India’s path to resilient growth with its global open payment network

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Second-Level Thinking

12 min readAug 9, 2023

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Understanding India

Population — 1.4 billion
GDP Growth for the 2022–23 fiscal year was revised higher to 7.2% from 7% (source: Trading Economics). A recent estimate by an economist at the State Bank of India (SBI, the largest lender) even says India would become the 3rd largest economy by 2027.
Watch this short video — April 2023 — (6 mins) — CNN, Fareed Zakaria: These 3 revolutions could truly transform India (and challenges ahead)

Typical payment systems

Open payment systems — India (IMPS & UPI — explained below), Singapore (PayNow), China, and Brazil (PIX payment system). Read my previous article on real-time payments — Fintech Investments — Prime Time for Real-Time Payments and the Economic Opportunities
Private, closed-loop payment systems — WeChat, AliPay
Traditional rails — Visa, Mastercard, SWIFT, SEPA (Single Euro Payments Area)

Cut the noise — going cashless and payment systems

Arjun Ramani, The Economist’s global business and economics correspondent, spent months immersed in the world of digital finance. He shares some of his insights from a special report about the growth of cashless payment systems and the importance of customer data.

Arjun Ramani, The Economist’s global business and economics correspondent

Core Pillars of India’s Technology Innovation Management

Before diving into different types of payment systems that are available in India, it is important to understand what are the core pillars that are supporting continuous technology innovation management in India —

India Stack— https://indiastack.org/

A set of open APIs and digital public goods that aim to unlock the economic primitives of identity, data, and payments at the population scale.

IDENTITY — digital identity products centered around Aadhaar — Unique Identification Authority of India (UIDAI) — http://www.uidai.gov.in/ — issuing every Indian a unique 12-digit ID that is verified by fingerprints or an Iris scan.
PAYMENTS — National Payments Corporation of India (NPCI) announced the launch of the United Payments Interface (UPI) (explained below)
DATA — Data Empowerment and Protection Architecture

India’s Payments Sector and Infrastructure

According to a study from strategy consulting firm Boston Consulting Group in conjunction with PhonePe (study link, June 2, 2022) —

Value of digital payments in India to increase three-fold from US$3 trillion in 2022 to US$10 trillion by 2026.
Digital payments will constitute nearly 65% of all payments by 2026, up from 40% in 2022.
UPI adoption will surge from 35% in FY 21 to 75% in the next five years.
7x growth in digital merchant payments — from US$ 0.3–0.4 trillion today to US$ 2.5–2.7 trillion by 2026.

Organization — National Payments Corporation of India (NPCI)

Established in 2008, NPCI is a “not-for-profit” parent organization set up as a utility for operating retail payments and settlement systems in India. NPCI is an initiative of the Reserve Bank of India (RBI) and the Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007, to create a robust Payment & Settlement Infrastructure in India. NPCI provides infrastructure to the entire Banking system in India for physical and electronic payment and settlement systems.

NPCI started with the 10 core promoter banks — State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda, Union Bank of India, Bank of India, ICICI Bank Limited, HDFC Bank Limited, Citibank N. A. and HSBC.
NPCI has 56 member banks as shareholders and in 2020, new entities regulated by RBI were inducted, consisting of Payment Service Operators, payment banks, Small Finance Banks, etc
NPCI offers solutions like tokenization and mobile-based PoS to support contactless payments and an ability for consumers to securely use their phones to make card payments without disclosing their sensitive card details.
NPCI International is another entity that evolved from the original NPCI vision of becoming the best global payment network. It has been established as a separate entity dedicated to the internationalization of RuPay & UPI (see more about these products below). To tap into the international growth opportunities, NPCI has successfully established partnerships with Discover Financial Services (DFS) USA, Japan Credit Bureau (JCB) Japan, Union Pay International (UPI) China, Royal Monetary Authority (RMA) of Bhutan, and Network for Electronic Transfers (NETS), Singapore.

Product — RuPay

Launched in 2012, a locally developed Payment System to grow retail electronic payments in India. The name derived from the words “Rupee and Payment” emphasizes how it is India’s very own initiative for card payments, competing directly with the incumbents like Visa and Mastercard.

By 2020, RuPay cards were issued by more than 1,100 banks which include Public Sector Banks, Private Sector Banks, Regional Rural, and Co-Operative Banks. As per the RuPay milestone tracker, there are now over 600+ million cards in circulation — https://www.rupay.co.in/milestones
RuPay supports the issuance of debit, credit, and prepaid cards by banks in India. A full range of various card types, including consumer, Government scheme, and business cards can be found here — RuPay Cards and RuPay Business.
RuPay Debit cards are available in multiple variants with different offers associated with them. The variants are Government Schemes, Classic, Platinum, and Select.
RuPay cards are widely accepted across ATMs, Point-of-sale (PoS) devices, and e-commerce websites in India. For e-commerce, RuPay cardholders securely transact online using Bharat E-commerce Payment Gateway (BEPG).
RuPay cards support the functionality of the National Common Mobility Card (NCMC) which can enable low-value contactless payments like transit, toll, parking, and retail using offline technology. Launched in 2019, NCMC is an inter-operable transport card conceived by the Ministry of Housing and Urban Affairs of the Government of India.

Product — Immediate Payment Service (IMPS)

Launched in November 2010, IMPS provides a real-time interbank electronic fund transfer service that is instant and available 24x7.

As a Person-to-Person (P2P) funds transfer service, it can be accessed by the public on multiple channels like Mobile, Internet, ATM, and SMS.
The service is a safe and economical way to allow the transfer of funds instantly within banks across India.
The service currently has 777 live members which includes banks and Prepaid Payment Instruments (PPIs).
To participate in IMPS the entity or an organization needs to have a valid banking or prepaid payment instrument license from the Reserve Bank of India.
With this service, bank customers (sender) can make payments just with the mobile number of the beneficiary (receiver). Customers have to register for mobile banking with their bank and get Mobile Money Identifier (MMID) and MPIN from the bank. To send money the customer needs to enter the beneficiary’s mobile number, the beneficiary’s MMID, the amount, and their own MPIN. Money is credited by the bank into the account that is registered with the beneficiary’s mobile number. Customers can also link multiple MMIDs to the same mobile number.

India’s Immediate Payment Service (IMPS) Product

Product— Unified Payments Interface (UPI)

Unified Payments Interface (UPI) is a system that allows a single mobile application the ability to access different bank accounts. With UPI customers and merchants can make immediate money transfers using their mobile devices round the clock 24x7 and 365 days.

According to a Worldline India report on India’s digital payments, in 2022, UPI processed over 74 billion transactions, an increase of 70 per cent YoY. Unified Payments Interface (UPI) continues to be the most dominant channel for digital payments in India driven by the proliferation of QR codes which jumped to 56% per cent in 2022. Source

UPI allows for a single-click payment using 2 Factor Authentication (2FA).
UPI supports payments to any merchant, utility bill payments, over-the-counter payments, and QR Code (Scan and Pay) based payments.
UPI supports both pay and collect funds requests. For a pay request, the initiating customer is pushing funds to the intended beneficiary and the payment addresses include mobile number, MMID, account number, IFSC, and Virtual ID. For a collect request, the customer is pulling funds from the intended remitter by using a Virtual ID.
UPI-enabled applications are provided by the National Payments Corporation of India (NPCI) as well as the Banks. It can be downloaded by customers from the app store or their bank’s website. Customers create their user profile using their name, virtual id (payment address), password, etc. After creating their profile, customers can add/link/manage one or more of their bank accounts within the app. See UPI-enabled apps like BHIM (by NPCI) and ICICI Bank app below.
Bharat Interface for Money (BHIM) is an app that lets consumers make quick payment transactions using Unified Payments Interface (UPI). Consumers can make instant bank-to-bank payments, pay and collect money using just a mobile number or Virtual Payment Address (UPI ID). Consumers can send money by entering the Virtual Payment Address (UPI ID), account number, and QR Scan and request money by entering Virtual Payment Address (UPI ID). It also supports paying by scanning the QR code through Scan & Pay or generate own QR code to let others make easy payments to you.

The New York Times covered how QR code is ubiquitous across India. It has allowed India to build an inclusive commerce across the country. See article: Where Digital Payments, Even for a 10-Cent Chai, Are Colossal in Scale

UPI enabled apps — BHIM App by NPCI and ICICI Bank App and the use of QR codes at merchants across India

NPCI has many other financial products under its portfolio and we will not be covering all of them in detail —

Source — https://www.npci.org.in/
National Electronic Toll Collection (NETC) system
National Financial Switch (NFS) ATM network
*99# service —USSD as the access channel that works across all GSM handsets (smartphone or otherwise). By entering *99# on the mobile phone the service allows sending and receiving interbank account-to-account funds, balance inquiry, setting/changing UPI PIN, and a host of other services.
Aadhaar Enabled Payment System (AePS) — allows the bank customer to use Aadhaar as his/her identity to access his/ her respective Aadhaar-enabled bank account and perform basic banking transactions like cash deposit, cash withdrawal, Intrabank or interbank fund transfer, balance inquiry, etc.
BHIM Aadhaar — enables merchants to receive digital payments from customers over the counter through Aadhaar authentication.
e-RUPI — a pre-paid e-voucher
AutoPay for recurring payments
UPI 123PAY — an instant payment system for feature phone users
UPI LITE — for low-value transactions that have been set at below ₹ 200
UPI One World — a part of the UPI experience for inbound travelers. It is the prepaid payment instrument linked to UPI provided to foreign nationals and non-resident Indians (NRIs) coming from G20 countries

Payment Processing Fees in India

There are a lot of providers in India, so for guidance, it is good to look at the processing fees posted by one of the most frequently used payments app in India — PayTm —

Consumer — Rates and Fees — https://www.paytmbank.com/ratesCharges
Business — Pricing — PayTm for Business — https://business.paytm.com/pricing (images below, Aug 2023)

Coverage by International Organization on India’s Financial Systems —

March 23 — Stacking up the Benefits: Lessons from India’s Digital Journey — https://www.imf.org/en/Publications/WP/Issues/2023/03/31/Stacking-up-the-Benefits-Lessons-from-Indias-Digital-Journey-531692
April 23 — India’s Financial System: Building the Foundation for Strong and Sustainable Growth — recording — https://www.wilsoncenter.org/event/indias-financial-system-building-foundation-strong-and-sustainable-growth
April 23 — Unleashing India’s Growth Potential — https://www.imf.org/en/Publications/WP/Issues/2023/04/21/Unleashing-Indias-Growth-Potential-532616?cid=em-COM-789-46446

Signals of next-level growth and innovation across India —

Signal areas — Central Bank Digital Currency (CBDC), Fintech Apps, Cross-Border Payments, Cashless —

Reserve Bank of India targets 1M CBDC users before end of June 2023 — https://coingeek.com/reserve-bank-of-india-targets-1m-cbdc-users-before-end-of-june-2023/
Reserve Bank of India Explores Cross-Border Payments with Digital Rupee — https://cryptobriefing.com/reserve-bank-india-explores-digital-rupee/
India’s Retail Central Bank Digital Currency Project Makes Headway — https://www.fitchratings.com/research/non-bank-financial-institutions/indias-retail-central-bank-digital-currency-project-makes-headway-25-07-2023
5 FinTech super apps transforming banking in India — https://ibsintelligence.com/ibsi-news/5-fintech-super-apps-transforming-banking-in-india/
Cashless, queue-less payment for government services in India — https://timesofindia.indiatimes.com/city/goa/cashless-queue-less-payment-for-govt-services-in-the-offing/articleshow/101737635.cms
India’s HDFC Bank signs up over 100,000 customers in digital rupee pilots — https://www.cnbc.com/2023/07/13/indias-hdfc-bank-signs-up-over-100000-customers-in-digital-rupee-pilots.html
How cross-border payments are reshaping Southeast Asian travel— https://technode.global/2023/07/12/how-cross-border-payments-are-reshaping-southeast-asian-travel/
India central bank eyes one million digital currency transactions daily by year-end, deputy governor says — https://www.reuters.com/markets/currencies/india-cenbank-eyes-one-mln-digital-currency-transactions-daily-by-year-end-2023-07-11/
Growth & adoption of UPI — India’s push to democratize credit tests limits — https://www.reuters.com/breakingviews/indias-push-democratise-credit-tests-limits-2023-06-30/
Why credit card adoption is rising in India — https://www.forbes.com/sites/zennonkapron/2023/06/22/why-credit-card-adoption-is-rising-in-india/?sh=2eb3abf55894

Extreme Inequality is a huge concern

As per the ‘World Inequality Report 2022’, India is among the most unequal countries in the world, with rising poverty and an ‘affluent elite.’ The report highlights that the top 10% and top 1% in India hold 57% and 22% of the total national income respectively while the bottom 50% share has gone down to 13%.

See below various other measures shared on inequality in India —

Jan 23 — Richest 1% own 40.5% of India’s wealth, says new Oxfam report — https://www.bbc.com/news/world-asia-india-64286673
July 22 — Income Inequality in India — https://thegeopolitics.com/income-inequality-in-india/
Oxfam — India: extreme inequality in numbers — The top 10% of the Indian population holds 77% of the total national wealth. 73% of the wealth generated in 2017 went to the richest 1%, while *670 million Indians who comprise the poorest half of the population saw only a 1% increase in their wealth — https://www.oxfam.org/en/india-extreme-inequality-numbers

Geopolitics

India, China, the US, and the rest of the world —

May 23 — The fight over the future of global payments — Digital payments have transformed domestic finance. Now the competition is going global — https://www.economist.com/leaders/2023/05/18/the-fight-over-the-future-of-global-payments — Cross-border retail spending (including tourism) and remittances will hit $5trn this year; business-to-business payments are worth eight times that. Three big players are duking it out to process these vast flows of funds. The West’s legacy system, including the Visa-Mastercard duopoly and Swift, a messaging system for bank payments, is the dominant incumbent. China is the most advanced challenger, with its payment apps, its card network, UnionPay, and cips, its more expansive alternative to Swift. In third place is India, whose ambition to deploy UPI globally has grown.
July 23 — Modi’s India is moving in an illiberal direction — https://on.ft.com/44DRgow
July 23 — Dark clouds are hanging over China’s economy — signs of deflation — CNN, Fareed Zakaria — https://twitter.com/FareedZakaria/status/1680642602347921408?s=20
July 23 — France to soon start using India’s UPI payment mechanism: Prime Minister Modi — https://www.livemint.com/news/india/india-and-france-agreed-to-use-upi-payment-mode-in-france-pm-modi-11689295284095.html
June 23 — Bessemer Venture Partners — US FedNow is an improvement, but won’t become as ubiquitous as Brazil’s PIX or India’s UPI
May 23 — BRICS alliance — BRICS Nations (Brazil, Russia, India, China, and South Africa) lead the charge in De-Dollarization — What it Means for Your Portfolio- https://etfmarket.cboe.ca/en/article/brics-nations-lead-charge-dedollarization-what-means-for-your-portfolio
April 23 — India’s plan to export its wildly successful digital payments system — https://restofworld.org/2023/india-upi-digital-payments-diplomacy/
April 23 — Nepal, India to sign cross-border digital payments deal to boost trade — https://www.business-standard.com/world-news/nepal-india-to-sign-cross-border-digital-payments-deal-to-boost-trade-123041100284_1.html