UPI is great, but India must be ready for next pivot in payments (2024)

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The government recently claimed that theinitiatives taken by it and the Reserve Bank of India (RBI) have resulted in the volume of UPI (Unified Payments Interface) transactions growing from 920 million in 2017-2018 to 83.75 billion in 2022-2023at a compound annual growth rate (CAGR) of 147 per cent.

UPI transactions continued to record scorching growth in 2023-2024. In October 2023, UPI recorded 11.41 billion transactions (against 7.3 billion in October 2022), generating over 50 per cent year-on-year growth. By December 11, UPI having clocked 85.72 billion transactions, had overtaken the previous year’s total transactions.

UPI has transformed India’s retail payments landscape. In 2022-2023, UPI transactions were 73.17 per cent of all non-cash retail payment transactions.Non-cash retail transactions have grown at an impressive CAGR of 31 per cent since 2013-2014.

How has UPI succeeded so well? Are cash transactions dead? Will UPI continue to serve us well as the world transitions to digital currency?

UPI's ‘instant’ success

The economy is all about buying and selling goods and services between two parties and transacting in assets. Money interposes and a transaction completes when the payment is made.

Payments are the lynchpin of an economy. Payments made exactly at the point of transaction work the best. Cash serves this purpose very well, but requires the parties to meet and exchange it. Cash has many other deficiencies, including non-availability of the exact amount, weight to carry, and risk of loss.

UPI solves all these problems.

The National Payments Council of India (NPCI) has digitally pooled all bank accounts into one single system. This enables UPI to make instant digital transfers through mobile phones and other devices.

These instantaneous secure and convenient payments underline thestupendous success of UPI.

UPI is fast replacing cheques and cash

UPI has been widely adopted by hundreds of thousands of retailers and small enterprises; and also by more than 250 million individual account-holders. You can see the tiniest of vendors and service providers in villages, small towns, and metros nonchalantly accepting payments through mobile phones or QR codes.

The RBI does not collect and provide data on the quantum of retail transactions taking place in cash. Until 2018-2019, it was anecdotally believed that about 90 per cent of all retail transactions were in cash.

The central bank, however, provides data on paper-based transactions (mainly cheques). Such transactions have decreased from 1.26 billion in 2013-14 to 710 million in 2022-2023, falling by a whopping 44 per cent.

Both paper-based and cash transactions are being substituted by UPI. Currency in circulation, however, continues to grow. It is high time the RBI conducts a comprehensive survey of all retail transactions to know the complete truth about retail payments.

UPI payments do not generate growth

The world is fast witnessing the replacement of cash by non-cash payments. In the 38-member OECD countries, this is taking place through the use of credit cards, which are increasingly being used digitally. In China and East-Asian countries, it is mobile payments using QR codes and credit cards.

UPI is India’s payment innovation. It is simple, less risky, and the most convenient. UPI may not be adopted by the G20 and the Global South, as India has tried, but its growth in India is unstoppable.

Payments, though, do not generate GDP growth as their contribution is limited to the charges/value received by the service providers. With fintechs and banks not allowed to charge anything for the UPI service, it has zero impact on growth.

Digital currency — the new disruptor

UPI uses deposits in bank accounts to enable digital payments, which is disrupting retail cash payments. The money in the deposit account is fast replacing the cash in hand.

However, the world is witnessing the arrival of a new kind of money — digital currency/cash.

Cryptocurrencies such as Bitcoin, innovated as blockchains enabling person-to-person payments in a decentralised mode, by tech-entrepreneurs, effects payments without using cash or deposits in bank accounts. Also, stable-coins (cryptocurrencies usually pegged one-to-one to the US Dollar) are being increasingly used to make international and domestic payments.

Such payments are small as yet. So were digital payments using bank accounts a decade back. There is a good chance that digital currency — the next disruptor — will replace a lot of digital account payments in the coming decades.

RBI is trying to stop but may not necessarily succeed

The RBI is experimenting with e-Rupee as India’s central bank digital currency (CBDC), but it has not yet got any traction.

The world economy is increasingly producing digital goods, services, and assets. Digital currencies (cryptocurrencies and CBDCs) are most suitable for their payments. As transactions in digital goods, services, and assets grow, the use of digital currency will begin to substitute UPI-type payments.

Many suppliers of digital services design and use their cryptocurrencies. As happens with new disruptive innovations, fraudsters try to take advantage of the information gap. Cryptocurrencies are currently going through that phase.

The innate vitality of cryptocurrencies will, however, triumph ultimately and the world will see the emergence of robust cryptocurrencies/CBDCs to take over a good share of global and local payments.

The RBI has unfortunately adopted an antagonistic attitude towards cryptocurrencies, which is hampering their technological development. Let us hope we course correct soon to avoid getting hurt when the next pivot takes place.

Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream’ and ‘We Also Make Policy’.

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH).