Tuesday, 2 August 2016

Unified Payment Interface (UPI) – India side story. Arguably a Unique Payment System ever attempted anywhere in the world.

What is UPI

It is an interbank payment system in India where money can be transferred from a bank account to any other account held with any bank in the network instantaneously. Round the clock every day of the year.  UPI facilitates both Credit Push as well as Debit Pull transactions. Never mind the Bankers’ gobbledygook.  It only means one can initiate a payment transaction and even receive a payment request on one’s mobile phone. Over 100 banks in India are expected to participate in UPI bringing in hundreds of millions of customers seamlessly into a common nationwide payment system.

How it Works

Banks can play three distinct roles in this payment system. At the heart is a role where a bank, acting as a Payment System Provider (PSP), offers a mobile application which can be downloaded and used by customers of any other participating banks. The basic but the most crucial is a role where every bank in the network has to allow its customers to link their accounts with any of the PSP banks’ mobile applications. This is called an Issuer role. Issuing bank will receive encrypted MPIN and accept debit request in the linked accounts. The third role is of a market maker where a bank acting as an Acquiring bank facilitates merchants to collect payments. A bank has to join the network as an Issuer. Roles of a bank as a PSP or an Acquirer are optional.    

Let’s assume a customer named Suresh who has an account with “MyBank”. But MyBank is only an Issuer. So Suresh downloads a mobile application provided by an ”OtherBank”. Once Suresh links his MyBank account on the OtherBank mobile app, he creates a handle for himself. If Suresh is lucky he can call his handle Suresh@OtherBank. Now using this handle Suresh@MyBank can send, receive and even collect money to & from AnyCustomer@AnyBank. Voila. Now you have hundreds of millions of customers making payments to each other. They can be customers sending money orders to other customers or making payments to merchants. They can even be merchants making or receiving payments to other merchants.

Pardon the Spiel

If you are not a banker and have still survived the first three paras then let me not further test  your patience.  I hope you will pardon the spiel. But I had to narrate the plot before I could begin to tell the story.

But we have Cards

A lot of people have brushed off UPI saying, there are already cards! Why on Earth do you need a UPI or whatever”?.  One needs to scratch the surface just a bit to look for an answer. It is easy but not obvious. Take a look at the cards in India.  The latest data from RBI shows that there are 24 million Credit Cards and 660 million Debit Cards for a population of 1.3 billion in India.  Of these, Credit Cards clock in 2.7 merchant payments per credit card per month and Debit Cards chip in with 1.8 merchant payments per debit card per year. This is not a proof reading error. But this data means a) there aren’t enough Credit Cards and b) not enough customers are making payments to the merchants using their Debit Cards. Contrast this with almost a billion mobile phones.
I have seen in almost all developed countries Mobile Payments equal payments made by the linked cards. So you have mobile phones where credit card information is stored to make payments using Near Frequency Communication (NFC) or a Quick Response (QR) code. But when you don’t have enough cards or enough people who use cards to pay, this ain’t no good in India.   

And we have Mobile Wallets too

Now I am going to stick my neck out and say Wallets is a different story altogether. They are hep, they are trendy, they are cool too. They are also a great way to promote brand for a Merchant. But there are too many of them. Spare a thought for the customer. What does she do if every high street store and every e commerce merchant offers a mobile Wallet each?  And Wallets tend to work in silos. Rare are the chances that a customer can use balance in the wallet issued by Merchant A to shop at the Merchant B.  Wallets don’t earn you interest on the balances either.

What guarantee, UPI will work?

Nope. I can’t offer one. But as they say, the proof of the pudding is in eating. The banks and their customers are about to start eating theirs, here in India. For starters it is safe. The unique ID or finger print of the mobile handset and the handle chosen by a customer together form a strong factor of authentication.  Besides, every transaction is authorised by the customer using an MPIN. This eliminates the apprehension of the customers in India of card data getting stolen or the card getting cloned. Second, customers can pay in real time with just a click and an MPIN whether they are paying to a friend a thousand miles away or shopping at a high street store. This is because UPI will allow them to make payments remotely from anywhere or even over the counter. Third, customers won’t need to take money out from their bank accounts to keep lying idle in multiple wallets. Fourth, all they need is a smart phone and a bank account. In a nutshell the ingredients are right and the recipe is perfect. Chances are so will be the Pudding.

UPI has been conceived by Nandan Nilekani, the IT Czar of India. The Proof of Concept was launched under auspices of the Reserve Bank of India. UPI will be operated by the National Payments Corporation of India (NPCI).  

(All the opinions in this article are personal)

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  1. Good one, Rahul. I have held back printing my Company Business Cards. I am keen to put my Financial Address on it so that anybody can send me money when I offer a service. Eg. sangamone@ktk or apnakhata@corp or cs@icici

    1. You can share your Instamojo profile name for this purpose.

  2. Sir, is there a scope for assisted model in UPI?

    1. Hi Prabhav, UPI allows one to use handset to create a handle (also called a virtual address), link a bank account and make payments using MPIN. So it’s a self self service model. No assistance required.

    2. I understand that. But we are looking for an assisted model for farmer's payments. Hence the question- is there a scope for assisted model? Can we think of a solution?

  3. What does UPI offer which IMPS doesn't (with the added advantage of not collecting biometrics)?

    1. UPI doesn’t “collect” biometrics either. Without getting into technical details such as messaging formats like ISO 8583 for IMPS ox xml for UPI, there are quite a few differences between IMPS and UPI. First and foremost, UPI facilitates payments against bills better than IMPS. IMPS is a great payment system for payer initiated “push” transactions however IMPS could not handle requests for payments. UPI does away with complexities such as MMID and OTP which were required for IMPS based payment requests. Second UPI will eliminate the need for the payees to provide their details such as account number, IFSC or mobile number etc. to the payers.

  4. Awaiting to use this facility. Honorable Nilekani Sir is believe in idea that is scalable and provide solutions for MASS. Grt !!

  5. One question on the debit cards.

    680 Mn debit cards like what you said that are accessible through phones : QR code, NFC. On the merchant side, the POS infrastructure could be a phone as well, to read the QR code. Still paltry adoption of ~2 transactions per year.

    What will the UPI really change?

    Is it lower Interchange rates? Is it the Easier payment experience (one click two factor auth).

  6. Thank you for sharing such great information. It has help me in finding out more detail about unified payment interface