The UPI Effect: How UPI Is Reshaping India’s Payment Industry

UPI’s popularity continues to grow, as reflected in its monthly volumes exceeding 9 Bn transactions for the first time in May 2023, a 58% YoY volume growth and value growth not too far behind. 

The volume growth of UPI peer-to-merchant (P2M) payments continues to trend significantly higher than that of peer-to-peer (P2P) payments, and for May 2023, P2M payments constituted 57% of total monthly UPI transaction volume. On a monthly run-rate basis, UPI payment volumes now exceed 75% of all digital payments made in the country, despite the fact that it has only been in use for about seven years.

Expanding Use-Cases & Account Types Driving UPI’s Success

While a key driver of this growth has been higher penetration as the use of UPI percolates into rural India, a major factor has also been the expanding set of account types that UPI supports, covering savings accounts, current accounts, wallets, prepaid cards, and more recently Rupay Credit Card accounts and credit lines hosted by banks. 

This has also meant that the use-cases for UPI are expanding, which is driving further growth. UPI payments continue to be free of charge for the end customer for a vast majority of transactions, and this makes for a very attractive mode of payment for most. 

Going back in time, more stringent regulations around know-your-customer, top-up, and payment restrictions imposed on the then preponderant digital wallet accounts triggered a pivot by various payment apps to start to focus on UPI as a preferred means to pay. 

The large user base and reach of these apps were key drivers for the growth acceleration of UPI and created a wave that has not subsided since. As one can see today, PhonePe, GooglePay, and Paytm are the largest UPI PSPs, and the expansion of their user bases has been key to the growth of UPI. 

UPI’s Value Proposition & Unique Features

UPI’s value proposition, which has made it so successful, has been a combination of the power of instant payments and its great end-user experience. Starting with first-time activation and on to transacting, be it merchant payments or P2P payments, the ease of use and speed is not something that any other payment mode can offer today. 

Its QR-code-based scan-and-pay capabilities at merchants have been a key contributor to the preference for UPI for merchant payments. The inherent capabilities of smartphones, which support enhanced authentication during payment initiation, while at the same time supporting non-repudiation, have been at the heart of making UPI an easier way to pay. 

It is estimated that UPI will record 1 Bn transactions per day by FY 2026–2027, according to a recent report by PwC. To promote digital transactions through UPI, the government had increased the allocation of financial incentives provided to acquiring banks from INR 1,300 Cr in FY 2021–2022 to INR 2,600 Cr in FY 2022–2023. 

UPI’s growth has not just led to the displacement of cash for payments in a significant way but also displaced other digital payment methods. For instance, the use of Debit Cards for merchant payments has been declining year on year, and UPI has also changed how prepaid wallets are accessed today. 

The Power Of Choice: UPI’s Open Service Provider Model

Another key design element has been to offer the customer a choice in their service provider for UPI, irrespective of which bank or financial institution hosts the customer’s account. The power of choice meant that customers could choose their preferred payment apps to access UPI for payments, versus being forced to use the service of the bank where the account was hosted. 

Many of these apps offered a lot more than just payments and were truly super-apps that offered a variety of services, be it shopping, investments, multi-media content, or even messaging. A single-user interface fulfilled a range of needs for an end-consumer, including the need to make payments. Their impact cannot be overlooked when analysing the success of UPI. 

Future Projections & Government Support

Jan Dhan Yojana and similar programmes rolled out by the government laid the foundation for expanding financial inclusion and access to the formal banking system for citizens. While benefits delivery objectives were a big part of this push, the rollout of UPI leveraging the mobile device was a force-multiplier that democratised a key element of financial inclusion, viz. payments. 

It is estimated that UPI has over 260 Mn users today, and this will continue to increase as smart devices further displace feature phones. The UPI 123PAY and UPI Lite services to support UPI for feature phones are also helping expand adoption, especially in rural areas, as per PwC’s analysis

Impact On Digital Payments Landscape

The success of UPI domestically has been a stepping-stone for international expansion, with the first stop being countries with a significant Indian diaspora. There are two dimensions to be looked into here, the first being the acceptance of UPI as a payment mechanism for the Indian diaspora and travellers. 

In this regard, countries such as Singapore, the UAE, Mauritius, Oman, and Indonesia have established or are in the process of establishing mechanisms to enable this, while many more countries have expressed interest in having bilateral arrangements in place. The benefits of international acceptance of UPI for Indians cannot be over-emphasised and this can have a transformative impact not just in terms of convenience and fund access but also in terms of economic benefits to countries that have a large number of travellers and diaspora from India. 

UPI As A Standard For In-Country Instant Payments

The other dimension is the use of UPI standards and technology to roll out in-country instant payments Countries such as Nepal and Bhutan have started programmes for this in cooperation with India. 

While India has made significant strides with UPI, many other countries across the world have their own standards and success stories around instant payments, and it is to be expected that there will be a large number of such systems that will co-exist and inter-operate. 

For ‘laggard’ countries that are yet to establish domestic real-time payment systems, it may be an option to consider adopting the well-proven and scalable UPI standard and technology. India and the NPCI have taken a proactive approach here and have kicked off outreach to key countries that may have a need. 

Unprecedented Journey & Transformative Impact

From a standing start seven years ago, UPI’s phenomenal adoption and acceptance today is a one-of-a-kind story that is unmatched when it comes to its scale and impact. Its transformative impact on citizens, consumers, merchants, and the various players in the banking and payments ecosystem is highly visible and has significantly changed the behaviour of each of them. 

With smartphone penetration continuing to increase and rural adoption of UPI taking off, it is still some distance away before its usage growth will start to plateau. NPCI has demonstrated an outstanding entrepreneurial spirit in working with stakeholders and the broader ecosystem to bring it to where it is today, and UPI has become one of the most significant achievements of the current administration.