India’s Payments System

Three years since the launch of UPI (Unified Payments Interface), the system is dealing with nearly 1 bn transactions per month. In September UPI clocked 955 million transactions, amounting to 1.61 trillion rupees (INR), demonstrating the extent to which Indian consumers have welcomed real-time payments. The continued success of UPI has required a collaborative effort, from the government to the Central Bank, from the largest public-sector banks to private institutions, emerging fintechs and, of course, consumers themselves. Fintech payment service providers including Google Pay, PhonePe and PayTM continue to lead from the front, accounting for 90% of the transaction volume. The increasing volume concentrated in just a handful of providers is leading to renewed focus from regulators, in order to ensure that the ‘democratization’ of payments is delivered. The good news is that the majority of transactions are between individuals, however, in order to sustain momentum more customer to trader transactions using UPI must be encouraged. Regulators are now aggressively pushing merchant-friendly features and mandates. The major drivers for merchants to shift from their traditional modes of payments acceptance (primarily cash) to UPI and other online payment systems are QR codes, seamless infrastructure, cost efficiency, building consumer awareness and encouraging new behaviours around digital payments. The Regulator has now ruled that merchants will no longer pay any merchant discount rate on UPI transactions that are below INR 100 when done through QR code scan and pay. Furthermore, the fee that the merchants pay to the bank that provides them with the infrastructure for accepting payments has been set at 0.30% of the transaction amount with a maximum cap of INR 100 per transaction. The average ticket size of UPI payments is slightly more than INR 1600 (close to the US $22), a large proportion of UPI transactions are low ticket size, and these new rules will benefit small merchant and mom and pop stores – kirana stores – that are a cornerstone of the Indian retail sector.