Back in 1946, when Brooklyn banker Mr. John Biggins invented the first card in the name of charg-it , no one could think that in near future it will make hard cash so much irrelevant . It allowed customer in the two square block radius of the bank to charge purchases directly to the bank. This small but radical disruption at that point of time has evolved to a time tested payment phenomenon and we have come a long way with fully portable debit/credit card. This has not only helped consumers to bid adieu to paper cash but has also helped banks to reduce their operational cost. Apart from these two direct players , this wave of change has also helped government to increase it’s tax compliance and hence have more money in its kitty besides creating thousand of niche skills jobs.
As this invention was going through various waves of formalisation via dinner’s club card in 1950 to Bank of America’s card in late fifties , some entrepreneurs were quietly working on to bring the second big disruption in the banking industry.
Then came 1981 and New York city ushered an another banking revolution by offering remote services as four of its bank made home banking accessible to it’s customers.This big disruption took the retail banking and customer experience to a whole new level and laid the foundation of what is known as internet banking today. This out of box innovation not only changed the whole banking landscape but also opened the ground for modern day IT industry. From that time we have never looked back and have continuously improved the banking experience by moving it from being the privilege of few to the empowerment of masses.
There is no doubt that since then we have come a long way , but considering all the technical avenues that are opening up, have we really taken the required long stride ? If you have used banking in the west then you will find resonance with the fact that all is not well with the options available for payment transfers. Most of the digital person to merchant transfers are done using credit/debit card. Some small vendors either don’t accept the cards at all or accept only above certain threshold. On most of the cases , cost associated with digital infra push these small merchants away from it as merchants has to pay a predefined percentage against every transaction to the bank.
On the other hand , person to person transfer has it’s own problems and limitations. I am not sure about US but in Canada the only viable option for such inter bank transfer is Email transfer. Using this you send money to an email id from your bank (by putting a secret question/answer which you need to communicate to recipient as well) and recipient get alerted about same and have option to get this money deposited in one of his/her account. Besides being non real time based transfer this option is plagued with many other problems like not being fully free, no option to verify recipient and the hassle associated with setting a secrete question and sharing it’s answer. On top of that this payment transfer is tagged to an email rather than to a bank account. If i get access to receiver’s email along with secret question answer then i can direct the funds wherever i want.
In order to make digital transactions smooth , enforce a less cost experience and increase the digital footprints of the economy , Indian government started a easy to use avenue of digital transactions named Unified Payment Interface (UPI). UPI was introduced in April 2016 and in the last 2 years have really changed the payment dimensions of the country with 1.3 Billion people by 360 degree. It offer an easy to use and cost effective option for both person to person and person to merchant transfers by offering real time ,24*7 interbank transfers by means of mobile application.
What is UPI
1. UPI exposes a set of APIs created and maintained by an umbrella organisation named National Payment Corporation of India (NPCI) under the control of Indian Federal bank (Reserve Bank Of India – RBI ).
2. In the UPI world , every bank account holder creates Virtual payment address which is used by NPCI to uniquely identify that customer in the banking infrastructure. When someone register on UPI , by default NPCI create a default VPA for you ( #phone_number@upi ) but user has option to create other VPAs subject to availability (exa : yourname@upi or yournickname234@upi ). Individual banks also offer their own customised upi solution and customer is free to choose between them (exa yourName@citibank ). The beauty about this UPI infrastructure is it’s openness and ability to speak across the banks ( with NPCI being the facilitator).
3) Every VPA is mapped to user’s bank account in the NPCI database.
4) So if i want to do a person to person transfer all i need is the VPA of the recipient and a UPI based mobile app on my phone ( and obviously a positive balance in my account). Apart from doing a real time transfer it also offer ability to verify the authenticity of the recipient and all of this at absolute ZERO cost. After receiving the transfer request , NPCI resolve the VPA to bank account and then make the transfer to recipient by communicating with the bank.
5) In addition to these payment transfer , India has also been able to successfully integrate UPI with a centralised Bill payment system ( named Bharat Bill Payment) to offer UPI as one stop shop for consumers.
Person to merchant transfers
- Besides getting VPA targeted payments , merchants also have option of printing QR code for their VPA and customers can pay by scanning this QR code.
Benefits for merchants
- very less MDR (Merchant Discount Rate) when compared to debit/credit cards as it don’t involve any third party player like VISA/Mastercard.
- Merchants don’t need to invest on hardware like Point of Sale terminal.
- As transfer happen on Real time basis so no settlement lag.
- Besides push based requests , UPI also support pull based request and in case of online shopping , merchant can send payment request to your VPA which user need to confirm from his/her UPI app.
- UPI has been designed keeping security at the core. In order to use the UPI your phone number must be registered with bank and you should be able to install app only on mobile using that phone number.So the application hard bind itself with the mobile and sim. Along with that every UPI payment need to be corroborated by user’s UPI pin.
What about Credit
- The recent upgrade in the UPI (labelled as UPI 2.0 ) offers the facility of overdraft account similar to credit card.
An opportunity for Fintech ecosystem.
UPI can not only reduce size of your wallet , but it also provide an opportunity for a whole new Fintech Industry ecosystem. These companies in partnership with banks can offer innovative and cutting edge financial solutions on top of UPI APIs. Besides creating thousands of niche skills jobs this also comes with a blessing in disguise for banking industry to reduce cost and offer a whole new set of customer centric services at fraction of cost . The whole idea of having centralized API to enable communication between sender’s and receiver’s bank is fascinating and can be a whatsapp moment for banking industry. Cashing on that idea many players like Google, flipkart have already entered the indian payment industry (Google offer an UPI app named Tez ) and many other like WhatsApp are doing beta testing.
From India’s perspective the arousing success story of UPI is indicative of big transformation toward digital economy. In December 2018 alone , UPI clocked closed to 620 Million transactions as it has seen the consistent upward trend since it’s introduction.
How the rest of the world receive it remains to be seen.