India’s digital leap: the Unified Payment Interface's unprecedented impact on the financial landscape

India has made significant progress in developing its digital public infrastructure – the digital systems and services that are available to the public, provided by government or public entities and operated under a set of enabling rules, to enable the delivery of public services and facilitate economic activity.

Some of the notable achievements of India's digital public infrastructure include the creation of Aadhaar, a unique biometric-based identification system, and the launch of the Unified Payment Interface (UPI), a real-time digital payment system that has revolutionised digital payments in India.

India's robust digital public infrastructure has played a pivotal role in enabling the country's digital transformation, providing citizen-centric and transparent governance services, and facilitating breakthroughs in various fields, such as DigiLocker (online repository of citizens' documents). Furthermore, the digital infrastructure played a significant role in enabling the country's response to the COVID-19 pandemic, with the Aarogya Setu and CoWin apps helping to track and contain the spread of the virus and facilitate the vaccination of a large number of people in a short period.

When we talk about digital public infrastructure, UPI is something which needs to be specially mentioned for the impact it has generated. The UPI, launched by the National Payments Corporation of India (NPCI) in 2016, enables citizens to transfer money from one bank account to another instantly. UPI has revolutionised digital payments in India, enabling individuals and businesses to make transactions seamlessly and securely.

Over the years, payment methods have evolved significantly as technology has advanced and societal preferences have changed. From bartering and using precious metals as currency to the introduction of digital payments, the way we pay for goods and services has undergone massive transformations.

UPI is a prime example of this, as it has seen tremendous growth over the years, with 9.41 billion transactions, worth INR 14.89 lakh crore ($181 billion), processed in May 2023 alone. This is approximately 3,600 transactions per second, a 58% year-on-year increase in terms of the number of transactions. In fact, as per the report published by ACI Worldwide in 2022, India leads globally in terms of real–time payment transactions with 48.6 billion transactions processed in 2021. It is interesting to note that China is in second position with only 38% of the real-time payment transactions processed in India in the same year.

UPI has initiated a significant behavioural change in the Indian populace as small and micro transactions, such as purchasing a cup of tea for $0.12 or buying a bag of fresh vegetables for $2, are increasingly being conducted through digital payments.

However, despite the significant investments made in the development of digital public infrastructure in India, there is limited research on the impact of these initiatives.

Therefore, to understand the impact of UPI in India, we undertook primary research using surveys of UPI users from all age groups across the country including Tier-1 and Tier-2 cities.

The study aimed to estimate the monetary savings by using UPI over other prominent methods and assumes that the money transacted through UPI would have been still transacted but by another method with a different cost to the economy. This economic cost is being measured in the study by taking into account the costs of transactions such as the Merchant Discount Rate (MDR) fees of credit and debit cards, costs of UPI transactions, and the cost of printing currency notes.

The survey assessed the preference of transaction medium of the people amongst cash, credit and debit cards, and we considered a range of first and third preferences for calculating a spread based on the total amount transacted through UPI till April 2023.

Up to February, approximately INR 300 lakh crore ($3.66 trillion) has been transacted through UPI methods since its inception in April 2016. Based on our research and analysis, we estimate that this amount, if not transacted through UPI and transacted through cash, credit/debit cards or other modes of payment, would have cost the economy approximately INR 5.5 lakh crore ($67.07 billion), which could go as high as INR 7.2 lakh crore ($87.80 billion) depending on the alternatives people opted for in the absence of UPI.

The cost of UPI transactions is taken into consideration and has been deducted to arrive at these savings. This implies that UPI has saved the economy approximately INR 5.5 lakh crore ($67.07 billion) since its inception. This is a significant amount and highlights the impact of UPI on the Indian economy.

Moreover, the study also revealed that UPI has become the most preferred mode of payment in India, with over 43% of respondents stating that they prefer UPI over other modes of payment. The ease of use, speed and security of UPI were cited as the primary reasons for its popularity.

In addition, it can be easily said that UPI has not only made digital payments accessible to all, but it has also enabled small and medium-sized enterprises (SMEs) to participate in the digital economy. By reducing the reliance on cash transactions, SMEs can now access formal credit and other financial services, thereby improving their competitiveness.

The effectiveness and large-scale impact of UPI can also be judged by the fact that it has become the most common medium of transactions in India as close to 300 million individuals and 50 million merchants are now using it and the system is also expanding its presence globally, with Singapore and the UAE being its latest adopters.