A UPI (Unified Payment Interface) refers to a real-time electronic payment system that enables users to instantly transfer money between multiple banks. In other words, UPI is a system that brings multiple bank accounts into a single platform, incorporating multiple banking services, smooth fund routing, and merchant payments under one umbrella.
In 2016, NPCI (National Payments Corporation of India) designed and developed this single-window system to eliminate the need to enter bank details and other confidential information whenever a user initiates a transaction. Another objective of introducing UPI as a transaction method was to reduce the “black money” in the economy, and bring more transactions under the jurisdiction of the tax department.
UPI has simplified the money transmission procedure significantly. A UPI user no longer needs to remember their account number, account type, IFSC, or the bank name of the receiver. Rather, users can transfer money with just an Aadhaar number, the mobile phone number associated with their bank account, or UPI ID.
As of April 2022, 316 banks are live on UPI with a total transaction amount of Rs. 9,83,302.27 Cr. Further, 5.58 billion transactions were processed using UPI in April 2022. This is the largest number of monthly UPI transactions since the digital payments system’s inception in 2016.
Between April 2021 and March 2022, or fiscal year 2022, the payments system logged nearly 45 billion transactions valued at Rs. 84 lakh crore. This was nearly double the total of 22 billion transactions totalling 41 lakh crore in 2020
These ongoing developments in UPI transactions reflect the fact that Indian customers are increasingly adopting and relying on online payments. Moreover, UPI has enabled businesses to establish and deliver trustworthy and responsive financial services products. This trend, together with expanding smartphone penetration, growing income levels, and consistent government and regulatory motivations, indicates that the industry is ready for the next stage of UPI adoption.
UPI’s journey to becoming the most preferred payment system in India
UPI was a lifesaver in the pandemic when social distancing was mandatory. The real-time payment system has proven to be one of the finest financial innovations in India since its independence, and it has initiated the process of completely replacing the cash economy. It has contributed significantly to making India one of the world’s fastest-growing digital economies.
According to the report titled ‘The Indian Payments Handbook – 2021-26,’ the Indian digital payments industry has a combined 59 billion (5,900 crores) transactions in FY22, and is expected to reach 21,700 crore transactions by FY26. India witnessed a record 2,200 crore UPI transactions in 2020-21, and these numbers are expected to reach 16,900 crore by 2025-26, growing at a CAGR (compounded annual growth rate) of 122%.
The government’s move to eliminate MDR (merchant discount rate) in December 2019 and reduce the transaction charge to zero, instantly benefited UPI. Banks and payment providers were instructed not to charge for UPI transactions. The most recent fiscal data shows an explosion in mobile-based real-time inter-bank transactions enabled by UPI. Across the country, retailers, service providers, small businesses, and dealers have already used UPI. The faster transfer of cash between two bank accounts on a mobile platform and the fact that RBI regulates UPI have made it a favourite payment system.
Data shows that UPI is gradually killing cash and card transactions
The Reserve Bank of India has suggested that all banks and ATMs accept cardless cash withdrawals using UPI (Unified Payments Interface), removing the need for debit cards and fostering the digital economy. UPI will not only regularise cardless cash withdrawals, but it will also lessen the danger of card cloning and other related scams.
In India, UPI has become a growing challenge to leading card payment solution providers such as Visa and Mastercard. Major UPI service providers including GooglePay, PhonePe, and Amazon Pay have made advancements in replacing cash for a wide range of use-cases where cards were previously unavailable. They are now challenging the credit card companies’ territory with solutions such as auto-debit.
In a study conducted by ACI and YouGov, it is found that digital payment stayed the most preferred payment mode for festive season expenditure as 41% of consumers have selected UPI as their preferred payment method, while cash (26%) and debit and credit card payments (23%) are far behind. While the data shown in a research report by SBI says that India has witnessed the use of UPI has increased 70 times in the last four years as Indian consumers are now preferring the ease of payment through a click of a button.
The following are additional facts on how UPI is killing cash obsession.
Because UPI is a government project, transaction charges will be substantially reduced, ranging from Rs. 0.50 to Rs. 5 when compared to charges we pay while utilising foreign platforms such as Visa or MasterCard.
Due to the taboo about online payments and revealing account information, the country’s e-commerce development has slowed down. UPI hopes to change this slowdown. By functioning as a Unique Identifier, UPI will reduce the need to disclose account data and is anticipated to provide online markets with a much-needed boost.
UPI eventually helped build a cashless economy which is environmentally beneficial as the demand for paper cash is significantly reduced.
UPI is intended to provide a single point of contact for all digital transactions; therefore it makes the complicated procedure easier by simplifying it.
The Enhanced Security provided by UPI is expected to alleviate the concerns that individuals have about online transactions. The Two-Factor Authentication technique is designed to provide excellent security without disclosing any personal financial information.
The additional benefit of UPI is its transaction limit. While other mobile wallets offer a transaction limit of Rs. 10,000 without KYC, UPI offers a transaction limit of Rs. 1 Lakh.
What businesses need to reap the benefits of UPI?
Payments are now simpler or more clear than ever as more customers, retailers, and service providers will accept UPI payments. This is both an opportunity and a threat to businesses. UPI eliminates the need to share bank information when making payments or the time it takes for a cheque to be deposited, drastically minimising delays. UPI will assist enhance a company’s cash flow and, because the payments are digital, it will aid in its tracking.
Moreover, UPI enables businesses to access multiple accounts from one place and helps eliminate the use of different bank applications by linking all their bank accounts. The money is received in the bank account that the recipient has set to receive the money. Apart from this, the UPI system allows online businesses to smooth, immediate settlements for all the payments they receive from their customers. Additionally, they benefit from its more elevated success path based on flexibility to switch between gateways/card networks.
Tax evasion and the use of black money will be reduced now that the government can trace all monetary transactions. Businesses must capitalise on this trend by implementing a new payment system that will improve end-user service delivery. Everything is measurable in the online age; the demand for accounting will grow as more money transactions become digital.
Now, businesses have to report for every transaction as GST is implemented, and UPI is becoming the extensively used payment mode. Even small companies will need to tighten up their operations and immediately deploy an ERP in order to reap the benefits of UPI.