The National Payments Corporation of India (NPCI) launched the country’s Unified Payments Interface (UPI) in 2016 to serve as a real-time payments system to facilitate peer-to-peer and person-to-merchant transactions via mobile phones. Since then, the payments infrastructure has seen massive growth, having reached its peak in December of last year, when it surpassed 12 billion transactions worth $220 billion (Rs 18.23 trillion) in the single month.
The U.S. launched its real time payments initiative, FedNow, last July and has a lot to learn from India’s UPI. As the U.S. seeks to modernize its own banking infrastructure, here are five key lessons that can be learned from India’s experience with UPI.
Simplicity and accessibility
One reason for UPI’s growth is its simplicity and accessibility. The payments system allows users to transact using their smartphones with just a few taps. Notably, UPI doesn’t require the user to remember long bank account numbers or Indian Financial System Codes (IFSC). By simplifying the user experience in this way, UPI has helped drive adoption, especially among the unbanked and underbanked populations.
U.S. financial services can learn from this focus on the user experience that ultimately makes digital payments more intuitive and easy to use. When friction is reduced for end users–especially with underbanked populations in mind– adoption has the potential to skyrocket.
Interoperability
With a lack of open banking regulation in the U.S., the banking system severely lacks interoperability. UPI, on the other hand, is built on the principle of interoperability, allowing users to make payments across different banks and payment platforms. Facilitating payments among all players has helped create a level playing field for consumers and merchants alike and has contributed to UPI’s rapid growth.
In the U.S., interoperability among banks and payment platforms is still a challenge because many systems operate in silos. Many fear that cooperating will lead to a loss in competitive advantage. However, adopting a standardized, open, and interoperable approach as outlined in the proposed Section 1033 of the Consumer Financial Protection Act has the potential to not only drive innovation but also improve the overall user experience.
Security and fraud prevention
The NPCI built UPI on a robust security framework to ensure that transactions are safe and secure. The payments systems’ security has earned consumer trust and has therefore been a critical factor in driving adoption.
Security concerns surrounding digital financial services abound in the U.S., however, where many consumers worry about the safety of their financial information and are concerned for their own privacy. Established financial services firms and fintechs alike should prioritize security and adopt best practices from UPI in order to improve trust and confidence in their digital payments operations.
Low transaction costs
One things UPI transactions are known for is the low cost per transaction, which makes them an attractive alternative to cash payments. The cost savings has been a key driver of adoption, especially among small businesses and consumers.
Many digital payments solutions in the U.S., however, still carry high transaction fees, thanks to the large number of middlemen involved. The costs associated with digital payments stifle adoption, and incentivize cash usage or even paper check payments. Reducing transaction costs would change the incentives, driving more people and businesses toward digital payments.
Government intervention
One of the biggest lessons the U.S. banking system can learn from UPI is the role of government support in driving innovation. UPI was developed and rolled out by the NPCI with the support of the Indian government, as part of the country’s push towards a cashless economy. The government’s proactive approach has been key to the success of UPI and has helped create a culture that fosters innovation.
In the U.S., greater government support and collaboration with the private sector could help drive similar advancements in digital payments. This idea carries significant challenges, however, as many Americans shy away from governmental intervention, especially when it comes to their finances.
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