The UPI Phenomenon: From Zero to 10 Billion

If there is one Indian innovation that has grabbed global headlines, it is undoubtedly the instant payment system UPI (Unified Payments Interface). In August 2023, monthly UPI transactions exceeded an astounding 10 billion, marking a remarkable milestone for India’s payments ecosystem. No wonder that UPI has not only revolutionized transactions in India but has also gained international recognition for its remarkable growth.

Launched in 2016 by the National Payments Corporation of India (NPCI) in collaboration with 21 member banks, UPI quickly became popular among consumers and businesses. In just a few years, it achieved remarkable milestones:

• By August 2023, UPI recorded an unprecedented 10.58 billion transactions, with an impressive 50% year-on-year growth.

• This volume represented approximately 190 billion euros.

• In July 2023, the UPI network connected 473 different banks.

• UPI is projected to achieve a staggering 1 billion daily transactions by 2026-27.

• The platform boasts over 300 million monthly active users.

• India now leads the global real-time payment market, surpassing China and South Korea.

Those figures are more than impressive and unprecedented in the payment space. To understand its success it is important to understand its origin and operation.

UPI facilitates inter-bank peer-to-peer (P2P) and person-to-merchant (P2M) transactions via mobile devices. End 2022 P2P transactions accounted for 49% in volume and 67% in value while P2M accounted for 34% in volume and 17% in value, but the growth of P2M is significantly higher in recent years than P2P transactions.

Notably, it is a free system, even for merchants. Unlike card payments with high interchange fees, the Indian government subsidizes banks to offer UPI services for free.
In April 2023, NPCI introduced a 1.1% interchange fee, applicable only when using Prepaid Payment Instruments (e.g. wallets) for payments above a certain minimum amount. As 99% of UPI transactions originate from bank accounts, this fee won’t affect the majority of users.

UPI enables instant fund transfers through a user-friendly mobile interface, leveraging virtual payment addresses (VPAs) to link multiple bank accounts from different banks. Robust security measures, including mobile number verification, PIN authentication, and QR code validation, ensure safe transactions.

In UPI transactions, four key players are involved:

• Payer PSP: the UPI app used by the sender, responsible for onboarding customers, creating UPI IDs, and ensuring device security.

• Payee PSP: the UPI app of the receiver, which may differ from the payer’s app. This entity handles customer and merchant onboarding and facilitates money transfers.

• Remitter Bank: the sender’s bank, responsible for managing and debiting bank accounts, as well as verifying UPI PINs.

• Beneficiary Bank: the receiver’s bank, processing incoming credits and funds.

Several UPI apps are available, but the top three, PhonePe (46%), Google Pay (35%), and PayTM (15%), hold over 95% of the market share.

Recent innovations include UPI-enabled ATMs (see https://www.linkedin.com/feed/update/urn:li:activity:7105113203340173313for small demo), allowing cash withdrawals by scanning a QR code showed on the ATM machine with an UPI app.

The success of UPI can be attributed to several factors:

• Prior to UPI, digital payments, especially card payments, had limited penetration in India, creating a ripe opportunity for innovation.

• India’s vast population, with over 1 billion inhabitants, presented enormous potential.

• Strong government backing through promotion, incentives, and investments ensured rapid adoption. The advantages for the government are more than obvious, i.e. more transparency on money flows (resulting in less black money and less fraud), increased security (people don’t need to carry paper money anymore), faster money circulation which can significantly help to grow the economy and positioning India as a high-tech country.

• UPI’s free model, supported by government subsidies to banks, encouraged widespread usage.

In contrast to many government initiatives worldwide, UPI’s success can also be attributed to its speedy execution and the chosen model. The government provides substantial support, regulated by the Reserve Bank of India, while maintaining an open ecosystem with open-source APIs built on the Immediate Payment Service. This openness allows various vendors and initiatives to enhance user experiences. Additionally, the system operates in real-time, is user-friendly, available 24/7, and highly reliable.

UPI’s influence transcends India’s borders, leading to a global rollout in recent years. Bhutan, in July 2021, became the first country to embrace UPI through BHIM UPI. Other countries, including Oman, the United Arab Emirates, Malaysia, the United Kingdom, Singapore, Europe, Bahrain, and France, have also adopted UPI. Notably, Worldline SA’s signed MoU in October 2022 will enable European merchants' POS terminals to accept UPI payments via Worldline QR codes, starting with Belgium, the Netherlands, Luxembourg, and Switzerland.

But UPI is not the only success story of India in the financial space. India also developed a large-scale government backed bio-metric digital identity system, called Aadhaar (also called UIDAI ID or UIDAI Number). It is a 12-digit unique identity number (based on biometric and demographic data) given by the Unique Identification Authority of India (UIDAI) that can be obtained voluntarily by the citizens of India and resident foreign nationals. It is the world’s largest biometric ID system. Certain UPI apps, like e.g. Google Pay, have also enabled Aadhaar-based identification, allowing to register for UPI using Aadhaar instead of via a debit card.
At the same time, India has developed the concept of Jan Dhan bank accounts, which are free bank accounts with no minimum deposit, aimed to improve financial inclusiveness within India. All those evolutions have given impressive results. It took India only six years to reach its financial inclusion target of 80% (41 years earlier than originally anticipated).

Comparing UPI’s success to European payment solutions, such as Payconiq (also a success, but nothing in comparison with UPI), highlights key differences:

• High card penetration in Europe has hindered digital payment adoption.

• European systems continue to rely on card networks, resulting in higher costs and delays.

• Unlike UPI, European initiatives, including Payconiq, are private initiatives, lacking substantial government backing and incentives.

Europe acknowledges the immense influence of Visa and MasterCard(both American companies) in the European payment landscape, while UPI in India, along with AliPay, WeChat in China, PIX in Brazil (another impressive success story, launched only in 2020 and already linked to 700 Brazilian financial institutions, processing 3.5 billion transactions per month and 150 million active users), and M-Pesa in Africa, offer formidable alternatives. Europe has local initiatives, but it lacks a robust native European platform. The European Payment Initiative aimed to address this gap, but political issues and lobbying hampered progress. A relaunch occurred, involving the acquisition of iDEAL and Payconiq, but its success remains to be seen as it will depend on strong support from all European countries for adoption.
Meanwhile, some countries, such as France, are exploring UPI as a potential payment system, underscoring the incredible accomplishment of UPI. However, it remains a missed opportunity for Europe not to develop its own digital payment system for such a vital economic instrument as digital payments.

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