India's Fintech Success: Unified Payments Interface

In April 2022, the crypto exchange Coinbase announced support for

payments

made through the Unified Payments Interface or UPI in India, unfortunately, a few hours later, the National Payments Corporation of India or NPCI, the company that maintains upi, said they were not aware of anything like this happening. of this coinbase still not working in India, maybe it will when I see this, who knows this fuss. Apart from that, the incident has highlighted the importance of Upi in India. This is a really interesting piece of domestic

fintech

that the Western world should know about. I have been interested in making a video on the Indian upi system for a while, this opportunity is as good as any to start with.

India has long been a cash-driven economy. A vast majority of its transactions are done in cash in the 2020-12 period. -13 years, India's cash-to-gdp ratio was almost 13, when the highest in the world in comparison, the United States is 7.4 percent and Sweden is 1.8. People love to use it and that has long presented a challenge to the government, a sore point for India. The government's goal is that cash transactions help people evade income taxes by hiding their wealth so that their wealth is not reviewed, so the Reserve Bank of India has long focused on making make the Indian economy less dependent on cash, not by completely eliminating the use of cash transactions, but by making them easier to use. digital cashless transactions, yet in 2015 Indians made an average of just six cashless transactions throughout the year, only a fraction of the country's more than 10 million retailers accept cashless

payments

despite having the ability to do it. upi had been working for a long time, the story begins in 2005, when the reserve bank published a vision document detailing its desire to establish an umbrella institution for all retail payment systems in India in collaboration with the association of

india

n banks or iba.

The reserve bank founded and incorporated the mpci in december. In April 2008, the company began operations with a mandate to consolidate all the disparate systems in the country and create a uniform and affordable payment system. In 2009, with the blessing of the reserve bank, the mpci started taking over the operations of the national financial exchange or nfs

india

's largest ATM network Banks have ATMs that help customers deposit and withdraw money . Having as many ATMs as possible helps the bank better serve its customers wherever they are, but deploying so many of these expensive machines across a large population is expensive if a bank joins the shared switch network its customers can use. and be served by the other ATMs in the network at that time the network had around 50,000 machines and 37 banking members under the supervision of the MPCI the network has grown to 256,000 machines and 1,200 members its ATMs are free to use For customers, the idea of ​​starting ATMs was quite clever so that they could join their ATM sharing scheme.

The network's member banks had to adopt common digital standards to communicate with each other. The standard can then be leveraged and expanded to new services, the npci thus introduced the immediate payment system or imps in 2010 built on the financial infrastructure of nfs with this end users can instantly transfer funds between banks at any time banks appear to have Heavily marketed this 24/7 feature, IMPs require the sender to know certain personal and banking details about the person they are sending money to or requesting money from, this includes their phone number. phone and a seven-digit mobile money identification number containing routing and account information.

If they are sending money to a commercial entity account, then they need to know the name of the beneficiary, their bank account number and the Indian financial system code of their bank or if the amount of money traded through imps grew in 2014, imps facilitated around 54 million transactions which grew rapidly and in 2020 Indians made almost 3 billion transactions through imps with that said, imp still had some usability flaws as a transfer service, while transactions can be initiated over the phone, there was still considerable payment friction. It reminds me of the way they send money in Taiwan. Taiwan's banking infrastructure is quite old to send money locally to a person. or company, you need to know your three-digit Taiwan bank code, different from the Swift code, and your bank account number.

This number is often very long and difficult to remember, so NPCI still believes that improvements can be made, and two important national developments help pave the way. way to make them possible first, Indian people quickly started adapting smartphones as telecoms like Reliance Jio slash data prices. Indians enjoy some of the cheapest data rates in the world and the vast majority now have smartphones. Second, the Indian government completed a national identity identification. The service called adhar opened the door to better understand the security requirements of its clients and prevent fraud. UPI is therefore built on top of IMPS, but smoothes out much of the friction that made the IMPS system difficult to use with UPI banks, financial institutions, mobile payment platforms.

Systems and users can interact with each other using a single digital language. Upi is a protocol, not a real bank account or a digital wallet like Venmo. There's no need to preload anything first with money from your bank account, which skips an often inconvenient step. Upi provides every Indian with a bank account the ability to create a virtual payment address sometimes also called upi id it looks a bit like an email as john at agenometry underscore bank sets it up along with a pin code for authentication called MPIN When you download a UPI app from your bank, once the address is set up, you can send or request payments from other people without the need to awkwardly share bank account details or the like.

QR codes are also available. Upi's peer-to-peer payments experience reminds me a lot of Zell, an American. Payment network built into many large US banks, such as with a UPI-enabled app, Zell allows you to transfer money directly from one bank account to another without needing to know the gory banking details, unlike UPI, however, Zell does not allow account holders to create unique virtual private accounts. Addresses works via email or mobile phone and remember that Zell like Venmo and the like is a service created by some private companies UPI is a nationally supported standard A critical improvement for merchants is the introduction of payment requests with imps like the system Taiwan bank account provider may provide their bank account details to the customer, but it is up to the customer to initiate the transaction with the requests.

A customer only needs to confirm the details and accept for the transaction to take place for mobile e-commerce. Upi makes part of the payment. It is much easier to buy something on the website and the merchant can send the payment request to your mobile phone. The buyer can then authenticate and complete the transaction there. Upi is an API which is short for application programming

interface

. An API takes a service traditionally seen as very complicated like the Indian banking system and simplifies it into something much easier to use for other parties, banks and third party banking software that seek to provide upi payment services are called in payment services player documents or psps when someone wants to send money or request money from someone, they go through their banking app, the psp, the psp validates the transaction and then triggers an api transaction request in xml format for npci , npci completes the transaction behind the scenes using the appropriate financial mechanism, something like imps or something else, upon completion it sends confirmation. notices to both parties the standardized digital language of an API makes the service very scalable some of the largest startups in Silicon Valley started with APIs, for example, Stripe is the most valuable American

fintech

startup in the world valued at $95 billion private marketplaces started with a set of simple APIs that allowed any business to accept electronic payments with a few lines of code. npci cited stripe and square now called block.

I assume it has direct influences in designing how upi would work. MPCI launched UPI in April 2016 with only 21 banks. While PPS like banks and Google Pay can integrate it into their third-party apps to facilitate payment, the government also launched its own app as a show of what the technology can do. B-H-I-M app stands for Barrett

interface

for money in India. Official National Payments Mobile App The app uses UPI to help people send or receive money between different banks Shortly after the launch of UPI the government started another major national policy initiative to help move Indian people's cash into the digital realm In November 2016 the government announced that it would demonetize the country's 500 and 1,000 rupee notes, holders had until the end of the year to exchange them for new 500 and 2,000 rupee notes. deposit and exchange notes people bought long train tickets as a way to preserve the value of their cash and some people even died in the rush the event was a massive shock to the economy but eventually 99% of the currency was exchanged demonetized its macroeconomic merits were and remain questionable, all it did was open the door to new payment systems to encourage the use of cashless payments.

The Indian government heavily promoted Upi when the Bhim app was launched. The government spent $65 million on merchant cash back programs and referral bonuses. For end users, in 2017, the government waived merchant discount rates or mdr on transactions made using upi and other similar types of payments with values ​​less than 2,000 indian rupees. This initial scheme would last until 2020. The mdr is a fee paid by merchants similar to those. for credit cards and distributed to aggregator banks and the network the removal of the fee encourages people to use upi for low value transactions the government shelled out taxpayer money to compensate some players for the loss of these fees in At that time it was estimated at around $140 million and $191 million respectively over the two years the plan was estimated to last, then in December 2019 the government announced an extension of the zero MDR policy.

Now all businesses with more than $6.5 million in annual revenue are required to offer upi payment via qr code or otherwise. The policy has been controversial with several industry players pointing to the potential long-term damage that occurred after the pandemic, when Indians spent more time at home and on their phones. Cashless digital payments increased in both volume and value in October 2020. Upi facilitated more than 2 billion transactions. Valued at around $50 billion year-over-year, or 80 percent growth in transactions and 101.7 percent growth in value from its launch in 2016 to October 2020, UPI facilitated nearly 30 billion transactions , more than a third of those 11.8 billion occurred in a single eight-month period after March 2020.

A year later, the volume and value of UPI transactions doubled once again to 4.2 1 billion transactions and 101 billion dollars, staggering growth considering the staggering growth in transaction volume, the zero mdr policy has been a double edged sword, networks cost money to upgrade and maintain, especially when they scale up. As quick as UPI was during the pandemic in mid-2020, the MPCI told the Indian government that the zero MDR policy had resulted in about $700 million in revenue losses for the ecosystem as a whole. NPCI has supported the abolition of the zero MDR policy. More long-term MDR fees are the ecosystem's only revenue model.

Removing them commoditises payment handling and forces those companies to make money in other ways, which is exactly the case seen in today's UPI-based super apps. The open-first nature of the UPI API allows it to support an ecosystem of third-party applications, the official UPI website lists thetransaction statistics and value of about 65 such apps, the four largest being phone pay, google pay, amazon pay and phone pay patem is a bangaroo-based financial technology company owned by walmart through its subsidiary flipkart. run the largest third party upi app with 47 market share in total transactions, google pay is the second largest third party app handling 33 percent of total transactions in the ecosystem and the official national bhim app it is only in third place with a market share of 24, interestingly.

Quite a bit, WhatsApp India's dominant messenger is far behind those companies with less than one percent transaction market share; However, they did not get approval to offer UPI payments until 2020, perhaps for political reasons, many of these payment apps have expanded beyond simple payments and become fintech super apps. Something reminiscent of what China and Financial did with their Alipay app, for example, payment by phone, has started offering investments in mutual funds and insurance through its app. Patem also has stock investment services along with purchasing movie tickets, booking flights, purchasing train tickets and paying bills, reminds me a bit of meituan's focus on the online and offline industry The Indian government's zero MDR policy has started a four-way competition between deep-pocketed companies trying to develop their fintech super app.

Bloomberg estimated that the big four spent more than $1 billion to promote their payments. applications in 2019, despite this, it is difficult to imagine pay by phone, Google Pay, WhatsApp or patent growing to the same dominance as an alipay upi is a public standard adopted by a wide variety of companies, so you can't block users in customers they can always move to another payment app, i think indians are quite proud of upi and should be up and running upi facilitated 5 billion transactions. Few pieces of national infrastructure have as many users and experience such rapid growth as a validation of their competitiveness. npci has worked to bring upi abroad in In 2022, they announced that a payment system operator licensed by the central bank of Nepal will adopt the upi technology standard as a way to address its own cash problem.

Countries like the United States still They are struggling to unify and upgrade their ailing financial industry to allow the introduction of a service similar to Upi. Many years of legacy practices and legacy players, each with their own incentives, have made it challenging to simply launch a seamless experience from end-to-end, although the Federal Reserve's Fed Now service scheduled for launch in 2023 is somewhat Interesting, it reminds me of the experience of telecommunications in certain countries. Populations in Asia and Africa skipped the telephone poles and went straight to the cell towers that connect millions of people. Right off the bat, India had the advantage of starting from a blank slate by leveraging the experiences of other countries to create something new from scratch.

Cash is still the dominant medium in Indian society, but I expect things to change rapidly in the near future. Well, that's all. For tonight, thanks for watching, subscribe to the channel, subscribe to the newsletter and I'll see you next time.