GS Paper 3
Syllabus: Banking/ Financial Inclusion
Context: In January this year, about eight billion (800 crores) transactions worth nearly $200 billion (Rs. 2 lakh crores approximately) were carried out on the Unified Payment Interface (UPI)
What is Digital Payment System?
A digital payment sometimes called an electronic payment, is the transfer of value from one payment account to another using a digital device such as a mobile phone, POS (Point of Sales) or computer.
Modes of Digital Payments:
- Unified Payments Interface (UPI)
- Bharat Interface for Money (BHIM)
- UPI 123PAY
- UPI Lite
- Cards (including RuPay Debit Cards)
- Immediate Payment Services (IMPS)
- Aadhaar Enabled Payment System (AePS)
Status of Digital payments in India:
- 40% of all payments done are digital
- Nearly 50 per cent of them are classified as small or micropayments
- The value of instant digital transactions in 2022 was four times more than the combined transactions in the United States, Britain, Germany, and France together.
Components of Digital Payment Ecosystem:
Tools used for Digital Payment ecosystem:
- JAM trinity
- Jan Dhan Accounts: As of 2022, over 46 crore bank accounts have been opened, with 56% belonging to women and 67% opened in rural and semi-urban areas
- Aadhar: Today 99% of adults have a biometric identification number with more than 1.3 billion IDs issued.
- Mobile: The cost of data dropped by 95% since 2016.
- JAM Trinity has catapulted verticals such as e-commerce, food delivery, and OTT content to take off in India.
- Unified Payments Interface (UPI) (launched in 2016 by NPCI with 21 member banks): It is a public-private partnership (PPP) that the National Payments Corporation of India (NPCI) led with an interoperable platform to facilitates direct payments linked to a bank account.
- An advanced version of Immediate Payment Service (IMPS), UPI manages multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood.
Significance:
- Made daily life more convenient
- Financial Inclusion: Expanded banking services like credit and savings to millions more Indians
- Last mile access: Extended the reach of government programs and tax collection
- Encouraged entrepreneurship: The digital infrastructure is seen as a set of ‘rail tracks’ laid by the government, on top of which innovation can happen at a low cost.
- The significant behavioural shift from a cash-driven economy.
Comparison of the digital evolution of America, China, and India:
| Country | Digital Evolution | Key Approach | Key Companies |
| America | Broad adoption of the internet and digital technologies across industries. | Ecosystem play, focusing on core assets and capabilities and continuously investing in them. | Amazon |
| China | Adoption of mobile-first digital platforms led by payments, resulting in the emergence of super apps. | A focus on core capabilities and the aggregation of multiple services around payments. | Alibaba, Tencent, WeChat, Alipay |
| India | Growth in internet access and smartphone penetration led by public-private partnerships in telecoms. | Ecosystem play, with a focus on developing moats by investing in adjacencies. | Reliance Jio, National Payments Corporation of India (NPCI), Aadhar |
Acceptance across the world
- Indian digital payment systems are available in Singapore, UAE, Oman, Saudi Arabia, Malaysia, France, and BENELUX markets – Belgium, the Netherlands and Luxembourg – and Switzerland, among others.
- India has signed MoUs with 13 countriesthat want to adopt the UPI interface for digital payments
- Singapore: UPI-PayNow linkage
About NPCI:
The National Payments Corporation of India (NPCI, a not-for-profit company) is an initiative taken by the Reserve Bank of India (RBI) and the Indian Bank’s Association (IBA) to operate retail payments and settlement systems in India. This organisation was founded in the year 2008 under the Payment and Settlement Systems Act, 2007.
NPCI International Private Ltd (NIPL): NIPL is the subsidiary of NPCI to popularise domestic payment technologies such as UPI and RuPay abroad and co-create payment technologies with other countries.
Insta Links
The Unified Payments Interface (UPI)
Mains Links
India’s progress in payment systems will provide a useful backbone to make a state-of-the-art central bank digital currency (CBDC), but challenges remain. Discuss. (250 Words)
Prelims Links
Which of the following is the most likely consequence of implementing the ‘Unified Payments Interface (UPI)’?
(a) Mobile wallets will not be necessary for online payments.
(b) Digital currency will totally replace physical currency in about two decades.
(c) FDI inflows will drastically increase.
(d) Direct transfer of subsidies to poor people will become very effective.
Answer: A
UPI allows direct payment from the bank account to the merchant account. So, the need for a wallet will no longer be required.
