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How the Unified Payments Interface will affect payment gateways


Need to know

  • The Unified Payments Interface (UPI) is a payments architecture by the National Payments Corporation of India (NPCI) which will allow payments via aliases which don’t need account details, and enable pull payments.
  • The UPI will eliminate the need for payment gateways to maintain relationships with each bank for settlement, and they will have to keep one with the NPCI.
  • Payment gateways will also help merchants set up an alias to receive payments.
  • Wallet and netbanking payments will decline (according to Harshil Mathur). Cards will still have use cases for payments on international websites.

The Unified Payments Interface (UPI) was launched earlier this week with 29 banks. The new payments architecture from the National Payments Corporation of India (NPCI) is poised to change payments in the country and will allow users to make a transaction without divulging their account details and IFSC codes through aliases (such as shashidhar@hdfcbank) and will allow pull-based payments.

In a conversation with MediaNama, Harshil Mathur co-founder and CEO of  Razorpay, explains how the UPI will change things for payment gateways.

The big advantage

Mathur explains that payment gateways currently have to maintain an individual relationship with each bank to route and settle payments. With the UPI, it would eliminate this. “So the UPI is a boon for payment gateways. Right now, we as a payment gateway are a facilitator for payments for merchants. Our relationship with the merchant is to help them with different payments instruments,” Mathur said.

Initially, the UPI will be offered to customers as another payment method in addition to cards, netbanking and wallets. This requires a payment gateway to maintain relationships with banks, card networks and wallet companies.

“When it becomes more mature, instead of having to build 57 bank relationships a gateway has to build right now, it needs to build only one relationship with the UPI. So it will ease our efforts and help out the merchant,” he explained.

Right now, a payment gateway will have to tie up with one of the 29 partner banks to enable payments on the UPI. He added that payment gateways are in talks with the UPI to let them access the architecture without the banks.

Fees associated with the UPI

Right now, fees are segmented across different payment methods. It varies from about 2-5%. Mathur said that debit card charges are lower while credit cards attract a higher fee. Charges on net banking varies from bank to bank. He explained further that there are many mediators in the payment chain who charge a lot of fees. With the UPI, Mathur thinks that these mediator companies will go away.

“When UPI comes in, it will be reduced to NPCI’s fees and the partner bank’s fees. Once UPI is open to private players as well, I think the partner banks’ cut will also go away,” Mathur added.

Setting up aliases

Payment gateways will also help merchants to set up their aliases which will help them accept payments into their accounts.

“Right now, even for card acceptance, payment gateways have to create MIDs (merchant IDs) on the Visa/MasterCard network. So the same thing will happen when the alias creation goes live. So we as payment gateway will help a merchant collect payments through aliases and create them for merchants. Say something like payments@razorpay,” Mathur said.

He added that on the UPI, the settlement is instant. On other methods such as cards and netbanking it might take up to 1-2 days for a settlement.

How it will change other payment methods

Cards: Credit cards and debit cards are not going away in one shot. Even when the UPI comes out, people will need cards to make purchases on international websites.

Netbanking: “Net banking is a local instrument, so there will be no significance of using net banking once you have UPI,” Mathur said.

Wallets: The UPI will threaten the business of wallets as it effectively turns a bank account into a wallet. In the original draft document of the UPI, wallets were to be included in the architecture. “The UPI would also allow interoperability of wallets, that has not been launched in the current scheme right now,” Mathur explained. Interoperabilty means that a user could transfer funds from a Paytm wallet to another.

“A lot of wallets have features built on top of it. But if a wallet is used simply as a means of bypassing two factor authentication, then they will lose their significance,” Mathur reasoned.

Two factor authentication

The NPCI also said that payments on the UPI will have two factor authentication.

“So right now it will work on m-PIN. Users need to set up a mobile-PIN with their bank accounts. And you will have to authenticate every transaction with that m-PIN. The other factor of authentication is the registered mobile number which you will give,” Mathur explained.

Image credit: Flickr user Jason Saul under under CC BY 2.0

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