UPI: The Gift That Keeps on Giving
UPI hit 10 Billion dollars worth of transactions in October 2021! Today we discuss its journey so far.
In October 2021, Unified Payment Interface (UPI) crossed 10 billion dollars worth of transactions, making it as big as the payment giant PayPal(!)
In this issue, we discuss the journey of India’s best fintech innovation (so far) - UPI and also pay a tribute to the two economic disasters that contributed to its success (Too sadistic? I agree.)
Let's dive in!
An Ode to Demonetisation
Exactly 5 years ago, the Indian government implemented a policy-induced crisis overnight. High-denomination currencies - which constituted 86% of the total value of the currency in circulation - were going to cease to be legal tenders via an announcement at 8:00 pm. The policy was to be enforced by midnight.
Demonetisation is considered to be the single most important economic reform since the liberalisation of the Indian economy in 1991. Yet, it was introduced practically within one night, and (obviously) there was resultant chaos. A policy decision affecting millions of people was enforced………overnight? Doesn’t really sound right. The modus operandi to introduce a financial reform this drastic is definitely a tedious and time-consuming process but moreover, an economy worth 2 trillion, sacrificed for the surprise reveal of a monetary policy? Somebody should’ve called the bluff? no? ok.
The immediate reaction to demonetisation was mixed. On one hand, the chaos that ensued had EVERYONE united in their suffering but on the other hand, people were still lukewarm about the failure or success of the policy in achieving its target. 5 years later, now when we look at things retrospectively, demonetisation can easily be labeled as a very futile policy decision. (I completely agree that there are a lot of other flawed policies too but I’m a little biased because this is my personal favourite policy disaster. Sorry.)
Source: The Economic Times
Silver lining
The economy was sacrificed for the greater good of eliminating black money circulation, the problem of terror financing, etc. However, as far as the issue of black money goes, the entire premise of the policy was solely dependent on the assumption that black money is, in fact, stored in the form of liquid cash. If large denominations cease to be legal tenders, the purpose of this mission(?) would be achieved. The only fallacy here is that the possibility of black money being converted into assets or properties was unaccounted for1. Anyway, the post-demonetisation economy saw an imminent need for digital payment infrastructure and that’s when UPI rose to the occasion.
The good part of this bedlam though, was that digital payments started getting integrated into the mainstream payment infrastructure. This wasn’t exactly out of choice, but rather out of compulsion due to the cash crunch. However, it definitely served as a boon in the long run, because even the people residing in tier-2 and tier-3 cities started using digital payments, who otherwise would’ve been apprehensive in adapting to technology for day-to-day transactions. Initially equipped with just 21 Banks, UPI has grown in an upward trajectory ever since.
Source: PIB
But wait. What exactly is UPI?
The Unified Payments Interface (also known as UPI) is a real-time payment system that provides for an interbank transfer of money and was introduced as a public infrastructure in 2016. UPI, being an inter-operable and open-source platform, acts as a very cost-effective mechanism for both the merchant and the consumer. Acting as an added layer to the retail transactions in the Indian scenario, it ushered Person to Person (P2P) and Person to Merchant (P2M) payments, giving customers 100% coverage of payment transactions. Initially, with the increased convergence of society and technology, UPI was force-adopted. But a lacuna still existed due to a lack of understanding of consumer-technology interaction. However, since the entry of third-party apps like Paytm, Google Pay, etc, innovation and inclusion in the digital transaction sphere has been immense.
Source: PIB
Financial inclusion scaled up post UPI introduction as even street vendors and small traders without bank accounts could send and receive money seamlessly. This immensely cut down the role of banks, facilitating money transfers. Now because of this, in just 5 years, over 100 million UPI QR codes have been deployed in the market for accepting merchant payments. Prior to this, only 2.5 million devices were accepting merchant payments.
Due to its adaptability, accessibility, and affordability, UPI effortlessly bore the brunt of COVID-19 and the menace it brought.
UPI during the pandemic
Fun fact - UPI is the world′s only API-driven, inter-operable, real-time money transfer platform designed for a mobile-only world. It even supports both PUSH2 and PULL3 models of payments.
Anyway, during a pandemic, when the sole objective was to promote no-contact alternatives for everything, UPI-powered cashless transactions gained momentum. At the outset of the unforeseen pandemic, India was lucky to have this sturdy framework already in place. Additionally, since it had already been incorporated in the non-metro cities, the blow that would’ve otherwise hit the economy was softened manifolds.
The digital infrastructure enabled privileges that otherwise would’ve been hard to enforce in the face of a calamity. However, when studying trends, it’s apparent that even digital transactions took a hit during the first wave. Yet, they bounced back substantially once the initial tremors were over. All thanks to the existing infrastructure facilitating this.
What has also differentiated this particular innovation is its design thinking, which is unique to the country. It mostly revolves around simplicity and scalability. This is crucial because it caters to the variety in purchasing power of various social strata, enormous heterogeneity in languages and literacy levels as well as the quality of mobile devices.
The present payment ecosystem even saw significant developments with the introduction of UPI 2.0 and RBI *finally* setting a future deadline for interoperability of wallets. Not just this, but actual substantial framework development also took place. This wasn’t just limited to digital payments but also pertained to data transfer, management, and storage in the financial sphere as a whole. Although these were major changes, not all of them were essentially….useful or needed. The developments that panned out once the initial shock wave of the pandemic was over, weren’t really positive. In all honesty, post the first wave, RBI was on a (regulatory) roll. There were new regulations for every aspect of the fintech verse. From payment aggregators and gateways to subscription-based businesses, nobody was spared. The over-regulation just messed with existing and prospective businesses.
What next?
UPI, hands down, has been the best Indian fintech innovation by far. BUT there are new layers being added to IndiaStack which could account for a very close competition.
What we’re looking at is the Account Aggregator Framework (and well, the DEPA). Launched recently by the RBI, the Account Aggregator (AA) framework is a substantial evolution in the way data transfer works inside the current banking system. NITI Aayog also envisaged a Data Empowerment and Protection Architecture (DEPA) framework that will empower individuals to gain control over their personal data. It aims to operationalise an evolvable regulatory, institutional, and technological design for secure data sharing. The announced Open Credit Enablement Network will also leverage the AA framework to democratise access to credit and have a consumer-centric infrastructure. It holds the potential to transform the regulatory and financial world irreversibly.
Yes, we don’t have a Personal Data Protection Bill *YET*. Nevertheless, it's heart-warming to see such ecosystems develop for the scope of seamless and protected data transfer. In the next issue, we’ll deep dive into the nuances of the AA framework and the envisaged DEPA implementation.
Thank you for reading!
Until Next time,
Drishti
Blast from the Past- during India’s second attempt at demonetisation in 1978, the then RBI Governor IG Patel had even observed in his memoir that, “such an exercise seldom produces striking results” since people who have black money on a substantial scale rarely keep it in cash.” “The idea that black money or wealth is held in the form of notes tucked away in suitcases or pillowcases is naïve”
But if only we could learn from the mistakes of our past and try new and more innovative ways to screw with our economy. *sighs*
PUSH- Send money