Cash Kerb-ed. UPI In. A Zugzwang moment?

|November 14, 2016 0
Image courtesy of renjith krishnan at freedigitalphotos
With the monkey of tricky cash now off many shoulders, would UPI or Unified Payments Interface climb over the way it was intended to?

Pratima H

INDIA: Tea-tasting is not for the faint-hearted. Besides a connoisseur’s palate, a sharp nose, and perhaps an endless appetite for swallowing leaves; one needs a particular trait, in liberal doses at that, in order to be a credible, professional tea-taster – Objectivity.

The ability to completely disconnect your taste buds from the previous cup and slurp the next one without any sprinkling of bias is a muscle that only some gourmets can boast of. For there is no way, no alley at all, through which you can judge something freshly brewed while comparing it to the after-taste of something else.

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Now those are some nostrils that would come in extremely handy in the cash-leaning-but-digitally-postured payment landscape of India. Underlining the gravity and urgency of this shift with what the country has witnessed in the last few, tectonic days would be too hackneyed. Yes, cash has been shaken up in an irreversible way with the demonetization quake and it would be such an obvious saddle to piggyback digital substitutes that anyone who is not making hay while the currency-moon is being eclipsed is either too patient or wearing loud headphones.

Can digital coffee take over saucers in a tea-drinking nation though? Would the UPI Latte be what people choose when other options are steaming with full aroma around?

The question is not giving ‘yes’ and ‘no’ options this time because the answer would be hugely juxtaposed with two adjacent cups that have seen storms of their own and very very recently– the POS card fraud chaos which triggered card and PIN replacements of many banking customers (not to forget the EMV Fiasco hangover from what the US just battled as well); and of course, the changing texture of once-so-smooth cash that India has just witnessed and experienced hands-on.

People may find succor in online payments, wallets, P2P transfers and other digital modes and that would be just the perfect nook to wedge in UPI. Or not? Because then it won’t be an organic transition and by the same reasoning, not a sustainable one?

There are only two ways to find out. Let’s try the first one. But before that….

For The Uninitiated

One more way to move money with speed, ease, less number of layers to be crossed, less procedure, and thus make payments using just 1-click instead of keying in several data sets – that’s how some people are explaining UPI.

Basically, this is what you were doing so far and this is what would change if you are a digital native already. With an IMPS (Immediate Payment Service) or Net Banking, you had to arrive at your bank’s app, add or authorise recipients before the money could be sent. The adding etc. essentially meant a number of details like your own card’s or account’s information or the recipient’s bank account number, or other information like the IFSC code or other strings of numbers (depending on what app or mode or player you were interacting with).

UPI proponents call that exercise as exhausting, long, baffling and cobbled.

Switch to UPI and all those hassle-heavy details would be wiped off with just one data set, an alias of sorts – the VPA or virtual payment address that apart from being payee/amount/time limited can also pack other security features like OTPs (One Time Passwords) or MPIN (Mobile PIN) but without getting in the way or making the payment process cumbersome.

With this just-one financial address, in theory at least, one can simply tap at an UPI app linked to one’s account, type in the payee ID or VPA and bingo! Click transfer. Without the need to enter beneficiary’s account’s bits and bytes.

Going by how NPCI (National Payments Corporation of India) spells it, UPI is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments under a single hood.

Flip to the Reserve Bank of India (RBI) Payment System Vision Document (2012-15) and you would find UPI envisaging a payments architecture that is directly linked to achieving the goals of universal electronic payments, a less-cash society, and financial inclusion, among other aims.

July and August this year saw the stirrings of UPI in a visible way with the announcement of technical launch by NPCI followed with operational availability of a slew of bank applications for UPI. Interoperability was the first thing that caught UPI its well-deserved attention – so now a user could easily hop across any bank or app without being boxed in affiliate boundaries. If you can withdraw money from any ATM irrespective of the bank you have account in, why can’t the same work for apps and wallets and other modes of payment?

The platform which is based on IMPS, and takes it to another level with the surface area of a mobile device, attracted more curiosity and confidence because of the Smartphone renaissance – if a phone can be the primary device for all authentication and authorization, whether it is push or pull variety transactions, then business and money transfers could be literally done in a jiffy.

UPI is supposedly faster, one-click-move, universal, real-time, efficient, interoperable and friction-lessImage courtesy of Supertrooper at freedigitalphotos

UPI is supposedly faster, one-click-move, universal, real-time, efficient, interoperable and friction-less

People sat up, took notice and then a bet. Examples like iMobile, Pockets soon floated about. Axis Pay, ICICI’s Pockets, YES Bank’s app, Flipkarts PhonePe and other e-commerce websites jumped into the fray because even if most websites accommodated Paypal, Bitcoin, Credit/Debit Card and Netbanking; the time taken for transaction-information alone and the safety of card/account information shared always stayed a grey area.

The degree of role that a bank plays in authorisation (with 3rd party authentication of UIDAI and tokenless payments) reduces the issuance burden and transaction costs considerably.

Merchants can rope in UPI as an alternative that is low-cost, real-time, aligned for both push-and-pull-based initiation, authorized, compliant with international standards, uses virtual identifiers, comes with biometric authentication support (defining for Aadhar) and is still instantaneous without too many infrastructure (POS or QR machines) stakes. Or so some say.

Because what would decide the real functionality, scale and value of UPI is how it ‘actually’ works out – sans any other stimuli (demonetization or card frauds, for instance).

Is that happening?

Non-Fat, De-café, Large

It is not clear how the user experience looks and whether it makes it easier or harder to pay from consumer’s perspective as Sandy Shen, Research Director, Gartner rightly wonders.

Albeit she discounts the judgement a bit and swings attention to how UPI’s potential depends on how many businesses it connects to and how good the experience is. “It is too early since the service is just deployed, not all institutions have rolled out the service. Ideally it is a payment platform for anyone that wants to pay and anyone that wants to collect money. ”

If UPI’s scope can go beyond small-scale/P2P transactions, then the plot would become more wide and playground-ly.

UPI, in the reckoning of Arnav Gupta, Forrester researcher, will clearly play a critical role in India’s mobile payments environment.

For Gupta, what makes UPI distinct, is how it enables real-time transactions between two parties in fewer steps than any other electronic payment mechanism, and is very fast. It is likely to eat into other payment channels such as debit, credit card and even mobile wallets to some extent, he anticipates explaining how all these payment methods are growing at a very fast pace which shows people in India are willing to shift to electronic payments if right incentives exist.

By 2017, a mobile payment market size of $350-$370 billion can emerge.Image courtesy of Anusorn P nachol at freedigitalphotos

By 2017, a mobile payment market size of $350-$370 billion can emerge.

“UPI further incentivizes that behavior. There is hardly any flip side to UPI as a concept however execution of UPI by industry participants is a different story.”

Let’s drill into that dimension a bit more – UPI vs. NEFT (National Electronic Funds Transfer), RTGS (Real-Time Gross Settlement), IMPS and the whole enchilada.

Tea-Bags and Hot Waters

The market is already inhabited with other money transfer modes like NEFT, RTGS, EMV, NFC, IMPS or their new-born cousins- the mobile wallets.

Would UPI make a dent in this heavily-occupied tray?

If we go by Forrester estimates, UPI is able to achieve 75 per cent reduction in effort when it comes to payment to a new payee compared to other electronic payment methods like NEFT, RTGS etc. Even IMPS, which is relatively easier with its quirks around MMID requirement aside, requires around ~70 per cent more effort than UPI, it turns out. Given firms around the globe are trying to crack the payment space these are substantial improvements over existing methods and will considerably reduce friction in payment.

For Rohan Angrish, CTO, Capital Float, an online platform that provides working capital finance to SMEs, what strikes interesting is the friction that UPI takes off and the simplicity it promises. “It is going to be indispensable and will change the element of friction in the payment space. Transfers can become smooth across many angles – not just P2P, B2B but C2B, G2C, C2G etc. The combination of so many entities in the system is so overwhelming is that one single UPI, in theory alone can streamline so much and iron out so many rough ends.”

Simplicity of use and scalability in terms of type of transactions it can support as well as integration with existing mobile banking apps and wallet apps – that’s what Deepak Kinger, Vice President, Banking and Financial Services, VirtusaPolaris prefers to carve out.

“It allows customers of any bank to transfer money to a customer of any of other using an easy to remember Virtual Payment Address (VPA) that is like an email ID of the format <customer name>@<bank.com>. This is much easier than remembering account numbers and IFSC codes needed for NEFT/RTGS and IMPS for example. Additionally, one can have multiple VPAs setup for different types of transactions like bill payments, groceries and shopping making the underlying bank account details anonymous.”

Support for both pull and push transactions in comparison to NEFT/RTGS etc. which are ‘push only’ (i.e. funds transfer can be initiated by either the payee or the payer) also etches a plus point for Kinger. “It is a much cheaper mechanism than credit cards and other cashless means of money transfers.”

Turn to Harshil Mathur, CEO and Co-Founder, Razorpay and you also hear how the launch of UPI comes as a boon to the banks that were losing their ground to mobile wallets.

“Most wallets have features built on top of it and the launch of UPI will not affect their business. However, plain vanilla wallets offering mere money transfers may lose their significance. In my view, UPI is another mode of payments, in addition to the existing available options.” Mathur considers this to be definitely a better option than the current options banks have. Whether it is able to carve its own niche is a matter of customer education and trust? That remains.

UPI is designed to be both push-and-pull friendly. Another candy for merchants?Image courtesy of mapichai at freedigitalphotos

UPI is designed to be both push-and-pull friendly. Another candy for merchants?

What makes everything further impressive for Gupta is that UPI is further simplifying the space. “It has taken one cost barrier on infrastructure – the ubiquitous POS terminal, out of the equation; which takes away significant cost from the system. Subsequently, the need for training has also come down. This makes us very optimistic about eventual adoption of UPI.”

All’s not impressive though. Not when you think of it objectively, without the shadows that the recent slate of events have cast.

If you have been encumbered with a sudden request for change of PIN or the indefinite wait for new card activation because your bank suddenly rubbed its eyes after a card-POS-fraud alarm, then UPI would be a quick thought. If cash has changed its connotation as a liquid medium of transaction now, UPI again would be chair to rush swiftly towards.

But are hurried and harried synonyms for a shift that should rather be well-thought-out, sturdy and objective? Without looking like one is playing musical chairs in a claustrophobic room?

Bitter Strains

The cautionary bit is in the execution of course. Angrish emphasizes that what remains to be seen is how banks plug in their systems and how UPI specifics are executed.

Wallets had to go through QR machines, cards had to navigate the investments in POS ecosystem – so UPI may also meet the proof in a porridge instead of the promised pudding.

Kinger picks out the dependence of this technology on mobile penetration as a possible kink. “Despite the massive rise of mobile devices in India, the penetration is still poor in the rural areas especially when it comes to data. The inflection point of UPI will come when this dependency goes away.”

He however dismisses the question of other ecosystem issues. “UPI can be done without massive changes in existing systems thereby reducing the investment needed. Most banks have been able to support UPI on their mobile banking apps within a couple of months of the blueprint being published by NPCI.”

While Mathur interprets UPI as a radical shift in how payments have been made in the digital era, he seconds that the success of UPI is dependent on the adoption of the platform by all banks and the user needs to have a Smartphone to make transactions.

That’s a tall ask in a country where less than 20 per cent have access to internet and coupled with little awareness of UPI as well as the comparatively slow adoption process, it is likely that customers would view it as another payment mechanism. “We’re still in the early stages.” Mathur tones down the noise.

Also, there are other parallel forces at work. “Mobile wallet companies have had deep pockets to educate customers, something UPI can’t bring to the table. This radical change will not happen overnight. The onus in on the stakeholders in the ecosystem to educate and make payments via UPI more prevalent. Since there is a limit on the transaction amount of two lakhs for UPI, its scope is debatable.” He points out.

Gupta still feels that UPI will clearly play a critical role in India’s mobile payments environment. The overall mobile payments that Forrester expects is till 4.3 billion transactions by 2017, resulting into a mobile payment market size of $350-$370 billion. “This is only poised to grow further.”

As Kinger buoyantly sees it unfolding, the scalable architecture and the fact that UPI leverages the overall banking infrastructure well, means it can scale beyond the small-scale / P2P transactions. “Once customers get comfortable using it, they will start using it for their high value transactions instead of NEFT or RTGS. “

And if that is indeed going to happen that soon, would UPI learn from the loose ends that its precedents have confronted or would it be another nightmare, rearing its head another random day?

Would users be worried about privacy and safety? Would banks find it favourable or otherwise? Would merchants too? Would UPI be everyone’s cup of tea? Part 2 follows…..

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