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How the Unified Payments Interface will (actually) affect digital wallets

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Need to know

  • Unified Payments Interface (UPI) architecture will allow payments via aliases which don’t need account details, and enable pull payments.
  • The UPI will effectively turn a bank account into a wallet with a simplified two-factor authentication and eliminates the need to store funds in a wallet.
  • However, Oxigen’s Sunil Kulkarni says it is not as simplistic. Wallets which focus on remittances by loading cash and converting them to digital money will not be affected. While wallets whose businesses focus on digital and convenience will be affected.
  • Paytm also explains the UPI helps its payments bank business.

The Unified Payments Interface (UPI), which was launched earlier this week, is a payments architecture 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.

However, there are many reports which say that the UPI would effectively kill wallets’ business (read here, here and here). The UPI would effectively turn a bank account into a wallet and would provide the convenience of the same.

How UPI payments could replace wallets

Banks would integrate the UPI app with their own mobile banking app which will allow us to create aliases directly linked to our bank accounts and store the aliases of people who we want to transact with. This could be people or businesses or entities we frequently transact with. Thereafter, paying any of these persons or entities will just involve sending a text on this app with a direction to pay to or withdraw from. The payer’s and the receiver’s banks will connect with the UPI server, which will authenticate the payer and the receiver’s identities and complete the payment.

The UPI has a more simplified two factor authentication where a user has to enter the registered mobile number with the bank and an mobile PIN. It is simpler than the number of hops a transaction has to go through payment gateway for a card or net banking transaction.

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“The UPI is an answer to the sub optimal payment gateway experience. Usually for ecommerce transactions there are four hops which are involved in a payment. If the Internet link is problematic in any of these four hops it would lead to a payment failure. Even if one link in the chain breaks, at least 25% of the transactions will fail,” Sunil Kulkarni, deputy managing director at Oxigen Services, explained.

Wallets were created to simplify the payment experience on cards and net banking and also carry out financial inclusion.

The value propositions for wallets and who will be hit

He further explained that there are three value propositions for wallets:

Limited liability in wallets: Some funds can be stored in wallets without exposing card details and bank account details. Thus a majority of funds in a wallet can be saved .

Ease of making a transaction: Funds stored in a wallet can by pass the RBI’s requirements for two factor authentication in cards and the sub optima experience in net banking.

Converting cash into digital money: There are many wallet players who convert cash into digital money and offer remittance services through this. They also carry out financial inclusion activities via the same and reach remote areas via business correspondents.

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So will the business of wallets be hit? Short answer is “depends on the kind of wallet”

Kulkarni explains that wallets which focus on only providing limited liability and ease of making a transaction will be hit as the UPI will directly challenge their value proposition.  “The wallets which are going to be under threat are the ones who are purely digital. Which load money only through cards and net banking,” he added. Think Paytm, MobiKwik and Ola Money.

The wallets which look to convert cash to digital and look at remittance services, such as Oxigen and Eko, would not see such a threat. In fact, Kulkarni says that the UPI would add a more seamless way to add funds for those who chose to add them via the UPI.

Paytm also echoed similar sentiments. “For Paytm wallet, it’s a more cost effective method of adding funds compared to other payment instruments,” Nitin Misra, vice president of Paytm said.

Payments bank

Paytm also added that following the launch of its payments bank it would drive the adoption of the UPI through its app. “All Paytm customers (currently 125m) can have their own virtual addresses with @paytm alias. This will allow Paytm customers to make payments anywhere where Paytm is currently not accepted,” Misra added.

Paytm says that currently, most small & medium offline merchants don’t accept electronic payments due to POS machines costs, need for separate connectivity for these machines, bank’s KYC norms that won’t allow these merchants to accept payments via POS machines and high fees.

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Paytm has been aggressively driving digital payments in offline/physical world where anyone can start accepting payments using only their mobile & their Paytm app. UPI will further strengthen this push as any merchants will also be able to accept the payment from any customer using UPI,” Misra added.

However, Kulkarni points out that the Paytm’s advantage in urban India would be diminished where merchants handle much higher volumes.

“If the total the total merchant payments in a day exceeds Rs 1 lakh, then you cannot keep that merchant. The payments bank has a limitation whether it is a current account or savings account,” he explained.

RBI’s guidelines on payments bank state explicitly state that payment banks’ accounts will be restricted to holding a maximum balance of Rs. 100,000 per individual customer.

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