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Digital Payments

What is the current status of the digital payments market in terms of revenue & growth? What is the scope of UPI in the coming 5 years & how would it contribute in increasing the GDP of India?

A Trariti Group Case Study by Aakash Malik

Overview

Today India is the largest Real Time Payments market in the world. India’s digital payments landscape has transformed dramatically over the past five years. Today, 40% of payments (by value) are digital, contributing to a US $3 trillion digital payment market on account of rapid expansion in digital infrastructure.

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Now, there are five key factors that revolutionised digital payments in India:

 

1. Rapid expansion of digital infrastructure

2. Accelerated migration to digital led by UPI

3. Shifting customer preferences for contactless driven by the pandemic

4. Increased merchant acceptance of digital payments

5. Tech disruptions & enablement by big tech and fintech

 

Covid-19 is nothing short of a watershed moment for the fintech industry in India that ushered the wave for contact less payment methods. In the pandemic when social distancing is the most critical form, The Unified Payments Interface (UPI) is like a godsend. The instant real time payment system has turned out to be the best financial innovation post-independence

You would be surprised to know that in the year 2011, an average user would have no more than 6 digital transactions in a year. 6 that's it! No, it's not that there was no facility to pay via cards. India already had 1 crore+ merchants who would accept card payments but still card payments were not in the mainstream. There are primarily three reasons behind it

1. Complexity

Not everybody owns a credit card. One needs a machine to operate a debit/credit card. If you have to digitally transfer funds you need to know the bank name, IFSC Code, account Number, etc. Who will be bothered with all of that stuff?

2. High Commissions

Merchants have to pay 2% to mastercard & visa on every transaction. This was indeed a lot of money for small shop owners/merchants.

3. Possibility Frauds

Cards getting stolen or getting duplicated is quite common.

 

In order to solve all these fussy problems, in 2016, National Payments Corporation of India, NPCI, launched UPI technology.

But what exactly is the issue that UPI ends up solving?

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The process is a bit complicated. So, let's understand it in a simple manner. Earlier you had to go to the bank to request cash deposits/withdrawals. Now using UPI, apps can collect/deposit money from banks on your behalf. Think of UPI as your right arm which goes to the bank for you but it is a special assistant that doesn't charge any fee/commission from you. This assistant is available for you 24*7 & has a network across India, meaning if you want to pay someone in Tamil Nadu sitting in Mumbai, your assistant will instantly do this job for you in no time.

UPI uses the already existing IMPS network. There is a dual factor authentication so that Transactions are safe & secure. It generates a special ID called VPA or Virtual Payment Address which is unique to all users. It is not only linked to your mobile number but also to your bank account. This whole process is only possible because the 1.2 Billion Indians have the Aadhar Card in place.

The interface facilitates inter-bank peer-to-peer (P2P) and person-to-merchant (P2M) transactions. The Reserve Bank of India (RBI) regulates it, and it operates by instantly moving payments between two bank accounts using a mobile platform.

The biggest feature of UPI is Interoperability. Basically, if you use PayTM & the shopkeeper uses GPay you will be able to scan his QR Code as well & transfer money to his bank account from PayTM. This means that you're not a prisoner of any single app in fact, the system frees you up completely.

 

This revolutionary idea has brought a lot of changes in India. On October 21, UPI crossed $100 Billion in transaction value. During Lockdown, when people were not comfortable transacting in cash. Phone Pay took quite a good initiative.They sent their agents to small shops, fruits & vegetable sellers to get their Mobile numbers linked to their bank accounts and then they put up a QR Code sticker at their shops. And the result?

 

Merely, a couple of years ago in April 2020 transactions via UPI totalled Rs. 2 lakh crore. In april 2021, this number reached Rs 4.93 lakh crores. & in October 2021, transactions more than Rs 7.7 lakh crore happened via UPI.

And this is huge!

Because earlier the money that used to come in cash is now getting directly deposited in the bank. Accounting processes are simultaneously getting all cleared out.

Zerodha's founder had said that it was unprecedented to see such substantial growth in the private equity & share market- "IPOs have played a huge role in attracting these users. Without UPI for IPOs, it wouldn't have been possible for Non-Bank Brokerage firms like us. India stack has probably been responsible for a lion's share of disruption & innovation in India Fintech."

Moreover, UPI is safer for the environment as well. Currency notes get wear-teared. People even go beyond and write on the notes as well. RBI periodically has to replace these notes & this has an adverse impact on the environment.The more the number of digital transactions, the lesser the number of notes that have to be printed. The best part is UPI Transactions are now possible without an internet connection.

Now the most important question arises-

Why are super powers like the USA & China eying this technology? Why do they want to stop it?

Today the US is a super power because the dollar is a global standard currency. When dollars' importance is challenged it would indeed create opportunities for developing nations. But if we play it right, India could soon become the pioneer in the digital payments market

Seeing the success of UPI, in 2019, Google suggested the US Federal Reserve to follow India’s UPI example & build 'FedNow' or otherwise there would be repercussions in near time.

Today international payments happen via SWIFT. SWIFT handles 30 Million Transactions everyday! Banks charge $25 to $65 on every transaction. If the full world begins to accept UPI this cost can be reduced to a great extent. SWIFT works as a messenger. This technology was introduced in 1977 & today in this world of cyber threat it is neither efficient nor secure. Additionally, under the guise of exchange rate, bank charges, convenience fee, the consumer is squeezed. This problem can be solved by Indian Technology UPI. UPI has the power to replace the SWIFT technology in the near future. This technology is already currently in use by 100+ crore Indias.

How cool is that? Isn't it?

Imagine a future where you go to a foreign country but you don't have to have any forex card, you don't have to unnecessarily convert INR to US Dollar & pay high conversion charges!

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Lets now talk about the growth prospects for digital payments?

According to the Phone Pe-BCG report, 2022, UPI has put India far ahead in the world as Indians can transfer the money with QR anytime anywhere.

India's digital payments industry to reach $10 Trillion by 2026. The emergence of embedded payments via 5G and the Internet of Things ( IoT), and the launch of India’s sovereign Digital Rupee (CBDC) are together expected to provide further impetus.

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For instance, Liquid Group, a cross-border digital payment service provider, signed an agreement with NIPL in September 2021 to launch a UPI-based QR code payment system in more than 10 countries. NPCI recorded almost 6 Bn UPI transactions worth over INR 10 Lakh Cr in May and June, France, the UAE and Singapore have already adopted the open digital platform, while Nepal, Japan and China are in different stages of conversation. NPCI will also be working on establishing UPI as a channel for making cross-border remittances.

However, as more and more people adopt technology or get connected to the internet, more services are going to be provided online. The technology is such that it changes at a rapid pace and the companies need to be up to date so that they can protect their consumer or customer data. Therefore threats to Cyber security & disruption or misdirection of the services they provide poses real-time danger.

Frauds as simple as click bait: content whose main purpose is to attract attention and encourage visitors to click on a link to a particular web page so that they can get access to your phone and steal your money.

Until and unless you don't share your personal details with the apps or it is present in the public domain then you are safe. While making online payments make sure you are making payment on a secured site and on an authentic site.

Speaking of the Implications- As more merchants begin to accept digital payments, it will unlock a significant change in access to credit for small merchants due to creation of a digital transaction trail.

The Indian digital payments market saw steady growth at a CAGR of 23 per cent (volume wise), and is expected to reach 217 billion (21,700 crore) transactions in FY26 from 59 billion (5,900 crore) in FY22. In 2020-21, UPI transactions reached a record 22 billion (2,200 crore), and it is expected to reach 169 billion (16,900 crore) by 2025-26, growing at a CAGR (compounded annual growth rate) of 122 per cent.

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A key challenge facing payment players across the board today is thin margins, which prompts players to increasingly transition to high-margin offerings while doubling down on digital payment growth. These players have built a large captive customer base with access to rich customer data and purchasing behaviour patterns and can diversify existing payment revenue streams by foraying into lending and investment facilitation among other avenues.

Unlocking the US$10 trillion opportunity requires certain enablers. It's a very important reminder for every Indian to not hide the failures of the country but to appreciate the success of the country.

"To every Indian who opted for a digital payment, you chose to bring a financial revolution."

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