Need for reforms in India’s Unified Payments Interface (UPI) system

Source: The post need for reforms in India’s Unified Payments Interface (UPI) system has been created, based on the article “Reform UPI: We need sustainable digital payments infrastructure” published in “Live mints” on 20th March 2024.

UPSC Syllabus Topic: GS Paper 3- economy- mobilisation of resources

News: The article discusses the need for reforms in India’s Unified Payments Interface (UPI) system. Unified Payments Interface (UPI) system in India

What is the current status of UPI in India?

High Usage: As of February 2024, UPI recorded 12.1 billion transactions amounting to ₹18.3 trillion.

Dominant Payment Method: UPI transactions constitute over 80% of India’s digital payments.

Free of Charge: UPI services are offered without transaction fees for both peer-to-peer and customer-to-merchant payments.

Government Support: Partial compensation for UPI enablers comes through a government scheme, despite the service being free.

For information on UPI read here

What are the benefits of UPI in India?

Public Good Status: As supported by the Finance Minister, UPI is considered a digital public good, demonstrating its importance and utility for the general population.

Economic Impact: By facilitating easy and cost-effective transactions, UPI contributes significantly to the digitalization and efficiency of India’s economy.

User Trust: UPI’s widespread adoption and major market share in India’s digital payments sector highlight its benefits. Its reliability and ease of use have fostered trust among millions, making it a preferred choice for seamless financial transactions.

What are the criticisms of UPI in India?

Monopolistic Control: National Payments Corporation of India (NPCI) sole authority over UPI limits competition and could lead to complacency.

Regulatory Concerns: The Reserve Bank of India, despite not holding equity in NPCI, plays a conflicting role as both owner and regulator.

Sustainability Issues: The zero-charge model for UPI transactions, though popular, raises concerns about long-term viability.

Imbalanced Market Share: Dominance by foreign entities like PhonePe and Google Pay, holding over 80% market share, limits local and smaller players’ opportunities.

Lack of Transparency: NPCI’s status as a not-for-profit organization and the unclear revenue model for participants create opacity in the UPI ecosystem.

For information on NPCI read here

How can the UPI system be improved?

Introduce Transaction Fees: Implementing merchant discount rates (MDRs) for UPI could make the system financially sustainable.

Encourage Competition: Licensing new entities, possibly as competitors to UPI, would enhance innovation and efficiency.

Promote Transparency: Clear policies on business revenue models for participants are needed for better financial clarity.

NPCI’s Corporate Transformation: Transitioning NPCI to a for-profit company could increase transparency and investment opportunities.

Market Share Regulation: Instead of setting a quota for UPI players, alternative methods to encourage diversity in the market should be explored.

RBI’s Policy Revision: Reconsidering RBI’s decision to not pursue new umbrella entities (NUEs) might invigorate the digital payment landscape.

Question for practice:

Examine the criticisms surrounding India’s Unified Payments Interface (UPI) system and propose potential solutions to address these concerns.