Road to cashless society: Here’s how Unified Payment Interface works
RBI Governor Raghuram Rajan along with National Payments Corporation of India (NPCI) adviser Nandan Nilekani launched the Unified Payment Interface (UPI) with the objective of proactively encouraging electronic payment systems for ushering in a cashless society in India. The interface aims to provide a safe, efficient, accessible, inclusive, interoperable and authorised payment and settlement system for the country.
Here is a quick guide on one of the landmark changes to take place in the financial sector.
What is the United Payment Interface (UPI)?
As the name suggests, UPI is an application level interface that aims to bring under its umbrella the multiple payment service providers presently operating in the country by adding a layer of interoperability within such platforms. It will enable anyone with a bank account to complete a transfer or make a payment without having to share bank account or credit/debit card details. It also incorporates additional functionality of authenticating such transactions with known identifiers like Aadhaar number.
This interface is vendor agnostic, so banks, e-commerce portals or any other platform involved in monetary transactions will need to include this interface within their payment applications instead of the end users having to use multiple applications.
Why do we need a platform like this?
The record of cashless transactions in our country is very dismal. At present it stands at 6 transactions/person/year which is partly due to the fact that out of the 10 million plus retailers in India, hardly 1.1 million have card payment acceptance infrastructure. The RBI has been vocal about ushering in more cashless transactions and one of the ways to do so is to tap into the expanding smart phone ecosystem that is slated to reach close to 500 million users in next five years.
The long-term goal is to use the UPI as a means to financial inclusion by encouraging transactions among the newly added accounts under the Jan Dhan Yojana (PMJDY) and direct benefit transfer programs.
How much of a part does Aadhaar play in the UPI?
The Aadhaar system that has close to 80 crore enrolments and is now legally accepted as a form of identity for Indian residents is the backbone for authentication and authorisation in the UPI. Aadhaar authentication is the process wherein Aadhaar number, along with other attributes, including biometrics, will be submitted by the interface to the UIDAI system for verification. There is also a provision for financial institutions to integrate their Aadhaar based KYC into their applications that use UPI.
The most notable feature however is the Aadhaar Enabled Payment System (AEPS) that enables banks to route the financial transactions through a switching and clearing agency allowing citizens to authenticate and subsequently operate their respective Aadhaar enabled accounts as well as perform basic financial transactions. So essentially, Aadhaar-enabled payments architecture is an overlay on the existing payment architecture of UPI, with the task of user verification handed over to the Aadhaar repository with UIDAI.
How will transactions done under UPI work?
The interface will sit on top of existing payment system by integrating into their code. The National Payment Corporation of India (NPCI) will maintain a database of customer’s Aadhaar number, Mobile number and Bank accounts. This central repository (Central Mapper) will be used to route payment instructions based on Aadhaar number or mobile number.
The Aadhaar Payments Bridge System (APBS) will use the NPCI Central Mapper as a part of National Automated Clearing House (NACH) to enable government departments to electronically transfer subsidies and direct benefit transfers to individuals mapped to their Aadhaar number. Similarly, Central Mapper will allow anyone to send/receive money from a mobile number without knowing the destination account details. This is achieved by mapping mobile number to one or more accounts.
What are the main benefits of UPI?
For the end users the most important feature of UPI is the ability to make payments by providing a virtual ID without having to provide account details or credentials to 3rd party applications or websites. It would also provide the ability to pre-authorise multiple recurring payments similar to ECS (bill payments, fees, subscriptions, etc.) with a one-time secure authentication and rule based access. Payments would be more secure with the introduction of single click two-factor authentication by using a personal phone without the need of new devices or hardware tokens. Lastly, as more and more payment service providers integrate this interface in their applications it will led to a fully interoperable system across all PSPs.
What does this mean for e-wallets and bank specific mobile applications?
While the UPI platform appears to target the transactional space presently occupied by e-wallets, the fact that UPI is vendor agnostic, would allow e-wallets to integrate UPI in their application and ease the process of loading money in the applications. Interoperability among the applications bought about by integrating UPI will indirectly led to more user friendly features getting added to e-wallets in the long run. As for bank specific applications, they should look to integrate UPI at the earliest as these will be the first applications to enable end users to avail of the benefits of UPI. Some banks like Yes Bank have already integrated UPI in their application, and early movers will definitely have an advantage.
One aspect that has not been clearly defined in UPI is that of grievance redressal. It is expected that once the technical integrations begin, a very clear path of addressing end user issues is charted out. The ownership of transaction failure on a platform that is masking identity of the parties engages in the transaction needs to be defined on the onset. This will augment end user trust in the platform which will in turn lead to widening of the user base.
Indian banking sector should look at the UPI as the disruptive innovation that will take its service delivery to the next level while enabling financial inclusion in a single stroke and push for adopting this technology with a sense of urgency.
The author is a policy analyst in the information security and data privacy domain. Views express here are personal.