Legacy Of UPI And a Legatee Called Gig Economy The open-to-use, free-for-all payments mechanism has had a multiplier effect on the Indian startup ecosystem and has even made investors grin

On 11 April 2016, Raghuram Rajan—the then-governor of the Reserve Bank of India (RBI) and a distinguished service professor of finance at the University of Chicago Booth School of Business—launched a pilot payments system which was untested and unheard of across the world. To say that the mechanism under test had a humble beginning would be an understatement as for the first three months post the launch, no financial transaction took place through it. In the fourth month, it was a paltry INR 38 lakh.

Notwithstanding the abysmal start, the intrinsic faculty of the mechanism was soon realized by fintech operators and aspirants who made a beeline to adopt the open-to-use, free-for-all railroad called the United Payments Interface (UPI). In December 2022, transactions using this idiosyncratic mechanism reached a record 7.82 billion and totalled INR 12.82 trillion, another record high.

Though the pilot of UPI was done with 21 member banks, as in December 2022 there were 382 banks live on the system.

The enigma of UPI has enchanted most advanced countries, with sophisticated financial and banking systems, as they have never experienced interbank payment settlements in split seconds, wherein users do not even require bank account details but just the unique UPI ID to transfer money.

Today, financially advanced geographies such as Singapore and Dubai, among others, are ready to deploy UPI-like payments mechanism. While the Monetary Authority of Singapore is ready with its UPI equivalent called PayNow, Dubai is exploring opportunities with the National Payments Corporation of India (NPCI)—the umbrella organization facilitating UPI—for cross-border remittances.

"NPCI's efforts in expanding UPI in markets such as Europe, Belgium, Netherlands, Luxembourg and Switzerland will act as a growth catalyst. Recent initiatives, such as allowing non-resident Indians to directly make payments for their bills using Bharat Bill Pay System, will also accelerate this process," said Akash Sinha, CEO and co-founder, Cashfree Payments, a payment disbursal platform.

A fortuitous consequence

While it may not have been intended so, or even fathomed, UPI has proven to be a game-changer for the Indian startup ecosystem. The number of customers and merchants using PhonePe, Google Pay and Paytm, among others, have proliferated to even the remotest parts of the country, thanks to the ever-increasing Internet coverage.

While the above-mentioned entities are the direct beneficiaries who are using UPI to enable peer-to-peer payments, the other stakeholders of the startup ecosystem have benefitted in equal measures.

According to Anand Kumar Bajaj, founder, MD and CEO, PayNearby, digital payments have had a multiplier effect on every other ecosystem participant, be it content, commerce or others as they can reach Bharat, i.e. rural India.

"Digital payments have become more of a compulsion than a fashion now. Earlier we used to just flash a card to show off that we have digital payment accessibility but now it has become a necessity," added Bajaj of PayNearby, which operates a branchless banking network empowering retailers.

As per a report by PayNearby released earlier this month, UPI transactions saw a staggering 650 per cent and 500 per cent increase in value and volume, respectively, across PayNearby retail counters, representing the growing adoption of UPI beyond tier II regions in the country.

According to data repository Statista, the smartphone usage penetration in India in 2020 reached 54 per cent and is estimated to reach 96 per cent in 2040. In actual terms, the number of smartphone users in India at present is around 700 million, with an equal number yet to take up such a device. This is the prime reason the world—investors and startup founders in this case—is bullish that the next economic wave will come from India.

"It (UPI) will also increase the financial awareness for underserved and unserved users, making them a new customer segment for businesses. We are entering into an exciting phase wherein fintech and digital payments will become force multipliers in India's financial inclusion endeavour," said Sinha.

Be it agritech, e-commerce or the newest kid on the block, Open Network for Digital Commerce (ONDC), each one has flourished and hopes to grow (in case of the nascent ONDC) riding on the back of a robust payment mechanism. As reported by Entrepreneur India, NPCI has already got RBI nod to start testing on the ONDC network.

ONDC has been established by the Department for Promotion of Industry and Internal Trade of government of India to develop open e-commerce.

In his blog, Nithin Kamath, founder and CEO at Zerodha, also acknowledged the role UPI has played in the growth of the personal investing space in the country. "Developments such as eKYC, online digital signatures, and UPI turned the largely offline industry into a truly online, paperless one, enabling mass participation. And, for us specifically, adoption via word-of-mouth from our customers," noted the blog of the founder of a new-age online stock trading platform.

That is not all though. While startups have gained immensely due to the presence of UPI, which has proved to be a bonanza for startup investors as well.

Speaking to Entrepreneur India, Karthik Reddy, partner and co-founder of Blume Ventures, an India-bred early-stage venture capital firm, said the UPI phenomenon fast-paced their fundraising plans as the payments mechanism catapulted startups. "Our Fund I and Fund II, because of the way the Indian market moved, started converging in terms of acceleration pace of portfolio at the same time. Fund I took five-seven years to get there, Fund II started doing the same in three-four years. Why? This was because Jio, UPI, UIDAI happened. Suddenly the momentum lifted both," said Reddy, who was on the Digital Cover of Entrepreneur India for January 2023.

Fund I by Blume Ventures—which invests across consumertech, SaaS, fintech and mobility, among others—was launched in 2015 and Fund II in 2018.

Plugging the gaps

In early December 2022, the central bank allowed the linking of credit cards to UPI, which means that customers will now be able to make UPI payments on credit. This means another 50 million users get into the fold. In addition, it is likely to help the unbanked population through sachetizing of credit into small tickets and formalising lending as well.

The other significant development has been the introduction of offline digital payments solution called UPI 123pay, wherein even feature phone users, with or without a bank account, will also be able to use UPI through Aadhaar authentication. Again, roughly 400 million users stand to get included, increasing the play area for businesses.

Nevertheless, Bajaj of PayNearby points out a chasm that needs serious consideration. While there are 943 million debit cards issued in the country, only 400 million debit cards are actively used, and only around 200 million debit card users have used UPI.

"A lot of debit cards issued under the Pradhan Mantri Jan Dhan Yojaya (PMJDY) have expired without being used as the acquirer infrastructure (ATMs, point-of-sale machines) was missing. PMJDY, under which each citizen of the country was to be provided a no-frills bank account, was launched on 28 August 2014 and was executed on a mission mode. To use UPI, smartphone users need an active debit card.

"Those broken pieces, if we are able to correct and connect in the right way, commerce, content and credit can reach mass market with faster velocity and the financial liberation can come sooner than planned," said Bajaj.