India.

Mobile Payment Service Analysis

There is a huge potential market for digital payment players to cover. However, we foresee some bottlenecks which are slowing the spread of digitization in India:

  • The psychological barrier. There is a misconception that digital transactions are costlier than cash. People usually don’t value their time, thus spending time on depositing currency in a bank is considered as a cost-free activity. Shifting psychological behavior requires continuous awareness and habit building.
  • Unaccounted money doesn’t come under taxation. Only 2% of Indians pay income taxes, and there is a tendency to save tax by paying in cash. The Government’s recent initiative of demonetization to replace circulation of old currency with new currency notes gave a blow to that concept. Further actions in this direction will channel money from the parallel economy to the digital economy. Thus, honest consumers will be encouraged to pay using digital currency in future.
  • Lack of infrastructure. India is way behind in payment points availability compared to any other developing country. Thus, using mobile as a primary platform to provide digital payments and banking services is a practical solution to overcome infrastructure barriers.
  • Last but not least, lack of inter-operability of payment institutions. Other than UPI, there is no other payment platforms working seamlessly across all banking platform.

We believe, UPI will revolutionize usage of digital payment by covering all limitations with its cross-platform functionality.

  • Digital India Program by GoI, and other awareness programs, will help to build confidence among rural consumers. With growing awareness and additional push from the Government, we expect UPI will take another two years to become the main digital payment platform in rural India with an estimated share of around a half of all digital payments.
  • Initial usage will be peer to peer money transfer. With integration of government services, bill payment gateway and merchant payment gateway etc. UPI transactions will penetrate in rural areas and likely become the main mode of digital payments in India.
  • UPI may become the main payment form but we will see wallet players and other payment services coexisting in the economy. Where UPI will focus on bank to bank transfer, other platforms will be focused on specialized partner-specific services like cash back and loyalty programs. It will be ideal for wallet players to integrate UPI transaction method into their platforms as alternative modes of payment.

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