UPI: the dawn of digital fintech nirvana

This virtual payment interface is an Indian technological success story, allowing us to move around with an empty pocket, except for a smartphone.

This virtual payment interface is an Indian technological success story, allowing us to move around with an empty pocket, except for a smartphone.

If you own a smartphone, chances are you have made UPI-based payments using BHIM or some other mobile app. The Unified Payments Interface or UPI processed transactions worth ₹10,41,520 crore in India alone in May this year. Over 40% of all retail digital payments (non-cash, non-paper payments) in India are now made through UPI.

The operation of the UPI

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

UPI-based payments broadly work 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 every transaction. It can be created in a couple of minutes using a UPI application. The only prerequisite is that your bank account is linked to a mobile phone number. Second, a payment service provider (usually a bank) handles the transactions back and forth to this VPA (and thus the underlying bank account), and lastly, the UPI software arranges the movement of funds from a customer’s VPA to a destination. VPA and complete the transaction.

This transaction is different from paying with a debit card or credit card as it does not involve a Merchant Discount Rate (MDR). The MDR is a fee that the receiving bank charges the merchant. For UPI transactions, there is no MDR (as in the case of the Indian government Rupay card which also has no MDR) and therefore the merchant does not have to pay any price.

A ubiquitous payment system

The popularity of UPI is evident: from small roadside shops to big brands, many merchants accept UPI-based payments. The main reason for this penetration is that UPI accepts transactions as small as one rupee and for merchants, the absence of MDRs that they have to pay to their banks is a significant incentive to accept UPI payments. Plus, the fact that your smartphone is the only device needed to complete a transaction makes the process as simple as possible, rather than using devices like point-of-sale card reader machines. If the customer or merchant does not have to pay an additional price, how does NPCI manage the cost of operating the infrastructure for UPI? Is it sustainable in the long term to continue without MDR to finance infrastructure? The answer may be that the cost savings from reduced hassle and overhead for banks (by supporting UPI) will be used to cover the cost of operating UPI in the long run.

You can’t miss the ecosystem in which UPI thrives: the presence of high-speed Internet in many parts of the country, technologies that power a smartphone, cloud computing, and modern software engineering technologies that complete a transaction in seconds. . The security of a UPI transaction is tied to the authentication of the user with the mobile phone: there is a mobile personal identification number (MPIN) for the UPI application and there is one more layer of security when the bank’s online transaction PIN is entered. . as part of every UPI transaction. If you block a mobile number due to theft, for example, UPI transactions on that mobile number will also be stopped.

continuous innovation

The NPCI has introduced multiple innovations in recent years: recurring monthly bill payments, international payments, linking UPI to credit cards, 123PAY which allows people without smartphones but with normal mobile phones to use UPI using missed calls, which enables one-time payment by allowing a merchant to generate a QR (quick response) code that is valid only for that specific transaction and many more features. The dynamic QR code is a huge boost to security and trust because there is no risk that someone has tampered with a static QR code (a static QR code is prevalent now and we see it on the wall of many stores). The merchant generates a QR code specific to that transaction amount and the customer pays via UPI by scanning the QR code.

The UPI is a phenomenal technological success story from India. In 2019, Google petitioned the US Federal Reserve to develop a solution similar to India’s UPI citing the careful planning, design, and implementation behind it.

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

Since the dawn of civilization, man has always accumulated and treasured; however, UPI allows one to move around with an empty pocket except for a smartphone; It makes us unlearn to carry a wallet but be sure that we can pay when we want.

The author is a senior employee at a multinational software products company in Chennai.

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