Understanding UPI; from phone banking to phone as a bank…

The RBI recently announced the launch of a Unified Payment Interface (UPI) in which 10 of India’s leading banks have participated. From a general standpoint, the UPI is not just important but can have some long term ramifications by which we can move money from one account to another. The UPI is a method of making online payments in which your smart phone actually doubles up as a bank. Unlike a wallet that is currently offered by Airtel today, you do not need to fill the wallet. The UPI can directly link up to your bank account and debit it based on a unique mapping and transaction code. It does not matter whether the party to whom you are transferring the money has an account in the same bank or in a different bank. This virtually converts your smart phone into a bank and all that you need to do is to download the app online from one of these participating banks. The only requirement is that you need to have a bank account. What are its ramifications?

Does away with the hassles of funds transfer…

Today the process of transferring funds is quite lengthy. You first need to get details of the other party like bank account number, bank name, nature of account and IFSC code. Then that bank account needs to be added on to your online banking account. There will be a cooling period of a few hours before the account is mapped and transfers can be made. The UPI does away with all these hassles. You do not need to know the account number or even the IFSC code of the person to whom you are moving funds. There is a unique code that is generated once the app is downloaded and that code is enough for you to transfer the payment. This makes it a lot simpler and quicker.

Reduces the need for Cash on Delivery (COD)

In India the penetration of credit cards and debit cards is still quite low and even otherwise there is a general hesitation to use your card online for fear of fraud and misuse. That is why in India e-commerce really took off after the concept of cash on delivery (COD) was introduced. The UPI can do away with the system of (COD) as even small amounts can be transferred to a third party at short notice. Additionally, the cost of executing a UPI transaction is so low that it does not impose a major burden either on the buyer or seller and either party can absorb it. The UPI can be a big boost forward for ecommerce in India as it will facilitate small payment denominations.

A big step towards financial inclusion…

The current government has been trying hard to pitch for financial inclusion. This has been partially achieved through Aadhar and the spread of bank accounts across India. A step forward will be UPI. With UPI, the Indian economy will actually graduate to become a predominantly cashless economy, which is the intent of the government anyways. A small app resting on your smart phone will be sufficient to undertake all your transactions with ease. The skew is quite obvious. India has 150 million smart phones and it is likely to grow to 500 million smart phones in the next few years. But the penetration of cashless transactions is abysmally low in India. This can be rectified largely by the UPI.

Converts your smart phone into a bank…

This is probably the biggest advantage of the UPI. It converts your smart phone into a bank and virtually makes it a store of value. The entire banking value proposition is resident in your app residing in your smart phone. The safety is also ensured as only transactions up to a certain amount are permitted through the UPI interface. This is the logical next step where there will be a real incentive for people to open and operate their bank accounts with ease by using their mobile phones.

The UPI could not have come earlier. It remains to be seen how India adapts to this app driven funds transfer. Many smaller and less developed countries have adopted this system much earlier. It will surely be a big step for bringing more people into the banking ambit and move towards a cashless society.

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