On April 16th 1853, India’s first passenger train left between Bombay and Thane. More than 400 passengers embarked on the 34KM journey, which was the start of an infrastructure revolution that has transformed the Indian sub-continent. Today, another revolution is taking place – led primarily by a humble QR code.
Across a country that spans 28 states, 22 languages and six major religions, QR codes are emerging as a universal means of exchange. They are sprouting on the sides of rickshaws and chai stalls, and are plastered above sari shops and jewellery merchants. They have become ubiquitous as a means of payment in a country where cash was once so widely used. No wonder officials say they are laying down the “rail tracks” of the country’s digital economy.
India’s Unified Payments Initiative (UPI) is a remarkable tale of policy innovation that has drawn in millions of previously unbanked people. It has transformed not only the way money changes hands but also the very language of exchange.
UPI is a payments interface that was developed by the National Payments Corporation of India, a non-profit organisation set up by the central bank of India. It allows users to link several bank accounts in a smartphone app and transfer money in real-time using just a mobile number or QR code. Crucially, it removes the need to enter bank details and other personal information when making transactions. UPI is free, and most banks in India are members.
Editor’s note: UPI sits at the centre of money movement in India to facilitate interoperability between remitting and beneficiary banks, banks providing payments services (known here as PSPs) and third-party app providers (TPAPs), which enable end users to make UPI transactions. TPAPs can’t access the UPI network directly; they need PSPs to connect with the UPI network and enable transactions.
Although it is not the world’s only instant payments system, UPI is considered among the most sophisticated – and at nearly 8 billion transactions processed monthly, has one of the highest adoption rates. This is largely because of the interoperability it affords. Customers can complete transactions from any bank, between any banks and on any app or site. The Reserve Bank of India (RBI) has actually mandated that all payment wallets and cards must now be interoperable with UPI. Today, over 50% of all e-payments in India go through UPI.
The bedrock of the new digital infrastructure is India Stack, a set of open APIs upon which private companies can build applications. [Editor’s note: in addition to UPI, the full India Stack includes a set of open APIs and digital public goods that ‘aim to unlock the economic primitives of identity, data, and payments at population scale.’ It’s owned and operated by NPCI, which is a non-profit organization created by the Reserve Bank of India and Indian Banks Association]
The creation of this public digital infrastructure has been a boon for fintechs, and as a result it means consumers—whatever their needs—can enjoy better integrated and more efficient digital services. In rural Punjab, a farmer can now have his identity confirmed and a monthly subsidy transferred to his account without having to wait in lengthy queues, while a student in Delhi could have a loan application approved in minutes.
PIX brings Brazilians into the digital economy at scale
The promise of interoperability is also at the heart of Brazil’s instant payments system: PIX. Launched in November 2020 by Brazil’s central bank, PIX is now used by more than 119 million people in Brazil and as a result, since 2021, cash transfers have surpassed credit card payments. As with India’s UPI, PIX enables users to receive money instantly using a mobile phone number or by scanning a QR code, and it’s compatible with digital wallets. One UN digital payments expert said:
“A mobile number is by far easier to remember than somebody's account number and sort code. Most people would be hard pressed to roll out from the top of their tongue their account number, but all of us can recite our mobile number.That's such a huge difference that so many central banks have not yet appreciated…It makes the biggest difference when it comes to uptake.”
Although they both share this trait, there are some key differences between UPI and PIX. In India, most payment apps don’t allow users to set their own UPI IDs, which creates an even more significant barrier when it comes to recalling the ID. Despite the promise of interoperability, this prohibits users from sending money across different payment apps – they operate in a semi-closed loop system. Brazil fixed this problem by allowing users to set their own PIX key, which can be a phone number or email address.
However, the Indian Central Bank recently updated its rules so that customers will now be able to transfer money seamlessly across apps. A Paytm user, for example, will be able to pay someone using PhonePE, without the need for multiple accounts and apps. This is bringing the wallets experience on a par with that of cards.
Where cash + card remain king
The success of UPI was no mean feat in a country with so many previously unbanked citizens and a strong allegiance to cash. Although instant payments are full of promise, they are nothing without a robust digital infrastructure. Nowhere is this more evident than in Nigeria. Despite being an African leader in digital and real time payments, Nigerian society is still heavily dependent on cash. In many remote areas, people do not have access to bank accounts, and phone networks are poor. As a result, recent attempts by the government to reduce the amount of cash in circulation resulted in people camping outside banks to access Naira.
In October 2022, the country’s central bank announced that N200, N500 and N1,000 notes would be taken out of circulation and replaced with new designs that are harder to counterfeit. The original deadline to switch the notes was January 31st, but this had to be extended because replacement notes were not made available in time. This led to a scramble outside banks as people struggled to access cash. The government encouraged people to make use of electronic payments, but the infrastructure was not prepared for the onslaught, and many digital platforms collapsed under the strain of excess demand. It underscores the importance of trust and reliability in alternative payment systems if the transition away from cash is to be successful.
An allegiance to cash is one obstacle, but an allegiance to cards poses another. Digital payments have taken off quickly in places like India and Brazil, where the use of credit and debit cards was not nearly as entrenched as it is in some Western markets. In Brazil, for example, it can take up to 30 days to settle a card transaction, and merchant fees are high. In South Africa, which recently launched real-time payments platform PayShap, nine out of ten transactions are still cash-based.
Compare that to the US, where the use of credit cards is highly entrenched and, crucially, serves customers and banks well. This goes some way towards explaining why instant digital payments have been slower to take off in the world’s most advanced economy. The US has several widely adopted closed-loop payment apps like Paypal, Cash App and Venmo, but they don’t move money from bank account to bank account instantly. Ledger entries can appear instant, but the actual transaction to a customer’s bank account can take days to settle.
The country edged closer to instant payments with the launch of Zelle in 2017. Not only can anyone with an account at a participating bank or financial institution send money using Zelle, but it also makes the funds immediately available in a customer’s bank account. However, it still settles transactions in batches once a day. Only a small fraction of users make use of “Zelle over RTP,” which settles transactions instantly over the real time payments network, one of two instant payment rails that exist in the US. Zelle is also only available to users with accounts at participating banks.
The latest instant payments innovation from the US is FedNow, which is still being developed and should be rolled out in the coming months. Like UPI, FedNow is a federal reserve initiative that aims to make instant payments widely available to consumers and businesses. It will be available to more than 10,000 financial institutions, with banks able to opt in. The U.S. federal reserve has been eager to stress that it has no intention to replace cash or any other payment method with FedNow, but feels that it could unlock substantial benefits.
Editor’s note: FedNow acts as the clearing service for financial institutions' transactions so they can provide immediate end-to-end payments to customers, 24/7. It’s designed primarily for instant payments between bank accounts in the US, including P2P payments, B2B payments, and government payments. Unlike UPI, FedNow is owned and operated by the Federal Reserve, or the central bank of the US, and works on profit.
Aaron Klein, an economist at the Brookings Institution, claimed recently that the rollout of RTP 12 years ago—when the Bank of England implemented it—“would have put more than $100 billion into the pockets of the Americans living paycheque to paycheque, who end up going to payday lenders.” Economists said it would also have helped with the distribution of stimulus payments during the pandemic as they could have gone directly into citizens’ accounts.
FedNow is still in the testing phase, but one key difference to PIX and UPI already stands out: UPI payments can be made using a phone number whereas FedNow payments will require a bank account number. This could affect how readily it is adopted, leaving the US once again lagging behind in the instant payments arena - much like they have with contactless and chip payment innovations before - while developing countries steam ahead.
Driving adoption in national instant payments systems
While each of these systems—and similar ones launched in Singapore, Mexico, and other markets—have seen varying levels of adoption and uptake, key drivers of success include regulation, bank participation and buy-in, ID form factors, interoperability and, of course, pricing.
The latter became particularly apparent when South Africa launched its version of national instant payments, PayShap, earlier this year. This is what Dave Glass, Chief Executive of South African fintech company Electrum Payments had to say about it:
“Regulation drives pricing, [PayShap] won't take off until the regulatory environment supports it... Here, the regulators have allowed the banks to self-determinate. If you read our act, it basically says the banks can run payments themselves as an oligopoly. And as a result, we get oligopoly pricing and oligopoly technology. I'm hoping that the regulator will become a little bit more serious about encouraging change.”
While it’s yet to be seen whether PayShap will see the same success PIX, UPI, Swish and other instant payment systems have enjoyed, it marks a positive step for South Africa’s still cash-heavy economy toward enabling greater access to digital payments for a more widespread population.
