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    How can government, RBI drive digital payments growth?

    Synopsis

    Fintechs have been at the forefront of innovation in the UPI ecosystem – right from creating simplified customer on-boarding and transaction platforms to a large-scale QR-code based merchant acceptance network .

    digital payment.
    Successful partnership and interface between incumbent banks and fintechs are a key to UPI.
    Explosion in digital payments over the last five years has been largely driven by the UPI. Unified Payments Interface in India has been built on a partnership model where tech-driven, new age players (e.g., PhonePe, Google Pay) have been able to work with traditional incumbents (banks/PSPs) to create a simplified user experience.

    This framework is an experiment by the Reserve Bank of India (RBI) to facilitate innovation in a regulated space with the right guardrails and controls. The success of the UPI formula paves the way for many more such ecosystems in the country. Similarly, the RBI has demonstrated a clear focus on interoperability in the entire payments space - the guidelines on making all payment wallets interoperable is another step in that direction.

    Fintechs have been at the forefront of innovation in the UPI ecosystem – right from creating simplified customer on-boarding and transaction platforms (PhonePe, Google Pay, Paytm) to a large-scale QR-code based merchant acceptance network (PhonePe, Paytm, Bharat Pe). This has been instrumental in driving the UPI volumes over the last 2-3 years.

    However, it is key to note that the adoption of UPI is still largely only covering the metros, tier 1 and tier 2 cities. Only in the last couple of years UPI adoption in tier 3 cities onwards has begun to reach reasonable levels of penetration.
    We expect to see a lot of innovation to cater to these hitherto under-covered segments – whether in solving for feature phones or solving for low bandwidth/coverage of telecom networks through offline payments and creating new forms of acceptance (e.g., contact less payments).

    Payment apps are also broadening their offering to become a one-stop-shop for mobile-first customers. Many apps like PhonePe have successfully created the network effect between merchants and consumers. These apps have the highest activation rate of consumers given the frequent nature of payment transactions during the day/week/month. We have also seen payment service providers like Amazon Pay innovate and provide payment linked credit like buy now pay later to their consumers.

    How can we unlock further innovation?
    Successful partnership and interface between incumbent banks and fintechs are a key to UPI. To facilitate such innovation NPCI and RBI have set up the appropriate sandbox environments for experiments, innovation and testing of new solutions.

    The UPI 123 and UPI lite solutions are examples of innovation emerging from the sandbox. Both are solving key unlocks to penetration – feature phone customer segments and offline methods of payment. UPI lite in its current avatar is the first solution for banks to be able to process transactions offline from the core banking infrastructure, thereby reducing the pressure on the CBS platform. As we move ahead, we expect to see a push towards enabling transactions in low/no network locations as well.

    However, more than a sandbox environment will be required to drive continuous innovation in the digital payments and lending domain:
    • Building awareness and trust on digital modes of payments to bring more consumers and merchants on-board, especially in tier 3-6 towns
    • Allowing payment service providers and other stakeholders to create appropriate economic and business models (with right consumer protectionism and keeping net neutrality principle in mind)
    • Clear and consistent guidelines around relationship between regulated banks and the unregulated fintechs (e.g., data management, FLDG norms, issuance of co-branded cards, etc.)
    • Further investments into the national payments’ infrastructure by all stakeholders (banks, PSPs, TPAPs) will help reduce technical failures and increase customer confidence
    • Some additional moves to build customer awareness and trust could be:
    • Real-time tracking of transactions with automated decisions and blocking fraudulent transactions when identified
    • Introduction of multifactor authentication (MFA) with integrated biometrics to ensure the user account is not hacked or used by others without user consent
    • Introduction of default transaction limits for new users so that minimum velocity controls can reduce the damage caused to an individual
    Having set a benchmark for P2P payments for the world to follow, India is now well positioned to increase adoption of digital P2M payments in the years to come. With NPCI and RBI partnering with fintechs through the sandbox environment and payment players continuously innovating on how to service their merchants and consumers, we enter an exciting new phase of payments innovation.

    (Prateek Roongta is Managing Director and Partner, BCG and Vivek Mandhata is Partner, BCG)
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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