UPI Disruption — Is it going to happen?

Because India is a cash based economy and Retail payments in India are dominated by cash. Only 6–7% of transactions here are directed electronically and the rest are in cash or cheques.

India continues to have low credit card penetration and low debit card initiation leading to a poor reach of electronic payments — still in single digits.

What is UPI?

UPI is being launched by National Payments Corp. of India (NPCI) to further RBI’s vision of migrating towards a “less-cash” and more digital world. Unified Payments Interface (UPI) is the new step in the payments market and has the makings of a heroic even before its launch. The biggest enticement for UPI is its power to make payments seamless and instantaneous by requiring the payee to only remember a virtual payment address (VPA), much like sending an email.

The UPI ecosystem functions with three key players:

Payment service providers (PSPs) to provide the interface to the payer and the payee. Unlike wallets, the payer and the payee can use two different PSPs.

Banks to provide the underlying accounts. In some cases, the bank and the PSP may be the same.

NPCI to act as the central switch by ensuring VPA resolution, effecting credit and debit transactions through IMPS.

Is UPI better than cards?

UPI works on the native idea of VPA, which is something like ‘raj@icicibank’. You only give the merchant your VPA who can initiate a payment request against this VPA. They never even get to see the bank account number. The UPI can also be used for shopping online. Instead of penetrating your debit card details, you’d just enter your UPI ID and get an alert to verify the transaction.

Impact on e-wallets

E-wallets have restricted cash-transferring abilities compared to the UPI. As per RBI guidelines, an e-wallet can allow payments for merchant transactions with a limit of INR 10,000 for non-KYC compliant users and up to INR 1 lakh to KYC compliant users. UPI permits transaction of INR. 50 to INR 1 lakh per day for all users. E-wallets permits direct transfer of payment to an individual or a company depending on whether it is open, closed or a semi-closed wallet system. The biggest gain of the UPI is its inter-operability among various banking platforms. Current e-wallets do not let user to transfer money to another e-wallet, whereas the UPI lets user easily transfer it to any networked bank. However, e-wallets can continue to come up with striking marketing schemes such as cash backs, discounts and offers, which the UPI does not offer. E-wallets have merchant tie-ups due to which these offers are possible.

Impact on payment gateways

Payment gateways currently have to retain an individual relationship with each bank to route and settle payments. With the UPI, it would eliminate this. So the UPI is a boon for payment gateways.

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