Everything you want to know about UPI. (Photo: The Quint)

Expensive Or Just Cumbersome? Why UPI Has Had A Slow Start

Cash is in short supply and the government is urging citizens to move to digital payments to tide over the aftermath of demonetisation. Companies that offer online wallets, like Paytm and Freecharge, have reaped the benefits of the low-on-cash environment with transactions and number of users surging. The same is not true for India’s homegrown digital payments solution - The United Payment Interface, which many thought would end up killing online wallets.

On April 11, National Payments Corporation of India (NPCI) launched the Unified Payments Interface (UPI) in pilot mode. Built on the existing Immediate Payment Service (IMPS) infrastructure, UPI allows people to settle transactions directly between their bank accounts in real time through a virtual address. The platform is one-of-a-kind since it bypasses the need to have a card, wallet or any other kind of instrument to make payments or receive them.

After a test run, UPI was formally launched in August.

Since then, however, the platform has had anything but a dream run.

30 banks have signed on and launched UPI-based applications but the country’s largest lender State Bank of India came onboard only last week. Five public sector banks are yet to join the platform. Moreover, transaction volumes have been slow to pick-up.

In a conversation with BloombergQuint, managing director and chief executive officer of NPCI admitted that the start has been slow and added that the low transaction volumes are a cause of concern.

There are 20 lakh people registered on the UPI platform, just 8 percent of the target of 2.5 crore users that Hota would like to achieve by March 2017. Transaction volumes are also low at only 30,000 transactions a day on average, Hota said.

We aren’t very happy about the numbers since we have two million people on the platform already. We are hoping that these numbers go up as soon as that critical mass of unserved consumers sign up on the platform.
A.P. Hota, MD & CEO, National Payments Corporation of India
Expensive Or Just Cumbersome? Why  UPI Has Had A Slow Start

Hota explained that by saying they need a critical mass of unserved customers, he means the need to bring those customers to the platform that currently do not have access to digital banking options. Such customers are likely to use UPI more regularly to transact as opposed to people who are already using other modes of payment transfer like IMPS, RTGS or NEFT.

By the end of September 2016, India had 72.8 crore debit cards and 2.68 credit cards as per Reserve Bank of India data. Moreover, there were close to 36 million IMPS transactions in September as compared to UPI’s tally of 0.9 million a month.

I think the problem is that the people who downloaded and got on to UPI system are used to internet banking modes like RTGS and NEFT. They must have downloaded it for curiosity. My guess is that this population is already well served by technology and several other payment methods.
A.P. Hota, MD & CEO, National Payments Corporation of India

What’s Holding Back UPI?

From convenience and communication to cost, there are a handful of factors that are preventing UPI from becoming popular.

A UPI transaction requires both the sender and the receiver of money to be registered with their bank applications on their phones, said Avinash Raghava, co-founder of iSPIRT foundation, a technology think-tank which often works with the government in digital and financial inclusion initiatives.

The registration identifier is called a virtual payment address which is the only information required to pay the other party. However, the virtual payment address makes things more complicated than what it would be with a simple phone number as the identifier, Raghava said

In my personal opinion, I think the biggest failure of the UPI platform has been in making it easy for people to sign up. Nobody wants to remember another email address to do their transactions. One thing that people never forget is their phone number and that should have been the front-end identification.
Avinash Raghava, Co-Founder, iSPIRT

Communicating UPI’s Potential

The cash shortage in the economy is a golden opportunity for a platform like UPI to pitch itself as replacement for cash transactions, particularly with merchants.

Almost 98 percent of all transactions in the country are done in cash and UPI is the only real time mode of transfer present, which is also interoperable among banks and doesn’t require intermediaries.

The problem, Raghava felt, is the lack of effective communication to convince consumers that UPI is a better alternative compared to other available options.

“The first thing that they should have done is to educate people simply how to use UPI and how is it better than RTGS or NEFT? I still use NEFT transfers because it gets the job done and most of the people I know are already added there,” Raghava said.

Lack of outreach from the NPCI and the government is something that even merchants complain about.

“I don’t think that they are trying to push UPI at all. The government is pushing all kinds of digital payments except UPI. There is no communication or push for the retailers to adopt it so they are not going to,” said Kumar Rajagopalan, chief executive officer of the Retailers’ Association of India.

The Cost Factor

Another reason for the relative disinterest from merchants is the cost involved.

UPI currently has only about 160 merchants on the platform and person to merchant transactions make up just 10 percent of the total transactions happening on the platform currently, Hota told BloombergQuint.

Retailers are unlikely to move to the platform if the cost of transacting on UPI doesn’t come down, said Rajagopalan. He added that the merchant discount rate, which covers fees involved in the transaction and is split across various service providers, needs to be brought down to ensure bottom lines aren’t impacted.

If the UPI system has to beat existing modes like RTGS, why does it have a merchant discount rate (MDR) higher than that of point-of-sale transactions by debit cards. The MDR on UPI should be waived off immediately if the government wants it to take off because it is a direct hit on the retailer’s bottom line of about 1 percent while cost of cash is barely about 0.2 percent of the transaction value.
Kumar Rajagopalan, CEO, Retailers’ Association of India

The UPI platform has been kept free for person to person transactions for now but it costs up to 1.5 percent of the transaction value for a merchant to accept payments through it. Typically, there are five to six parties involved in a transaction, including accepting and issuing banks, payment gateways and payment aggregators, who split the MDR between themselves.

Expensive Or Just Cumbersome? Why  UPI Has Had A Slow Start

Hota agreed that the high MDR could be a deterrent for merchants to sign up but indicated that there are no immediate plans to bring it down.

I agree that cost of UPI transactions for merchants is equivalent to PoS transactions done through debit or credit cards. There’s no plan at the moment to cut rates, we will have to speak to banks for that to happen but we are working on ways to make UPI more merchant friendly in terms of transaction cost.
A.P. Hota, MD & CEO, National Payment Corporation of India