India’s UPI Offers THE Playbook For Ending Card Payment Fees

If there were ever a case study for the future of payments, look no further than India’s Unified Payment Interface (UPI).

Pushed by India’s Reserve Bank (RBI), UPI solves the digital payments problem.

Ironically, though, UPI was started to eliminate the high use of cash and make digital banking more accessible to its denizens.

UPI is a countrywide, instant payment system that’s tethered to over 210 banks. Mobile payment app providers – the most notable of which is Google Pay (formerly Tez in India) – are welcome to use UPI’s rails to move funds for its users and merchants.

How does a merchant use UPI in practicality?

A QR code.

Mobile apps generate a unique QR code per transaction. The customer scans the code with their mobile device and instantly transfers funds from their bank account to that of the merchant. For busier merchants, we’ve been told merchants will often connect a speaker to their UPI account so they can hear when a successful transfer has been to reduce the concern that the customer didn’t really complete the transaction.

RBI conceived of UPI in 2011, but it took until 2016 to go live (cuz government and banks are perhaps the slowest creatures on the planet).

But 5 years later, UPI can count 10% of India’s commerce through its platform.

While a majority of transactions on the UPI platform – almost 81 per cent by value – are peer-to-peer, suggesting UPI is replacing cash in the payment ecosystem and consequently leading to more digitisation of the economy, around 19 per cent of the transactions are peer-to-merchant, accounting for nearly Rs 9.96 trillion, surpassing both credit and debit card point-of-sale transaction values.

https://www.business-standard.com/article/finance/upi-clocks-3-55-billion-transactions-in-august-worth-rs-6-39-trillion-121090100409_1.html

UPI made up for 10 per cent of the overall retail payments in 2020-21 (excluding real-time gross settlement), growing at a compound annual growth rate of 400 per cent between 2016-17 and 2020-21. Until a few years ago, UPI’s share in the overall retail payments was only 2 per cent. UPI’s incredible growth can be attributed to interoperability, open-source platform, ease of use, and zero merchant discount rates.

https://www.business-standard.com/article/finance/upi-clocks-3-55-billion-transactions-in-august-worth-rs-6-39-trillion-121090100409_1.htm

So India has created a payments rail with NO fees that currently accounts for 10% of total transaction volume and has grown at 400% CAGR since inception.

Making a comparison to America, it’s been estimated that the US processes $7T of debit and credit spend annually. Assuming 3% of that goes to the issuing banks, networks, and acquirers (because nobody gives the merchant the reprieve on debit transactions that dumb-dumb Dick Durbin thought they would), that’s $210B of economic drag.

If we created a system of transfer like UPI and it followed the same growth rates, we’d have saved the economy $21B this year.

$21B.

That’s a lot of money.

Moreover, you’d eliminate predators from the business landscape.

The real genius behind UPI?

Google Pay, who’s collecting all the customer transactional data. It should surprise nobody that this data can be used for ads and a host of other value-adds.

And UPI, we postulate, is a microcosm of what will come to pass in payments:

Transacting commerce become free, and the revenues associated with traditional payments will transfer to those who create products from the data generated when commerce is conducted.

How long it takes us to evolve is anyone’s guess. FedNow will launch in 2023, but there are clearly a number of incumbents making serious amounts of undeserved revenue interested in keeping things status quo.