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How is UPI Changing the Fintech Sector in India?
Future Challenges and Opportunities for UPI in Fintech
The inception of Unified Payments Interface (UPI) in April 2016 by the NPCI marked a pivotal moment in India’s journey towards a cashless economy. Introduced just before the demonetization move, UPI aimed to accelerate the adoption of digital payments. Built on the foundation of the Immediate Payment Service (IMPS), UPI enables real-time, 24/7 fund transfers between banks using smartphones.
UPI has emerged as a transformative force in India’s fintech sector since its launch in 2016. This groundbreaking payment platform, developed by the National Payments Corporation of India (NPCI), has not only revolutionized the way Indians transact but has also garnered global attention.
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How is UPI Changing the Fintech Sector in India?
UPI has rapidly become one of India’s preferred digital payment methods, facilitating millions of transactions daily. Its widespread adoption can be attributed to its user-friendly interface and compatibility with various banks and mobile applications. Know how UPI is reshaping the financial landscape in India, and its future in the fintech sector of the country.
Read on – Fintech in India: Will Voice-Based Payments Be the New Trend in 2024 and Beyond?
Role in India’s Digital Evolution
Over the past decade, India has witnessed a profound transformation in its banking and finance landscape, marked by the emergence of neo-digital banks, innovative payment platforms, and the rise of fintech. UPI has been a torchbearer in this evolution, making digital payments as commonplace as sending a text or scanning a QR code.
UPI has catalyzed the development of numerous UPI-based mobile applications, including BharatPe, PhonePe, and Paytm. These apps cater to diverse digital payment needs, from person-to-person (P2P) and person-to-merchant (P2M) transactions to bill payments. Users can link multiple bank accounts to a single mobile app, providing a comprehensive financial management experience.
The surge in UPI transactions, expected to surpass 10 billion in June, signifies increased spending and a notable shift towards digital adoption, replacing the reliance on cash-based transactions. This landmark achievement is not just a testament to UPI’s success but also an indicator of an evolving digital India.
Impact on Cash Transactions and Economic Benefits
One of the most significant changes brought about by UPI is the transformation of transaction habits. GlobalData research indicates that cash transactions in India have decreased to less than 60% in 2021 from 90% in 2017. UPI’s efficiency, coupled with widespread smartphone adoption and government initiatives for bank accounts, has successfully carved out a niche in India’s payment landscape.
In a fin tech study conducted by Cebr Economic Research, the quick and efficient nature of UPI payments helped save as much as $12.6 billion in costs and in 2021 provided the Indian economy with $16.4 billion.
According to data from the Reserve Bank of India (RBI) and the National Payments Corp. of India (NPCI), UPI transactions totaled ₹139.2 trillion in the fiscal year 2022-23. Projections by PwC suggest that UPI transactions are set to reach 1 billion per day by 2026-27, constituting a remarkable 90% of all retail digital payments in the country. This widespread adoption extends beyond metropolitan areas, with tier 2 and 3 cities actively participating in the UPI ecosystem.
Financial Inclusion and Pre-Approved Credit Lines
The digitization of the economy and the availability of data through UPI provide a comprehensive basis for credit assessment. Lenders can leverage UPI data to build robust underwriting models, incorporating transaction parameters such as declines due to insufficient funds, merchant types, and geographical locations to assess the creditworthiness of borrowers.
Building on its success, UPI is set to play a transformative role in financial inclusion and fintech industry. The RBI’s proposal to expand the scope of UPI by allowing pre-sanctioned credit lines through UPI is a strategic move towards enhancing access to formal credit and digital payments.
The introduction of pre-approved credit lines on UPI is a game-changer, connecting the formal banking economy with over 30 crore Indian consumers and businesses active on UPI. Previously limited to bank accounts and RuPay credit cards, UPI’s new policy allows users to link loan accounts, providing a seamless payment experience. This move is aligned with the RBI’s payments vision for 2025, aiming to facilitate financial inclusion through innovative product designs and underwriting models.
The move holds immense potential for industries like Micro, Small, and Medium Enterprises (MSMEs), which contribute significantly to the GDP but often face credit shortages. UPI-based lending is expected to make banks and NBFCs more efficient, providing credit quickly and economically to borrowers.
Read on – Indian Fintech Sector: Will Hyper-Personalization Be a Future Banking Trend?
Future Challenges and Opportunities for UPI in Fintech
The global expansion of UPI presents significant growth opportunities for the Indian financial tech ecosystem. With UPI transactions expected to cross borders, Indian fintech startups are poised to innovate and establish new business use cases, contributing to the sector’s projected $2 trillion valuation by 2030.
Banks and Payment Service Providers (PSPs) are expected to launch innovative UPI-based revolving credit lines, instant overdrafts/EMIs, and personal loan solutions, aiming to monetize UPI payments and reduce the cost of credit disbursement. The expansion of UPI’s role in lending also opens avenues for top Indian fintech companies to explore new business models, enhancing interoperability in the credit domain.
As UPI continues its growth trajectory, it faces challenges on the global stage. Established global payment giants like Mastercard and Visa, occupying 80% of the market, present formidable competition. UPI must adapt its technology to cater to the Western world and navigate compliance with various digital regulations and interoperability between payment systems.
To overcome these challenges, UPI stakeholders must collaborate with global payment system providers and regulators to ensure compliance with local regulations and standards.
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Conclusion
Undeniably, UPI has emerged as a game-changer in India’s fintech sector, offering a blueprint for other nations seeking to enhance their digital payment systems. Its success in promoting financial inclusion, reducing transaction costs, and fostering innovation positions UPI as a pivotal player in the global transition towards a digital economy. As UPI continues to evolve and adapt to changing fintech technology, its impact will extend far beyond India, influencing the future of digital payments worldwide.
