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How the Unified Payment Interface is Disrupting the Indian Banking & Financial Industry

Launched by the National Payments Corporation of India (or NPCI) in April 2016, the Unified Payment Interface (or UPI) is designed to enable mobile phone customers in India to transfer funds or make payments instantaneously across different banks. Currently offered by over 70 banks, the UPI-based payment system allows digital transactions between these banks without the need to enter the NFSC code or other bank account-related details.

Driven by the growth of the Internet and mobile banking in recent years, the Indian banking system is undergoing a state of technology-driven transformation. According to Infosys co-founder and the architect of the biometrics-based Aadhar card system, Nandan Nilekani, disruptive technology like mobile banking and payments are not only more inclusive but are also more cost-efficient as compared to traditional banking. Raghuram Rajan, the former RBI chief, comments that an increasing number of Indian banking customers are benefitting from improvements in the payment infrastructure in the country along with the launch of an alternative banking model driven by technology.

These banking and payment technologies such as the UPI can alter the traditional structure of the Indian banking system and bring disruption in the banking industry that can only benefit the Indian banking customer.

Are Banking Technologies More Inclusive and Cost Saving?

Despite being the fastest growing economy in the world, 40% of the Indian population does not have a bank account while over 145 million households remain excluded from the formal banking industry in the country. The total number of non-cash payments per individual each year stands at six transactions, which is lower than that of other emerging economies. According to industry statistics, only 14.6% of Indians possess a debit card while payment cards account for only 3.9% of the overall Personal Consumer Expenditure (or PCE). With regards to merchants and retailers accepting digital forms of payment, industry statistics estimate that only around 10 million outlets in the country accept non-cash modes of payments from their customers.

Electronic payment systems like the National Electronic Fund Transfer (or NEFT) and the Real Time Gross Settlement (RTGS) have shown improved growth; however they remain ineffective in becoming inclusive and reaching out to weaker sections of the Indian society.

In addition to being non-inclusive, the cost of maintaining a cash-dependent payment system is likely to be between 5 to 7%, while migrating this economy towards a cashless payment structure can save around $6.3 billion for the Indian economy.

So, can digital banking technologies such as the UPI be more inclusive and cost-efficient? Here is an assessment.

How the Unified Payment Interface can Transform the Country’s Payment System

The emergence of the Unified Payment Interface or UPI system in India has been primarily driven by the rapid growth of smartphone users in the country. With an estimated base of around 337 million smartphone users in 2018 and the number likely to grow to approximately 491 million users by the year 2022, mobile payment systems including the UPI is leveraged to fulfil the payment needs of citizens currently excluded from formal banking in India.

Here is how the instant settlement-based and mobile-enabled UPI can make cashless payments more inclusive and cost-efficient:

  • Single point of contact for all digital banking transactions

The UPI systems simplify digital transactions by removing all hassles associated with it. No longer do users have to enter their payment card details or unique customer IDs at multiple touch points, but only use a single point of contact to complete various transactions.

  • Security aspect

Among the primary reasons for the slow growth of conventional digital payment modes in the country is the reluctance of Indian customers to reveal confidential information (such as bank account details or debit/credit numbers) during transactions. UPI eliminates this concern by not requiring their subscribers to enter their crucial financial data, thus making it attractive to a larger subscriber base.

  • Cheaper transactions

Customers can use a UPI-enabled platform to transfer up to 1 lakh instantly, as compared to prepaid digital wallet customers (without KYC) who cannot make monthly transactions valued at more than 10,000/-. Additionally, the cost of each UPI-based transaction is estimated to be lower than 45 paise, thus making it highly cost-effective.

  • Cost-effective as compared to point-of-sale (or POS) machines

Most merchants and small shops do not keep POS or card swiping machines simply because they are expensive. Additionally, they have to pay service charges ranging from 1.25% to 2.5% for each completed transaction. In addition to benefitting from lower transaction cost, UPI is beneficial for retail shops (particularly in villages and small towns) as they can operate their transactions entirely through their smartphones and do not have to invest in costly POS or payment gateways.

  • Instant transfer of payments

Based on the IMPS payment platform, UPI works 24×7 with the payment instantly transferred and completed. Unlike other forms of digital payments where an addition of a new payee typically varies from 0.5 to 24 hours, UPI can be used to register new payees and transfer payment to them instantly.


The adoption of UPI-based digital payment systems means that it no longer “business as usual” for the formal banking industry in India. Leading banks such as Kotak Mahindra are responding to the changing times by offering mobile banking services such as the Kotak 811 account, which can be operated entirely by smartphones.

The launch of the UPI-based apps such as the BHIM (or Bharat Interface for Money) mobile app is gradually transforming the mode used by Indians to transfer money between bank accounts.

Digital payment systems like UPI augers well for creating a cashless (or less cash) economy in India along with how they are more inclusive and cost-effective as compared to traditional banking modes.


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