Inside UPI: How India is bringing mobile banking to 1.3 billion people

India is embarking on an ambitious project that hopes to bring banking to every smartphone user in the country.

For decades, the country of more than 1.3 billion people has struggled to bring hundreds of millions of its citizens to a bank. The penetration of bank accounts, and by extension, debit cards and credit cards remain low in the country. But its new audacious payments system could bring banking and financial services to its entire population.

India has launched a new payments system called Unified Payment Interface, or UPI, which is designed to make person-to-person and e-commerce transactions swifter and easier. Doing transactions, the government says, will be as easier and as faster as sending a text message.

Unveiled earlier this year by the National Payments Corporation of India (NPCI), the primary body that governs all retail payments in the country, UPI aims to propel the economy towards more cashless transactions. This would, among other things, help the government curb unreported money exchanges that aren't subjected to tax. The number of non-cash transactions per person in India is only six per year.

The government has opted for smartphone as the computing platform for UPI. India is the world's fastest growing smartphone market. The country has over 350 million smartphone users, and the number is projected to grow past 700 million by 2020. By making digital payments available in full-fledged capacity on smartphones, the country is diminishing the barrier point and making it easier for more users to join the bandwagon.

The other integrals of UPI are inter-operability — allowing transactions across banks — and need for  a single-identifier to make transactions. It is built on top of IMPS protocol, a 24x7 and real-time transaction service. But unlike IMPS, which requires the concerned parties to provide a fair amount of bank details such as account number and IFSC code, UPI-enabled apps will only require the knowledge of a virtual address. For this, it leverages on India's biometrics-enabled national ID system, Aadhaar.

This virtual address is a 12-digit number which is unique to a person based on their fingerprint, iris, and facial features. Not only does utilizing Aadhaar makes the whole process more secure, it also gives the government a way to target a wider consumer base. Over a billion people now have an Aadhaar card.

So how do UPI-enabled apps work?

Nearly two dozen Indian banks including ICICI Bank, Canara Bank, Andhra Bank last week announced they will be releasing a UPI-enabled app on Google Play in two to three days. ICICI Bank announced on Tuesday that the feature is live on its 'iMobile' and 'Pockets' mobile apps. The latter allows peer-to-peer and e-commerce payments by users including those who don't have an ICICI Bank account.

"UPI is a path-breaking concept which will enable convenient person-to-person and merchant payments using mobile phones. I believe that it will revolutionize the landscape of electronic payments in India and go a long way in reducing the usage of cash in the economy," said Ms. Chanda Kochhar, MD & CEO, ICICI Bank.

It is the first time in the world that a project of such a scale is being introduced to customers.

"It is the first time in the world that a project of such a scale is being introduced to customers," she added.

Several other major banks in the country such as SBI, HDFC, and Kotak have assured that they will be releasing a UPI-enabled app soon. The iOS version of UPI-enabled apps are expected sometime in the next six months.  Any bank with over 1,000 pilot customers, 5,000 transactions, and an 80 percent higher success rate is eligible to adopt UPI on their app and offer it to the general public through the Google Play.
Once they become available, you're required to download a UPI-enabled app, set a PIN code, create a virtual address and link it to any bank account.  Once you have set it up, you only need to know the receiver’s unique ID. When you have it, you open the app, select the amount, enter the unique ID, and select “send.” The app will ask you for an authentication ID, which you will receive on your phone. After which, regardless of the bank in which the receiver has her account with, the money will go through instantly.
UPI offers a considerably wide payment range — between Rs 50 (75 cents) to Rs 100,000 ($1,500) in one transaction. The payments system is designed to serve as a replacement for all the apps that you needed to make money transactions on online shopping websites, pay electricity bills, barcode-based payments, and deposit college tuition.

This is by far one of the most audacious plans India has ever had. But it might just be enough to get everyone on the digital payments ground. Though how much time it will take to get substantial traction, and its impact on existing mobile payment solutions such as Paytm and mobile wallet apps by several other e-commerce portals and banks, remains to be seen.