Welcome financial inclusion

UPI upgrade can bring mobility to household savings

The Reserve Bank of India (RBI) governor’s announcement last week that the central bank is seeking to make the Unified Payments Interface (UPI) more inclusive and affordable, has been welcomed by stakeholders. The RBI will release a discussion paper on digital payment charges (including cards, wallets, and fintech, as well as the UPI), and it also proposes to extend the system to feature-phones.

It will be technically tricky and ambitious to design and implement a safe, seamless way to access and operate the UPI from feature phones. But this would, at one stroke, double penetration. As it stands, only about half of India’s 950 million mobile subscribers use smartphones and only they have access to the UPI.

The 450-500-million feature-phone users are mostly rural or belong to lower-income groups. Many reside in geographies where the internet is unavailable, or unreliable. They are excluded from the UPI (and other digital payment options that require a smartphone and Net access). If they gain UPI access, it would lead to a jump in the volume of digital payments and also extend the geographical UPI footprint.

The RBI wants to create the software and back-end data processing infrastructure to launch UPI-based payment products for feature phone users, who may not have Net access. This would be based on products tested in the RBI’s existing “Regulatory Sandbox on Retail Payments”. In addition, the RBI wishes to overhaul the UPI system to simplify process flow for small-value transactions, by using a mechanism of “on-device” UPI wallets. It also intends to enhance transaction limits for payments via the UPI for direct retail subscriptions to government securities and to initial public offerings. It envisages raising the limit from the current Rs 2 lakh to Rs 5 lakh.

Creating access to financial markets this way has big implications in terms of the mobility of household savings, since a very small percentage of this is invested in capital markets or government debt. But most cash transactions are real-time, in the range of less than Rs 500, with a semi-rural bias, which coincides with feature-phone penetration. Enabling a wallet-based feature phone UPI option would lead to many such small transactions going digital.

Given the financial profiles of feature-phone users, the spurt in small digital transactions, as and when the new feature launches, will reduce the need to use coins and lower-denomination banknotes, and enable a better understanding of the informal economy. Ensuring the system is secure, easily operated by digitally unsophisticated users, and capable of handling a large expansion in volumes will, however, be crucial.

About 89 per cent of Indian transactions (by volume) are conducted in cash. This is a little lower than the pre-demonetisation levels of 96 per cent but an improvement on nearly 100 per cent in 2010. Cash in circulation has grown 17 per cent over October 2016 (pre-demonetisation) levels. However, the pandemic has also led to accelerated growth in digital real-time payments. The UPI system logged over 4 billion transactions, worth Rs 7.7 trillion, in October this year. The UPI hit 1 billion transactions for the first time in October 2019 — so that’s 300 per cent growth in two years. Over January-October 2021 (calendar year), the UPI processed 29.94 billion transactions, worth Rs 57.71 trillion, which is roughly double the number in the same period of 2020. If the central bank can quickly and robustly implement this, it would strengthen this already impressive trend of growth and improve financial inclusion.