Unified Payments Interface (UPI) has been at the forefront of India’s digital payments revolution, making faster inroads into retail payments than any other online mode. The mobility restrictions brought on by Covid only heightened its appeal with monthly transactions value clocked by UPI vaulting from ₹1.8-lakh crore in November 2019 to ₹7.6-lakh crore by November 2021. While credit and debit card payments flat-lined at ₹13-lakh crore between FY19 and FY21 and use of IMPS grew from ₹2-lakh crore to ₹3.6-lakh crore, UPI payments have jumped from ₹8.7-lakh crore to ₹41-lakh crore. But with cash use still at a high and UPI commanding less than a 10 per cent share of digital retail payments, there’s still considerable headroom for growth. This makes the Reserve Bank of India’s resolve, expressed in its recent monetary policy review, for renewed efforts to expand UPI’s footprint, quite welcome.

To expand penetration, RBI plans to deploy innovative solutions allowing feature phone users to onboard UPI. With about 37 per cent of India’s mobile phone users still using basic phones and internet connectivity in the hinterland dodgy at best, this is a good idea. But RBI needs to evaluate why its earlier National Unified USSD Platform service launched in 2016 with similar functionality, proved a non-starter. Perhaps the low penetration of UPI-linked bank accounts then and the need to remember the beneficiary’s bank details proved a deterrent. Device requirements apart, RBI needs to address UPI’s high transaction failure rates which makes users hesitant to rely on it for high-value payments. RBI believes that such failures can be attributed to the large volume of transactions below ₹200, clogging banks’ system capacities. It plans to route such transactions through an on-device wallet in the UPI app, which works like a prepaid instrument, to avoid multiple debits and credits to the underlying account. While this may work, holding participant banks more accountable for tardy reversal of failed transactions may be needed too. RBI guidelines set a one-day limit for a beneficiary bank to reverse a failed account-to-account UPI transaction and a five-day limit for merchant payments, with a penalty of ₹100 per day for failure to comply, but these rules are observed more in the breach.

To ensure that digital transactions are both affordable to users and remunerative to service providers, RBI plans to issue a discussion paper specifying transaction charges across digital modes. One hopes that it doesn’t see reason to disturb its zero Merchant Discount Rate policy which today renders UPI free of cost to users. If Covid has propelled digital payments, it has also ironically led to a return to cash transactions in the economy, which after an inordinate spike to 14.5 per cent of the GDP in FY21, are only now moderating. The time is opportune for RBI to redouble efforts to wean the economy away from cash to digital modes.

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