Generally, when a new technology is introduced –
Two names—the USA and China—come to mind, But in India when everyone is talking about blockchain and Web 3.
Then a UPI system was implemented.
How UPI has Transformed India’s Digital Economy?
The rapid decline in market share of big corporations like Visa and Mastercard is caused by UPI.
Systems like RTGS, NEFT, IMPS and UPI, why are these systems different?
why not combine them all into one system?
Due to UPI, the toffee-making companies are at loss.
Because ever since the UPI has implemented, The practice of retailers giving out coffee instead of changing money has been discontinued.
If you transfer money from one bank to another, It does not imply that the bank fills up a truck at night and drives the money deposited during the day to another bank.
Even after UPI emerged, it became a topic of discussion everywhere from Silicon Valley to Australia.
Reserved bank along with the national payment corporation of India.
All the 29 banks who had initially opted for UPI, Payments in India last month whenever we transfer money online, we use NEFT or RTGS or IMPS.
So the first thing is why is it different?
what is the difference between all these systems?
What was the weakness in these that led to the creation of UPI?
UPI became a topic of discussion everywhere from Silicon Valley to Australia.
Whether it is about India being the top in digital transactions.
or it is a campaign to advance Digital India.
UPI is in talks, The Economic Times even published that the company making toffee is lost due to UPI.
Because ever since UPI is implemented, The practice of retailers giving out coffee instead of changing money has been discontinued.
This barcode you see in front of the little stalls made UPI a game changer.
You will see day after day who introduced UPI.
And there is a line of people taking credit for who made it.
But in reality, why was there a need to introduce UPI?
and what is UPI doing that is making India’s name more well-known?
So, let’s discuss all these things in detail.
if you had to transfer money to someone earlier, either you would give him cash or used to transfer money by bank.
Banks used to maintain big registers, They used to have a folio number where all the transactions of your bank were maintained.
And you walked to 3/4 counters to complete your verification.
Had to maintain a passbook.
Minimum account balance also had to be maintained, This was the reason why individuals considered bank transfers as their absolute last option.
Those who lived away from home because of jobs or studies, So, they used to send money through someone used to use money-order etc.
Additionally, there was no way to track whether funds from government schemes were reaching the intended recipients.
small payments were fine, however, the large payment, which was made in lakhs, the government wanted to be done from the bank.
This was the reason that to speed up the entire payment system, RBI developed the RTGS payment system from IDRBT.
Real-Time Gross Settlement.
Think of it in such a way that a system was made where people’s money was being transferred immediately.
without going to the bank.
It takes crores to build and maintain such systems, so, this system was only for those people who have to transfer more than 2 lakhs.
and do it immediately.
And there were some charges per transaction, This is the amount you had to pay to use the RTGS system.
This system can be used by any citizen of India and banks can also use it.
How UPI has Transformed India’s Digital Economy?
In the modern day, if you transfer money from one bank to another.
Therefore, it does not imply that the bank will put the money that was deposited during the day into a truck and send it to another bank during the night.
In this simple numbers are exchanged, When you transfer money, the number in your account is reduced and it gets added to the account of another.
Just like we have accounts in banks, similarly, all bank accounts are in RBI.
You can understand this whole thing in a way like Paytm wallet.
In that, no matter how much money we transfer, the actual money remains with Paytm, Until and Unless, you are withdrawing or transferring the money.
there is the same concept between RBI and Bank.
The bank can exchange the digits, however, in the final, only the RBI computes.
The question is that the numbers are exchanged, but when we withdraw from the cheque or the ATM, how is that maintained?
for that RBI maintains a currency chest in different areas and there is cash in it.
If banks have more than enough cash, then the bank deposits it in the currency chest.
And if the bank needs cash, it takes it from the currency chest.
And Currency chest sends daily reports to RBIthat how much money is deposited or withdrawn by banks.
Let’s understand one more thing here, banks like Axis Bank, HDFC, and ICICI, compete with one another.
They do not share any data of their customers.
neither gives access, After that, if the user of one bank wants
to transfer money to the user of another bank, then it happens immediately.
So, how it works?
Let’s look at it with an example, Suppose, you have an account in HDFC Bank and you have to transfer thousand rupees to Axis Bank, So you will request online or by the bank that request will go to the system made by RBI, RBI will verify whether there is money in the account of the person sending the money or not and on the other hand, it will also check whether the receiver’s account exists or not.
As soon as RBI verifies everything, it will transfer the payment.
And you will have to pay the transaction charge.
The amount you pay per transaction for NEFT or RTGS, they charge for this reason.
So, RBI acts as a mediator between all these banks.
All the banks have competition among themselves but they are confident about RBI.
RBI will not leak any detail.
Before NEFT and RTGS in India, RBI brought the ECS-Electronic Clearing Service in 1990.
It used to be paid in the bulk of salary and pension etc.
According to the technology at that time, it was fine.
But it wasn’t that advanced
That’s why in 2004, RBI brought RTGS to the people.
Real-Time Gross Settlement.
But after this RBI realised very quickly that there should be a payment system
for less than 2 lakhs transactions.
And in 2005 RBI introduced NEFT.
In the payment system, RBI said that there is no limit, to the amount of money you have to transfer, if you want to transfer even one rupee, then you can do it.
Now there is a lot of cost in doing such small transactions in real-time.
Therefore a rule has been imposed that the banks will complete the transaction in batches.
that means there will be a wait for 30 minutes, whatever NEFT fund transfer request will come to the bank, will have to be verified and transferred together in the group.
Earlier it was one hour but nowadays it gets transferred in 30 minutes.
That’s why you will notice whenever you do NEFT, the money reaches the account after 30 minutes.
NEFT form 48 groups and transfers the money per day.
Although RBI has suggested that there should not be any transaction charges on the savings account, this is the amount that has to be paid per transaction.
Whether it is NEFT or RTGS, earlier all banks used to do transactions during working hours only.
Because the system wasn’t trustworthy earlier, If there is any issue then it will be resolved within the bank hour but as the system and technology became trustworthy, it started being transferred within 24 hours.
But still, this payment system was not that handy for people.
The government was aware that if they wanted to connect people more with the digital payment system, then it should be an easier process.
IMPS was introduced in 2010Immediate Payment SystemWith the advent of IMPS, you can now transfer money by pressing the button on your mobile, It has options for less than two lakhs and immediate transfer to use IMPS, your mobile phone and MMID were required, In the payment system of IMPS, your verification is done based on the SIM in your mobile.
and the Sim which is linked to your mobile.
That is why you must have noticed that if you put a SIM in your mobile which is not linked to the bank, then you are unable to use mobile banking apps.
This architecture is also used in UPI.
that we will discuss next
Initially, the limit of IMPS fund transfers was 2 lakhs.
After that, it was increased to 5 lakhs.
The way NEFT and RTGS are run by RBI, IMPS is run by NPCI.
NPCI was also made a non-profit company by RBI in 2008.
This NPCI has introduced IMPSand NPCI has also introduced UPI.
There is an association of many banks in NPCI, earlier it had 10 banks but in 2016
13 public sector banks, 15 private banks, one foreign bank, 10 cooperatives banks and 7 regional rural banks were added.
Whether it is NEFT, RTGS or IMPS, in all these systems, you could transfer money online instantly.
But after that bank gets you to add beneficiaries when you are transacting for the first time banks do this so that your security is maintained.
After adding the beneficiary, the bank takes time which is called a cooling period.
In the cooling period, the banks notify you in different ways like SMS or emails that it can be confirmed that the transaction is being done by the same person who has the account.
RTGS is there if you want to transfer more than two lakh payments instantly.
If you want to transfer less than that and you can wait for 30 minutes, and then you can use NEFT.
And if you have to make a payment of fewer than two lakhs immediately and with a mobile then use IMPS.
But still, people did not have the option to buy goods from direct merchants.
had to add a beneficiary to transfer money, it was time-consuming if you want to transfer money through net banking, then you have to follow multiple steps, you have to wait for OTPAnd then in 2016, the solution to all these things was brought by NPCI Unified Payment Interface i.e. UPI.
UPI was originally brought by Raghuram Ranjan and Dilip Asbe
UPI is considered to be the brain chain of these two
UPI is the advanced version of IMPS
UPI works on the same architecture and technology as IMPSBut UPI introduced a single-pay virtual
payment address instead of sharing the IFSC code or account etc. to transfer money.
Now you can do payment transactions from a virtual payment address without sharing any of your details
Which is called UPI ID.
UPI is a QRcode-based system which not only transfers funds, but is also a merchant payment system in which you can easily buy goods and make payments.
How UPI has Transformed India’s Digital Economy?
Earlier you could not request payment but UPI gives you the option you can request payment to anyone who approves it then you get the money you might have this question why are these systems RTGS, NEFT, IMPS, or UPI different?
Why not put all these together into a single system?
Look, all payment systems operate on utterly different architectures from each other.
There are crores of users enrolled and crores of transactions running lives are not easy to migrate all these and integrate them in one place.
Therefore, whenever a major change has to be made, a separate system has to be made.
But UPI has still integrated all these payment systems to a large extent.
You can link all the bank accounts with the same UPI ID.
You can give money to the shopkeeper, you can take it from anyone.
Just the mobile number linked to your bank account should be on your mobile.
For shopkeepers, UPI’s infrastructure costs less than any other payment system because only a QR code has to be used Earlier the system had to have a machine for swiping the card.
But your cost in UPI is almost negligible PC wanted the technology of UPI to reach more and more people, and the technology of UPI was also securely given to other apps, like Paytm or Google or Phone pay etc.
Before this, you must not have seen that the option of RTGS and NEFT was in any app.
But UPI’s technology integration was allowed and its API was securely given to third-party apps.
what happened to BSNL, it should not be in the case of UPI.
by offering more cashback on a single app or by applying some other trick. All the users of UPI should not go to the same app,
so UPI has put a limit that a third party app can keep only 30% of the users on of their app through UPI.
Now, UPI may be Indian but the product you use using UPI is from American companies like Google, Apple, and Amazon we use them every day but we are their consumers, not investors.
Due to the correction in the USA stock market, the stocks of these high-growth companies at very low prices
Due to UPI, all the big companies like Visa,
Mastercard, their market share is also decreasing very fast.
Now, why this is happening?
See it was a long time ago when the ATMs were introduced
The bank whose ATM card was available
was then authorized to withdraw
money from that particular bank’s ATM.
If you have an ICICI Bank Debit card, then you can withdraw money from ICICI Bank ATM onlyNot from any other bank ATM.
Whereas the technology of ATMs and debit cards is the same.
Banks could have allowed using of ATM cards from different banks as well, but even after that, they did not allow us because they did not allow it. After all, the details of the customer had to be shared among themselves.
And if this was the case then their customer details would have gone to their competitors.
And Networking companies found a solution for this, Visa and Mastercard are called networking companies.
they stated that every bank in India is at a loss lot of money will have to be spent to build ATMs these network companies told the bank that do one thing,
does not share the details of the customer among themselves
give us the details
Whenever someone uses ATM, we will verify its details ourselves
As soon as the details are verified, you allow performing each other’s ATM transactions.
And about the details of the customer, then we will keep them secure.
But the network company i.e. Visa and MasterCard charge per transaction money on it.
Whether it is an ATM transaction or payment related to merchants.
This is called the MDR-Merchant Discount Rate.
the government has already made it clear in UPIthat there will be no MDR charges in UPI transactions.
This is the reason that UPI is rapidly taking down the market for Visa and MasterCard.
Just on August 17, 2022, RBI released a discussion paper.
the notice seemed about UPI charging for the transactions, There was a lot of fuss about this but the Finance Ministry put an end to the fear emanating from this working paper ofRBI on August 21, 4 days later.
The Finance Ministry made a tweet that the government has no intention of levying any charges on UPI.
A ₹800 transaction of UPI costs around ₹2.
Now, in this case, when UPI transaction is not chargeable at all the companies and banks with the UPI platform how do they earn money?
According to a PWC report”The Remarkable rise of UPI in India”
This company is collecting this payment data and then sells them to Telcos and NBFCsin a specific inside group.
UPI is growing very fast at the global level as well
Whenever you need to transact outside the country you have to use swift
All the banks of the world are connected through this and now people can pay outside because of Swift
Like in India we use the IFSC code.
Similarly, when payment has to be made outside India, we use the Swift code instead of the IFSC code.
Recently, in Ukraine and Russia wars, the US banned Swift from Russia.
That is, all the banks of Russia were out of the Swift payment system.
And because of this, Russia was completely cut off from the international market.
People were facing a lot of difficulty in their business, but if UPI is implemented well all over the world
So India will be safe from all thingsNPCI has started a subsidiary named NPCIInternational Payments Limited NPILwhich has taken UPI to the International level.
UPI is being implemented in Singapore or Bhutan Dubai and the vision of India is to operate UPI all over the world.
UPI is now being linked to credit cards as well
Earlier, if I have UPI then I can go shopping and make a payment by scanning QR code but UPI remains linked with a Debit card only can’t pay with a credit card.
Now that UPI will be linked with a credit card, I can pay with my credit card as well.
With this, the base of UPI will increase further all over IndiaWhen a new technology is introduced, the name of the USA or China comes to mind.
But in India, when everyone was talking about blockchain and Web3an UPI system was implemented, No transaction cost, no middleman, payment is done in 2 to 3 seconds and it was available 24 by 7.
Looking at the success of UPI, Google also suggested to the US Government that we should also have a system like UPI.
In the US, the Federal Reserve had to bring FedNowfor real-time payments inspired by UPIBut US is not happy with UPI growth because Visa, MasterCard and Swift are US based.
Let us also discuss this.
what are the challenges for UPI?
The way UPI transactions are growing so fast, its infrastructure is not growing accordingly.
UPI has grown rapidly but there has been no major change in the infrastructure.
This has increased the list that the existing infrastructure may not be able to handle the volume of the transaction.
Also, the problem with UPI is that UPI is a 0% charge policy, So, there isn’t any revenue for the banks or payment service providers.
So these people are also not promoting it in the way, they promote credit cards and debit cards.
Still, nothing has been done the accountability of failed transactions in the UPI payment system.
There is no detailed data on failed transactions and their types.
Also, it has multiple players involved, Due to this the accountability for the transaction failure is not fixed on any one person.
But the good thing is that steps are also being taken to improve the failure rate of the transaction.
Like RBI is going to make a Unified Disputeand Issue Revolution UDIRC Management System
To address UPI cake failure risk, This system will help users to launch complaints and track their resolution.