A UPI (Unified Payment Interface) refers to a real-time electronic payment system that enables users to instantly transfer money between multiple banks. In other words, UPI is a system that brings multiple bank accounts into a single platform, incorporating multiple banking services, smooth fund routing, and merchant payments under one umbrella.
The National Payments Corporation of India (NPCI) developed UPI in 2016 to simplify money transfers and reduce the use of “black money” in the economy. UPI has streamlined the process of transferring funds, eliminating the need for users to remember bank details and other confidential information. With UPI, users can initiate transactions using just an Aadhaar number, the mobile phone number associated with their bank account, or UPI ID. The benefits of UPI payment includes increased convenience, enhanced security, and greater transparency in transactions, which has resulted in more transactions coming under the purview of the tax department. As of April 2022, 316 banks are live on UPI, and the system processed 5.58 billion transactions amounting to Rs. 9,83,302.27 Cr in that month alone, making it the highest number of monthly UPI transactions since its inception.
The benefits of UPI payment are becoming increasingly evident in India, with the payments system logging nearly 45 billion transactions valued at Rs. 84 lakh crore between April 2021 and March 2022, nearly double the total of 22 billion transactions totalling 41 lakh crore in 2020. These ongoing developments in UPI transactions reflect the fact that Indian customers are increasingly adopting and relying on online payments. Moreover, the benefits of UPI payment have enabled businesses to establish and deliver trustworthy and responsive financial services products. This trend, together with expanding smartphone penetration, growing income levels, and consistent government and regulatory motivations, indicates that the industry is ready for the next stage of UPI adoption..
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UPI’s journey to becoming the most preferred payment system in India
UPI was a lifesaver in the pandemic when social distancing was mandatory. The real-time payment system has proven to be one of the finest financial innovations in India since its independence, and it has initiated the process of completely replacing the cash economy. It has contributed significantly to making India one of the world’s fastest-growing digital economies.
According to the report titled ‘The Indian Payments Handbook – 2021-26,’ the Indian digital payments industry has a combined 59 billion (5,900 crores) transactions in FY22, and is expected to reach 21,700 crore transactions by FY26. India witnessed a record 2,200 crore UPI transactions in 2020-21, and these numbers are expected to reach 16,900 crore by 2025-26, growing at a CAGR (compounded annual growth rate) of 122%.
The government’s decision to eliminate the merchant discount rate (MDR) and reduce transaction charges to zero for UPI transactions in December 2019 has greatly benefited the platform. Banks and payment providers are now prohibited from charging for UPI transactions, resulting in a surge of mobile-based real-time inter-bank transactions enabled by UPI. The benefits of UPI payment , such as faster cash transfers between two bank accounts on a mobile platform and regulation by the Reserve Bank of India (RBI), have made it a popular payment system among retailers, service providers, small businesses, and dealers across the country. The elimination of transaction fees and increased convenience have made UPI an attractive option for merchants and customers alike
UPI payments have emerged as a challenger to traditional cash and card transactions in India, with data showing a gradual shift towards digital payments. The Reserve Bank of India has recommended that all banks and ATMs accept cardless cash withdrawals using UPI, which not only regularizes such transactions but also reduces the risk of card cloning and related scams.
The benefits of UPI payments are multifaceted: they foster the digital economy, simplify transactions, and reduce the need for physical debit cards. Leading UPI service providers such as GooglePay, PhonePe, and Amazon Pay have made advancements in replacing cash for a wide range of use-cases where cards were previously unavailable, and are now even challenging credit card companies with solutions such as auto-debit. In a recent study conducted by ACI and YouGov, UPI emerged as the most preferred payment mode for festive season expenditure, with 41% of consumers selecting it as their preferred payment method, while cash (26%) and debit and credit card payments (23%) trailed behind. As per a research report by SBI, India has witnessed a 70-fold increase in UPI usage in the last four years, as Indian consumers increasingly prefer the ease of payment through a click of a button.
Because UPI is a government project, transaction charges will be substantially reduced, ranging from Rs. 0.50 to Rs. 5 when compared to charges we pay while utilizing foreign platforms such as Visa or MasterCard. This reduction in transaction charges makes UPI an affordable and cost-effective payment option for businesses and individuals alike. Additionally, UPI provides a secure and convenient payment option that eliminates the need to carry cash or reveal sensitive account information. This feature is expected to boost the growth of e-commerce in the country. By functioning as a Unique Identifier, UPI will reduce the need to disclose account data and is anticipated to provide online markets with a much-needed boost.
UPI offers several benefits of UPI payment such as contributing to building a cashless economy, which is environmentally friendly, as it reduces the demand for paper cash. Additionally, UPI simplifies the complicated digital transaction process by providing a single point of contact for all digital transactions. Another advantage of UPI is the enhanced security it offers through the Two-Factor Authentication technique, which provides excellent security without disclosing any personal financial information.
The additional benefit of UPI is its transaction limit. While other mobile wallets offer a transaction limit of Rs. 10,000 without KYC, UPI offers a transaction limit of Rs. 1 Lakh.
What businesses need to reap the benefits of UPI?
Payments are now simpler or more clear than ever as more customers, retailers, and service providers will accept UPI payments, offering numerous benefits of UPI payments. This is both an opportunity and a threat to businesses. UPI eliminates the need to share bank information when making payments or the time it takes for a check to be deposited, drastically minimizing delays. UPI will assist enhance a company’s cash flow and, because the payments are digital, it will aid in its tracking.
The benefits of UPI payment are numerous. UPI enables businesses to access multiple accounts from one place, which eliminates the need to use different bank applications by linking all their bank accounts. Additionally, UPI allows for online businesses to experience smooth, immediate settlements for all the payments they receive from their customers. This system also provides a more elevated success path based on flexibility to switch between gateways/card networks. Money received through UPI is deposited directly into the bank account that the recipient has designated to receive the payment.
One of the benefits of UPI payment is that it can help reduce tax evasion and the use of black money since the government can trace all monetary transactions. This presents an opportunity for businesses to capitalize on this trend by implementing a new payment system that will improve end-user service delivery. In the online age, everything is measurable, and the demand for accounting will likely grow as more money transactions become digital. UPI payment can assist in facilitating this growth by providing a secure, reliable, and efficient way to make and receive digital payments.
Now, businesses have to report for every transaction as GST is implemented, and UPI is becoming the extensively used payment mode. Even small companies will need to tighten up their operations and immediately deploy an ERP in order to reap the benefits of UPI.