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Why in news?

Recently, digital payments in India touched a new high by reaching a billion monthly digital payment transactions on the Universal Payment Interface (UPI).

Payment on the UPI platform rose from 0.1 million in October 2016 to 1.3 billion in January 2020.

Google has written a letter to the US Federal Reserve, asking them to learn from Indian digital payments.

Reasons for this Payment Revolution

Political Will: A clear vision for shifting the system from low volume, high value and high cost to high volume, low value and low cost. This can be seen through Jan Dhana Yojana and Aadhaar

A clear vision for shifting the system from low volume, high value and high cost to high volume, low value and low cost. This can be seen through A Proactive Central Bank: Reserve Bank of India (RBI) created a non-profit market participant entity and leveling the playing field between non-banks and banks.

Reserve Bank of India (RBI) created a entity and leveling the playing field between non-banks and banks. A paper by the Bank for International Settlements (‘The Design of Digital Financial Infrastructure: Lessons From India’) suggests that India demonstrates how “a central bank can be proactive and equal partners with private sector counterparts when it comes to fostering technological innovation in finance”.

(‘The Design of Digital Financial Infrastructure: Lessons From India’) suggests that India demonstrates how Use of Technology: It aims at balancing trade-off like ease-of-use vs fraud prevention. This can be seen through UPI.

Elements of revolution

Launch of Aadhaar Aadhaar put simply is one of the biggest depositories of biometric data in the world. About 1.2 billion Indians now have a digital identity. Aadhaar has provided a solid foundation for banking the unbanked (financial inclusion). Aadhaar acted as an “identity rail” e. giving banks and Fintech companies a secure means to identify would-be customers — and the government and businesses an easy way to pay them.

Role of National Payments Corporation of India (NPCI) National Payments Corporation of India (NPCI), an umbrella organization for operating retail payments and settlement systems in India, is an initiative of Reserve Bank of India (RBI) and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007, for creating a robust Payment & Settlement Infrastructure in India. It has been incorporated as a “Not for Profit” Company under the provisions of Section 25 of Companies Act 1956 (now Section 8 of Companies Act 2013).



UPI

NPCI together with the RBI and Indian Banks Association (IBA) has established a platform called UPI.

UPI, in turn, acted as a “payments rail”, it gives those players access to infrastructure that enables the transfer of funds.

it gives those players access to infrastructure that enables the transfer of funds. UPI provides a payment experience that is mobile-based, low-cost, 24/7, instant, convenient, interoperable, fintech friendly, inside banking, and safe.

What is UPI?

UPI is a single platform that merges various banking services and features under one umbrella.

It also caters to the “Peer to Peer” collect request which can be scheduled and paid as per requirement and convenience.

collect request which can be scheduled and paid as per requirement and convenience. UPI turns smartphones into a virtual debit card. It allows real-time bank-to-bank payments to be made using a mobile number or virtual payment address (UPI ID).

to be made using a UPI has made the money transfer process a lot easier as there is no need to remember the receiver’s account number, account type, IFSC, and bank name.

Instead, money transfer can be made only by knowing Aadhaar number, mobile phone number registered with the bank account, or UPI ID.

A UPI ID is a unique identification for a bank account that can be used to send and receive funds.

How is UPI different from regular payments?

Regular payments are based on overlay systems.

More banking layers mean less efficiency, higher cost and higher barriers to entry.

UPI is both cheap and enables instant payments as it is interoperable.

Interoperability means allowing individuals to manage money residing in several accounts from a single bank or payment service app on their phone.

This increases competition between banks by enabling people to switch funds cheaply.

Way Forward

The central government must deadline digitizing all its payments.

Nandan Nilekani Committee for Deepening Digital Payments.

RBI must also make UPI and RuPay fit for use in our $70 billion inward remittances that currently come through exploitative financial institutions.

for use in our inward remittances that currently come through Digitization of the economy needs to be backed up by a strong data protection law.

Mains model question

Explain how digital transactions on the Universal Payment Interface (UPI) have brought a payment revolution in India.

References