Opinion | Bridging the financial divide digitally

This has led the world to look out for newer ways to transact, resulting in companies searching for opportunities which not only provide strong tailwinds to the digital payments ecosystem but also lead to higher standards of safety. Here, seemingly the UPI payment interface, hugely successful in India, could provide an alternative. The phenomenal growth of the Unified Payment Interface (UPI) in a country as diverse as India has drawn attention of all the big tech companies around the world with firms like Google requesting the US Federal Reserve to build a similar interbank real-time gross settlement service (RTGS) for faster digital payments in the US, taking cue from the UPI based digital payment in India. The UPI is an instant real-time payment system which uses a mobile interface to transact money. The UPI transactions in India has already clocked figures 18 billion transactions annually since its launch 3 years ago.

What makes UPI interesting is the fact that while there has been a drop in payment across all traditional modes globally, digital payments like UPI surprisingly have fared better than others. Since its launch in 2016, India’s Unified Payments Interface has helped propel the growth of online payments in the country of 1.4 bln people. The system allows people to make cheap, instant transfers across bank accounts based on an IMPS (Immediate Payment Service) number and pays for everything from groceries to online services. The UPI is expected to be replicated well across other developed and developing countries alike also because of its successful implementation in an idiosyncratic market like India where there exists a top end of the market which behaves more like the western world, and a bottom of the pyramid market having similarities with the developing or undeveloped economies.

UPI could also play an important role in better governance and policy implementation of the government across various developing economies. For example, UPI promoted as part of a drive to accelerate financial inclusion led to a rise in proportion of Indians with a bank account from 35 per cent in 2011 to 80 per cent in 2017, according to BIS, above the global average. Further, the UPI and Aadhaar-enabled payment system helped the government transfer $10 each to 193.6 million of needy women and $40 to 8 crore farmers adding 400 million transactions for three months during the pandemic at the click of a button. The next step could be to use similar UPI technology to lending and over-draft accounts which would enable seamless lending facilities to farmers and the informal workers who mostly are not able to avail formalized lending due to bureaucratic hindrances, weak institutions and regulatory obstacles in developing economies.

Every country has diverse needs. Developing countries need financial inclusion of its population and developed countries need a faster transfer mechanism. The fast adoption of UPI with more than 1.5 billion transactions monthly and a value that’s about 10% of India’s GDP, it seems UPI provides the simplest and the best transfer mechanism for one and all.

Given the estimate that India’s digital economy is set to reach 1 trillion dollars by 2023, a large chunk of it would be definitely driven by the UPI transactions. UPI has catalysed the process of financial inclusion and will continue to play a major role till India achieves complete financial inclusion. UPI adoption has also contributed significantly in improving Ease of doing Digital Business of India which does not have a robust brick and mortar banking network.

There is a new found interest among countries across the world regarding the UPI payment interface. SAARC countries have already reached out to India to offer them help in developing a digital payment system prototype and that’s not all. India has also started working with developed countries like UAE and Singapore on similar projects. The Indian government is very optimistic about the UPI adoption and therefore it has also constituted a subsidiary that will export UPI technologies to governments and banks of the world that might be interested in similar instant real time fund transfer processes. UPI finally seems to be India’s innovation to the world.

(The author works in the Strategic Investment Research Unit of the Ministry of Commerce and Industry. Views are personal and do not reflect Mint’s.)