As a way to encourage small-ticket digital payments without burdening technology infrastructure of banks, the National Payments Corporation of India has proposed that mobile applications enabling transactions on the unified payments interface add an on-device wallet. The wallet, christened UPI Lite, is aimed at facilitating transactions under Rs 200 in an offline mode.
Eventually the idea is to get to a milestone of a billion transactions a day. UPI Lite, it is believed, can play a role in getting there.
A user can enable the UPI Lite wallet on their existing UPI app and direct all low-value transactions through it. The wallet can have a maximum balance of Rs 2,000 and can be loaded directly through the user's bank account. Users can also disable the wallet, where the balance in the wallet will automatically be transferred back to their designated bank account.
The NPCI released a circular on Mar 16 informing banks and other service providers that a pilot project for UPI Lite will soon be launched, with a full scale launch to follow.
According to a person in the know, without adequately segregating the high-value transactions from low-value transactions, getting to the one billion transactions a day target would be difficult. That‘s the core idea behind UPI Lite.
The payments industry is divided on whether such a wallet, specifically designed for low-value transactions, will succeed. While part of the industry believes that it could rapidly increase adoption, others say it could be dead on arrival.
The NPCI did not respond to queries emailed on Wednesday.
What Does UPI Lite Solve?
UPI has become one of the largest modes for digital payments since its launch in 2016. With nearly 304 banks processing transactions, UPI operates across nearly 60 mobile applications. In the month of February alone, UPI reported 452 crore transactions worth Rs 8.27 lakh crore.
But this rapid rise over the last six years have also burdened banking infrastructure. According to the NPCI, nearly 50% of all UPI transactions are less than Rs 200 each. Such a large volume of low value payments on UPI becomes a drag on core banking systems, increasing the chances of failed transactions.
NPCI's monthly data shows that major domestic banks had an approval rate of 90-95% on UPI, indicating that 5-10 of every 100 UPI transactions routed through these banks were not successfully concluded.
This is what UPI Lite seeks to solve. Directing low-value transactions through the wallet is expected to reduce the burden on bank systems. Since UPI Lite will function in a "near offline" mode, where debits happen offline and credits online, the failure rate of transactions can also be reduced to a great extent.
"UPI Lite's ability to reduce the failure rate of transactions, reduction in transaction time and simplified payment experience will be very important to make the overall UPI ecosystem and banking infrastructure more efficient to extend it to next 200 million smartphone users," said Sunil Kulkarni, CEO at Business Correspondent Federation of India.
Since the UPI Lite by design prohibits a pull function on payments, it protects users from scamsters who may send fraudulent payment requests, Kulkarni said.
Unlike other offline payments which can only be done face-to-face, UPI Lite will allow all digital payments. This will ensure that customers can use the UPI Lite wallet to make their payments, even if they are not near a merchant.
The head of one of India's largest UPI-based applications, speaking on conditions of anonymity, said that of the approximately 25 crore UPI user base, about 40% use UPI as a "lifestyle". These customers are typically high-frequency users and contribute to about 70-80% of the total volume of transactions, through peer-to-peer and peer-to-merchant transactions.
If UPI Lite is able to convert a large chunk of these high-frequency users to transacting via the wallet, it could lead to debulking of the overall system, this person said.
So What's The Problem?
Critics of UPI Lite feel that asking customers to open a special wallet on an existing UPI app may be akin to messing with a good thing.
According to the CEO of a digital payments firm, who also spoke on the condition of anonymity, UPI Lite is geared toward an urban user base, which uses smartphones. These users are not really deterred by failed transactions and have the option of completing a transaction by either paying cash or using an alternative application. Asking them to open a wallet because banks cannot handle the high-volumes seems counterintuitive, this person said.
Changing customer behaviour could also be difficult at this stage where UPI has become an intrinsic part of the digital payment experience.
"People are used to doing UPI transactions in a seamless manner with minimum friction and a great experience hence this exponential growth. Now to ask them to download a wallet, load it and use it for small value transactions only, seems like added burden on the users," said Asim Parashar, partner, PwC India. "There are two ways to increase adoption of this directive, either payment companies can incentivise users through rewards--but the low value of these transactions will be challenge for this--or the banks having the accounts create some level of disincentives for users."
Not everyone agrees with this assessment though.
"The NPCI is also talking about a system where both debits and credits can happen offline in future, like in the case of mass-transit payments. This could be a gamechanger for user adoption and to bring digitisation of micro-payments to traditional small retail segment," said Kulkarni of Banking Correspondent Federation of India.
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