New Delhi: From Rs 21 lakh crore worth of transactions in FY 20, the financial year before COVID struck, UPI has processed Rs 30 lakh crore last month.
While Aadhaar has created a unique identity for Indians, UPI has become the backbone of Indian payments, even if it has not replaced cash entirely.
Ten years of UPI has not just transformed payments in India, but the behaviour of customers and merchants. The government’s push, reforms, policy and regulatory support have catapulted the payments platform into the world’s largest real-time payments system.
“UPI has successfully decoupled digital payments from high-end hardware and high-income brackets to driving genuine financial inclusion across the country,” said Rahul Chari, co-founder and CTO of PhonePe. He is also the chairman of UPI Committee of the Payments Council of India.
The central government set a target of a billion transactions a day for the platform last year. With UPI recording 800 million transactions a day in March, the platform is likely to achieve the target by the end of this financial year.
“It seems like UPI is a matter of fact. It is everywhere around you and all that, but if 10 years ago someone had told you it would be like this, I think it would have been very hard to believe,” Sharath Bulusu, senior director at Google Pay and Wallet and head of Google Pay India.
Future tense and opportunities
“UPI has achieved over and above of the goals set for the platform. Now the next phase of growth should be beyond the transaction value and volume, and how it can bring more people into its fold. Whether the platform can do what traditional banking channels, other digital payments have failed to do, such as enabling credit to half a billion people,” said a senior banking official who did not wish to be identified.
Despite lower subsidies, UPI is growing at a healthy rate of 30 percent and is now targeting a billion users over the next 10 years. The platform currently has around 400 million active users.
UPI Upwards journey
The central government subsidies for UPI have been declining since FY 24.
“While the growth might feel more “organic” in terms of percentage points because the base is now massive, but in absolute volume, the expansion will be relentless as UPI becomes a financial identity for all age groups and population segments,” Chari of PhonePe said.
The biggest opportunity is the possibility of providing micro-credit to the millions of underserved people in the country, who do not have access to formal credit at reasonable interest rates. Credit Line on UPI could become large and successful if more banks and non-banking financial companies could participate in the ecosystem.
“Credit opportunity is still in its infancy, relatively small amounts of credit population needs of the economy, and UPI has an incredible opportunity to democratise credit. There are a few more structural pieces that have fallen into place, and credit is one big thing that will happen sooner than later,” Bulusu said.
The revenue conundrum
The lower subsidies for UPI come at a time when digital payment frauds have been going up. Artificial Intelligence and quantum computing are also likely to pose threats of breaches and opportunities in enhancing the security of the platform.
One of the biggest concerns for UPI, as well as its ecosystem partners have been the lack of monetisation opportunities. The payment companies have been requesting the government to implement the Merchant Discount Rate (MDR) on high ticket transactions or for payments at large merchants, who have an annual turnover of more than Rs 40 lakh.
While CLOU can bring some revenue, the current scale is too small to offer any meaningful revenue.
“While the ecosystem has thrived on adoption, the underlying economics remain thin for the players who have heavily invested in the infrastructure, security, consumer awareness and merchant acquisition. For the ecosystem to remain resilient for the next decade, we need to ensure that the players grappling with minimal revenue opportunities today can find a path to long-term viability,” Chari added.
For instance, the ecosystem processes over 22 billion transactions a month or over 750 million transactions a day. The data centre requirement or the technology stack robustness to hold up during peak hours need huge investment, the payment firms say.
The fintech that matters
The National Payments Corporation of India (NPCI), which runs UPI, has kept up the pace of innovation even as the platform and the company have scaled up dramatically over the last 10 years.
It has launched a slew of new features every year, before the ecosystem partners can keep up. Last year, NPCI launched Reserve Pay, which helps e-commerce firms to enable Artificial Intelligence (AI)-powered agentic payments without user intervention. It also launched biometric (fingerprint or face identification) authentication for UPI payments.
For minors and senior citizens who are not well-versed in digital payments or not old enough to make financial decisions, NPCI launched UPI Circle, which can delegate payments to others with checks, controls and balances.
Over the last three years, NPCI has launched new features, including a credit line on UPI, voice-activated UPI payment mode ‘Hello UPI’, BillPay Connect that facilitates conversational chat-based bill payments, UPI Tap & Pay based on near-field communication (NFC) technology and UPI Lite X, an on-device wallet facility. Customers can also withdraw cash from ATMs through UPI without using cards.
All these features are adopted at varying speeds by the apps and banks. More than 700 banks plug into the UPI network. There are close to 50 third-party UPI apps (TPAP) like PhonePe and Google Pay. More than 100 financial apps connect to the network through partners.
Strong technology backbone
The organisation’s technology stack architecture allows for infinite scalability. The ability to think of the network effect of innovations also help NPCI to bring out features that customers and its partners want the most.
While UPI faces several failures at the bank-level, the system-wide outages were few and far between. NPCI has also been working with banks to improve the technical decline (TD) rates (server unavailability issues) to reduce such incidents. From around 5-6 percent in 2020 and 2021, the TD rates have come down to below 1 percent for most large banks.
NPCI is owned by the banks and other payment companies, and being a non-profit organisation, the organisation is likely investing all the profits to build more products and add more features.
Of late, the organisation is focusing on internationalisation of UPI apart from expanding the scope and attractiveness of Rupay credit cards through offers and partnerships.
Challenges: Duopoly continues
Another big area of concern for the ecosystem has been the two-player dominance in the ecosystem. PhonePe has around 45 percent market share followed by Google Pay at around 33 percent. Paytm is a distant third player with 6 percent market share.
The lopsided nature of the consumer market has sparked fears of systemic risks if any breach or outages happen at either of these companies. Several members of the Parliament has also expressed fears of both these companies being owned by US-owned multinational firms. However, if PhonePe is listed in India, some of the concerns could be called unwarranted.
Meanwhile, several smaller UPI players such as Sachin Bansal-backed Navi, Flipkart Group’s super.money, NPCI’s BHIM app and WhatsApp Pay have all shown good growth.
“The pie itself is expanding. Inevitably, in such a massively expanded market, no single player will ever be able to serve it fully and you will find a plethora of players. Some of them will be more broad-based players like those who will do a little bit of everything in the ecosystem, and you also find specialists who will build the best recurring payments or credit products,” Bulusu of Google Pay said.
In fact, a lot of new UPI apps are focusing on launching NPCI’s RuPay credit on UPI. These players include Kiwi, super.money, Jupiter, BharatPe, Scapia among others. As credit card on UPI takes off, some of these players could be large players over the next decade.
