UPI Payments: Empowering Users, Challenging Banks

• 24 Jun 2023

For Prelims: Unified Payments Interface, National Payments Corporation of India

For Mains: Infrastructure challenges associated with UPI

Why in News?

The rapid rise in Unified Payments Interface (UPI) transactions in India has led to the introduction of various daily limits by banks and apps, creating a complex landscape of limitations in terms of value and volume.

• The surge in UPI transactions has revealed the need for continuous development and improvement of banking infrastructure and technological capabilities.

What are the Daily Limits on UPI Payments?

• The National Payments Corporation of India (NCPI) set a limit of 20 transactions per day and ₹1 lakh per day in 2021. However, banks and apps have implemented their own limits, adding to the complexity.
  • For instance, ICICI bank allows 10 transactions in 24 hours, while Bank of Baroda and HDFC Bank allow 20 transactions in the same period.
• Certain specific categories of transactions, such as capital markets, collections, insurance, and forward inward remittances, have a higher limit of ₹2 lakh.
• For UPI-based ASBA (Application Supported by Blocked Amount system) IPO and retail direct schemes, the limit for each transaction was increased to ₹5 lakh in December 2021.

What is the National Payments Corporation of India?

• About:
  • It is an umbrella organisation for all retail payments systems in India.
  • It was set up with the guidance and support of the Reserve Bank of India (RBI) and Indian Banks’ Association (IBA).
• Objectives:
  • To consolidate and integrate the existing multiple systems into a nation-wide uniform and standard business process for all retail payment systems.
  • To facilitate an affordable payment mechanism to benefit the common man across the country and propel financial inclusion.

How has the Number of UPI Payments Increased Over Time?

• UPI gained popularity as an alternative to cash after demonetization in India.
• The surge in transactions from May 2018 to May 2023 was primarily in terms of volume rather than value.
  • In May 2018, the value of UPI transactions was ₹33,288 crore (₹1,756 per transaction).
  • In May 2023, the value rose to Rs.14,89,145 crore (Rs.1,581 per transaction), representing a decrease of Rs.175 per transaction in five years.

Recent developments in UPI ecosystem:

• New Rules:
  • Introduction of interchange fee for Prepaid Payment Instruments (PPIs) wallet transactions via UPI, applicable from April 2023. The fee is up to 1.1% on merchants for Person to Merchant transactions above ₹2,000 and will be shared between banks involved in the transaction.
  • UPI AutoPay feature for recurring payments up to ₹5,000, enhancing customer convenience and merchant retention.
• Collaboration:
  • NPCI has partnered with several countries such as Singapore, UAE, Bhutan and Japan to enable cross-border payments using UPI.

What are the Effects of these Trends for Users and Banks?

• Positive Impacts:
  • Convenience and Efficiency: Quick and hassle-free digital transactions through smartphones.
  • Financial Inclusion: Access to digital payments for individuals.
  • Reduced Cash Dependency: Minimizing risks and combating illicit transactions.
  • Enhanced Transparency: Tracking and monitoring financial activities.
  • Boost to Digital Economy: Promoting digital entrepreneurship and innovation.
• Negative Impacts:
  • Users:
    • UPI as an Alternative to Petty Cash:
      • Consumers are increasingly using UPI for smaller transactions, replacing petty cash. The declining value per transaction over time reflects this trend.
    • Limited Transaction Flexibility:
      • The complex web of limitations set by different apps and banks on UPI transactions creates confusion and restricts users' flexibility in terms of transaction volume and value.
      • Users have to navigate through varying limits, impacting their ability to carry out transactions according to their needs.
    • Increased Transaction Failures:
      • The struggle of banks to upgrade their infrastructure and technical systems to keep up with the surge in UPI payments can result in transaction failures. This can frustrate users and hinder their seamless payment experience.
  • Banks:
    • Infrastructure Challenges for Banks:
      • Banks face difficulties in keeping up with the surge in UPI payments, leading to transaction failures.
      • Upgrading banking infrastructure and technical systems is crucial to meet the growing demand.
        • Banks need to ensure that their servers are able to handle the increasing volume and frequency of UPI transactions without any glitches or downtime.
    • Security and Fraud Prevention:
      • With the rise in UPI transactions, the risk of cyber threats and fraudulent activities also increases.
      • Banks need robust security measures, including encryption, two-factor authentication, and fraud detection mechanisms, to safeguard user data and prevent unauthorized access.

Way Forward

• Agile Infrastructure Development:
  • Invest in robust infrastructure and advanced technology solutions to handle the increasing volume and frequency of UPI transactions.
  • Embrace edge computing, and distributed ledger technology (DLT),
    • DLT is a decentralized digital system that enables secure and transparent recording, storing, and sharing of information across multiple participants in a network to ensure scalability, security, and real-time transaction processing.
• Personalized Financial Insights:
  • Leverage data analytics and artificial intelligence to provide personalized financial insights to UPI users.
  • Offer real-time spending analysis, budgeting tools, and tailored recommendations to empower users in making informed financial decisions.
• Blockchain Integration:
  • Explore the integration of blockchain technology into the UPI infrastructure to enhance transparency, security, and scalability.
  • Smart contracts can automate transaction processes, reduce intermediaries, and enable seamless cross-border transactions.
• AI-Powered Fraud Prevention:
  • Harness the power of artificial intelligence and machine learning to detect and prevent fraudulent UPI transactions in real-time.
  • Implement advanced anomaly detection algorithms that analyze user behavior patterns and transaction data to identify suspicious activities.

UPSC Civil Services Examination, Previous Year Question (PYQ)

Prelims

Q1. With reference to digital payments, consider the following statements: (2018)

1. BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account.
2. While a chip-pin debit card has four factors of authentication, BHIM app has only two factors of authentication.

Which of the statements given above is/are correct?

(a) 1 only 
(b) 2 only
(c) Both 1 and 2 
(d) Neither 1 nor 2

Ans: (a)

Q2. Which of the following is a most likely consequence of implementing the ‘Unified Payments Interface (UPI)’? (2017)

(a) Mobile wallets will not be necessary for online payments.
(b) Digital currency will totally replace the physical currency in about two decades.
(c) FDI inflows will drastically increase.
(d) Direct transfer of subsidies to poor people will become very effective.

Ans: (a)

Q3. Consider the following statements: (2017)

1. National Payments Corporation of India (NPCI) helps in promoting the financial inclusion in the country.
2. NPCI has launched RuPay, a card payment scheme.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Ans: (c)

Source: TH