May 21, 2024 ☼ Payments
UPI (Unified Payments Interface) has transformed India’s economy, enabling seamless transactions across markets, offices, and homes. Indians use it for everything from paying bills to making purchases, bypassing the “cards phase” of payments by jumping directly from “cash” to “mobile.”
But is UPI truly a success? While widely adopted, its long-term sustainability is questionable.
UPI’s zero-MDR (Merchant Discount Rate) policy is key to its appeal. Unlike Visa or Mastercard, which charge interchange fees of over 2.5% per transaction, UPI is free for merchants. However, these fees fund operational costs, infrastructure, and fraud prevention for global payment networks. UPI’s high failure rates reflect insufficient investment, a direct result of its zero-MDR model.
UPI is owned by NPCI, a government nonprofit. Historically, profit-driven companies have pioneered payment innovations like EMV chips and NFC payments. Can a nonprofit spearhead future advancements like biometrics or cryptocurrencies? Indian banks also lack incentives to innovate, as they earn nothing from UPI transactions.
UPI has hurt local players like Paytm, which once led India’s payments space but has lost users to UPI. Ironically, UPI’s biggest beneficiary is America’s Google, whose app gathers valuable commerce data from Indian users. So much for Atmanirbharta (self-reliance).
Without UPI, Paytm might have leveraged India’s growing economy to expand globally, much like Visa and Mastercard. A less interventionist policy, akin to the EU’s PSD2, could have fostered competition without stifling innovation. Instead, India’s reliance on government-led solutions mirrors past missteps with state-owned airlines, banks, and telecom operators.
While UPI enables fast, free transactions, its zero-MDR model, lack of innovation incentives, and unintended consequences for local players raise doubts about its sustainability. For all its success, UPI risks becoming another example of myopic policy prioritizing short-term conveniences while undermining long-term progress.