UPI: Factors for success, impact

UPI: Factors for success, impact

Subject :Economy

Section: Monetary Policy

Unique characteristics of UPI:

1. Innovative: Immediate Payment Service (IMPS) forms the base of UPI, its innovative application is behind UPI’s success. Adopting a UPI ID rather than entering bank account numbers and IFSC codes has made transactions effortless.
2. Inclusive: UPI is not just limited to one App. Interoperability of the UPI allows one to send money or receive it from anyone on the UPI system irrespective of the poarticular application like GPay, Paytm etc.
3. Security: UPI provides reliable end-to-end security and data protection making it a secure platform. Use of a mobile number already registered with the bank ensures ease of compliance with RBI’s KYC requirements.
4. Ease of Use: No need to enter any details like account number or IFSC code, which makes adoption by masses more likely.
5. Contactless: After Covid-19 there is a greater preference of contactless payments, hence people prefer UPI over debit/credit card.

Other supporting factors (Macro factors):

1. Digital Connectivity: Rise of e-commerce along with widespread availability of high speed mobile internet after entry of companies like Jio in telecom space have helped UPI’s growth.
2. Hardware Cost: Rise in the use of smartphones linked to availability of feature packed affordable handsets has also been a contributing factor for UPI’s success. (especially true for Rural areas)
3. Government Policies: Policy of promoting an integrated digital payment ecosystem with  schemes like–Aadhaar Enabled Payment System, FASTag, Rupay, and IMPS have simplified payments, and projects like DIGIDHAN Mission through their promotion of digital transactions has also helped in UPI’s growth. The Jan Dhan accounts through financial inclusion have ensured that most households are linked to formal banking.
4. Merchant Discount Rate (MDR):  MDR is an amount/percentage paid to the payment gateway by the merchant; For cards the cost is around 1.8%. For UPI, the MDR is Zero. This helped in merchant’s preference for UPI over debit/credit cards.

Impact:

• UPI has resulted in significant savings on transaction costs. It is forecasted that by 2026, an additional $45.6 billion or 1.12% of India’s GDP, will be boosted by savings made possible by UPI payment.
• UPI monthly transactions value touched a high of 14 Lakh Crore in March 2023 with 865 crore transactions. For FY23 the total UPI transaction value is around Rs 139 Lakh Crore.
• Debit card use is seeing 20% fall YoY. ATM withdrawals have also reduced to half.