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Bharat Interface for Money: Promoting Safe and Secure Cashless Economy in India

Bharat Interface for Money (BHIM), India’s own indigenously developed digital payment app was launched in 2016 with the aim of advancing the digital economy and encouraging cashless transactions through the broad adoption of electronic payment methods in India. BHIM App was the brainchild of the National Payments Corporation of India (NPCI), a not-for-profit entity established by the Reserve Bank of India (RBI), India’s central bank, and the Indian Banks’s Association (IBA) to create a strong payment and settlement infrastructure in India. The payment app was operating on the Unified Payments Interface (UPI) system, a real-time payment system that combined different financial services, easy fund routing, and merchant payments under one roof, enabling numerous bank accounts into a single mobile application.

UPI was essentially the flagship product of NPCI and the first of its kind globally to revolutionize the digital payment system through real-time money transfer. The interface runs as an open-source application programming interface (API) to simplify inter-bank peer-to-peer (P2P) and person-to-merchant (P2M) transactions using mobile phones. It was created using protocols that could communicate with many types of payment systems. Not only conventional banks, but even digital payment platforms like Google Pay, Paytm, PhonePe, etc could operate using UPI technology. Powered by UPI, the BHIM app was an app for payments using biometric authentication. These are vetted by a simple KYC authenticated using the details of customer’s digital identities such as an Aadhaar card linked with their bank account. Customers could transfer money between different bank accounts instantaneously while keeping their bank account information private. It was interoperable with other UPI transactions and payment could be made even without a smartphone or internet connection.

The BHIM app was primarily created and promoted by NPCI to provide program partners the chance to utilize this as a beginning app to become UPI compliant and give their clients the ease of using the UPI platform. It was intended to encourage UPI adoption to democratize the digital payment system. During the demonetization of the Indian currency in November of 2016 and subsequently the active promotion of the BHIM app by the central government and banks operating in the public sector, the utility of this app was recognized and adopted by the public, leading to its exponential growth. As part of the plans to outspread its digital footprint internationally, the Indian Government promoted the BHIM services in neighboring countries like Nepal, Bhutan, Singapore, and so on by partnering with their central banks.

As India moved on to further opening up the market for many entities to participate in the UPI ecosystem, NPCI publicized the launch of the open-source license model of the BHIM App. With the launch of the model, NPCI aimed at bridging the gap by encouraging those entities without a UPI app to create one to enable real-time online interbank transactions utilizing the BHIM app’s source code. However, some were hesitant to adopt this and were voicing the need to make it a paid service, as they felt that, to handle the unexpected surge in payment volumes, some banks who were slow to implement UPI technology also had to improve their back-end infrastructure, leading to additional costs with no incentives in the form of large-scale revenues (due to the complete waiving off merchant discount rates by NPCI for UPI transactions).

NPCI intends to balance the cash transfers by way of placing a capping mandate on third-party app providers; however, whether it becomes practically feasible and monitoring systems become operational, needs to be seen, and NPCI is gauging the feedback from both banks as well as fintech firms. The policymakers would like to assess the impact and value of NPCI’s strategy of incremental and open-source approach in promoting UPI through the BHIM app and leverage the same to hasten the transformation of the country into a cashless economy in the long run. Additionally, policymakers are also keen to map out the role of BHIM in the larger spectrum of digital India and identify the obstacles and challenges in the process from the banking system, the business sector, emerging technology, and the banking and business and technology regulators, if any.

Digital Payment Landscape in India

Digital Payment Landscape in India

The Indian payment ecosystem has undergone a paradigm shift over the years. It has a long history, starting with cash-based physical transactions, progressing to card-based payments, and transitioning to virtual accounts and electronic payments. The creation of bank accounts and the advancement of the banking system made it feasible for people to transfer money easily and safely. Before the advent of the Internet, card payment systems were the most widely used non-cash payment methods in India. The first credit cards were issued in India in 1980 by the Central Bank in collaboration with Visa and Master Card. Both consumers and retailers quickly and readily accepted it as a form of payment. In the late 1980s, there was a growing awareness of the necessity for banks to be computerized. As a result, the Reserve Bank established a committee in 1988 with Dr. C. Rangarajan as its chair. Initially employing standalone personal computers, banks transitioned to local area network connectivity as they began to use information technology.

The core banking platform was later embraced by banks as technology developed further. The transition from branch banking to core banking occurred at that time. Core banking Solutions (CBS) enabled banks to increase client comfort, and they were lauded as a promising first step towards improving customer convenience with the system of “Anywhere and Anytime Banking.” Following that, the trend of computerization accelerated with the early 1990s economic expansion. Before the 1990s, India’s payment system was characterized by a network of clearinghouses that was overburdened, delayed settlement of transactions, and a lack of a regulatory framework for payments. For the most part, India lagged behind the rest of the globe in terms of payments. With the liberalization of the economy in 1991–1992, the computerization process accelerated.

With the arrival of the internet in the mid-90s, it brought in a new type of boom with people starting to sell their goods and services online, popularly known as E-commerce. However, the emergence of e-commerce companies necessitated the development of a new payment method that consumers could easily access and use online. E-commerce has caused the Indian payment gateway sector to expand concurrently. An online payment gateway was a paid service offered by e-commerce app service providers that allowed credit/debit card transactions and online banking direct payments. Payment gateways acted as an interface between a payment portal such as a website and the acquiring bank to ensure payments in online transactions were handled safely and securely. The increased competition from private and foreign banks served as a primary catalyst for this development. To stay competitive and relevant, commercial banks started converting to digital consumer services. As reforms took root, India’s economy increasingly expanded to permit both domestic and foreign capital which had its pressures on India’s payment system as well.

To ease the load on the systems, during the 1990s, RBI introduced Electronic Clearing System (ECS) that handled bulk and repetitive debit and credit transactions electronically. When the Indian banking and financial system underwent its initial reforms, there was a need to establish a higher learning institute that would also provide information technology assistance to banks and financial organizations. Thus, RBI proposed to set up the Institute for Development and Research in Banking Technology (IDRBT) that would design innovative technological solutions for enabling electronic financial transactions. During that time, there was a lack of interoperability for ATM transactions for debit cards in India due to the infrastructure gap. Interoperability is referred to as the technical compatibility that would enable one payment system to work with another. It would facilitate the system providers, issuers, and participants to execute and settle payments across systems without requiring them to engage with several different systems. To promote the interoperability of credit and debit cards, the India Bankers Association (IBA) introduced the Swadhan card switch, the first network of shared ATMs in India in 1997. It came to an end followed by banks’ initiatives to establish their switch. Later, in 2004, RBI agreed with Euronet Worldwide through IDRBT to implement National Financial Switch (NFS), the largest network of shared automated teller machines (ATMs) in India. The shared network aimed at creating a neutral platform that would serve both as an integrated inter-ATM switch that would permit banks to link their ATM switch networks to NFS and as an Internet and e-commerce payment gateway to facilitate e-commerce transactions using debit/credit cards. Even though the Indian economy had experienced a major transition by this time, payments were still processed by thousands of regional clearinghouses operating in a decentralized system, with the RBI settling transactions on a net basis. India was still far away from adopting global standards.

To smoothen large-scale interbank transfers, RBI introduced two important money transfer tools – Real Time Gross Settlement System (RTGS) and National Electronic Funds Transfer (NEFT) in the year 2004 and 2005 respectively. While RTGS was launched as a fund transfer mechanism to permit the instantaneous transfer of money without any delays, NEFT was implemented based on Deferred Net Settlement system (DNS) where financial transactions were settled in half-hourly batches. By the time RTGS was increasingly used by central banks worldwide, India was a late adopter. It was the 69th nation to implement RTGS system in 2004, trailing nations like Cuba, Kazakhstan, Ghana, and Malawi.

In order to help it accomplish its objectives, the central bank created the Department of Payment and Settlement Systems (DPSS) in 2005 to focus exclusively on the systems for payment and settlement. RBI also charted a road map called “Payment Systems in India – Vision 2005-08”. The vision document highlighted that “A point of view which is being increasingly recognized is that the regulator should not be the service provider unless the payment system is systemically important”. It planned to establish an umbrella organisation with a solid technological platform that would deliver high-quality services to clients at a reasonable cost. The Payment and Settlement System Act, which was put into effect in 2007 also clearly outlined the responsibilities and rights of various players in the payment ecosystem. and empowered RBI to authorise a separate entity to operate retail payment system in India. As part of this, a dedicated team of RBI had a visit to Riks Bank, the central bank of Sweden and to Bangirocentralen (BGC AB), a not-for-profit entity setup by eight Swedish banks for providing retail payment services as a public good. Hence, the BGC provided a link to the idea of establishing new entity as a non-profit corporation. Based on this, RBI’s advisory board strongly recommended for the formation of a separate body as a non-government institution to undertake the management of clearing house operations and the payment and settlement system to ensure India’s payment system was at par with the global standards. National Payment Corporation of India (NPCI) was founded as a result of the RBI’s initiative to create a single organisation to manage the country’s whole retail payment system.

NPCI: Fostering Fintech Innovation Ecosystem in India

NPCI: Fostering Fintech Innovation Ecosystem in India

Founded in December 2008, the NPCI was an initiative taken by the RBI and Indian Bank’s Association (IBA) to operate the retail payments and settlement systems in India. Taking into account the utility nature of the objects of NPCI, it was decided that the entity would be registered as a not-for-profit organisation in accordance with the Payment and Settlement System Act, 2007 and would be jointly owned by a consortium of major banks who were competing players in Indian banking sector. IBA was entrusted with the responsibility to engage core promotors banks comprised of public, private and international banks to guarantee that different institutional viewpoints on payment systems were represented. State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda, Union Bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank N. A. and HSBC were the ten core promotor banks which infused a paid-up capital of U$13 million for setting up NPCI. Despite not making direct investments, the government made sure it had indirect control by owning the bulk of public sector banks. Members of its Board of Directors included an independent representative, as well as a nominee from the RBI, and representation from each member banks. NPCI was the first legal entity with the not-for-profit goal to offer equity shares using the private placement funding route and banks as a strategic investor not entitled to dividends for their investments.

NPCI began its operations officially only in 2010. Since then, the ten-year period between 2010 and 2020 might be referred to as the decade of payments in India due to the significant impact of NPCI on the nation’s retail payment systems. The objective of NPCI was to leverage technology to implement novel ideas into commercial payment systems, with the goal of boosting operational effectiveness and augmenting payment system usage. The retail payment industry had grown and expanded further with the variety of innovative retail payment products rolled out by NPCI (Exhibit I). Initially, the entity was entrusted with the task of managing the operations of NFS Switch, the backbone of the Indian ATM network with 37 members connecting 50,000 ATMs in January 2010.  The ATM network is aimed at enabling the interoperability of various bank ATMs and processing the majority of debit/credit card transactions in the country. NFS generated sufficient revenue for NPCI to be self-sustained from the start. During that period, Interbank money transfers in real-time round the clock, 365 days were a challenging task for the banking sector. Only NEFT and RTGS were available to users for financial transfers only during banking hours. There was a need for a real-time payment platform to facilitate interbank retail payment transactions.

Later in November 2010, NPCI launched Intermediate Payment System (IMPS) to provide an instant, round-the-clock interbank electronic cash transfer service that could be accessible by a variety of channels, including mobile, internet, ATM, and SMS. In the time frame, the Indian government was very keen on setting up a centralised database for citizens in India for national security purposes that led to the emergence of Unique Identification Authority of India (UIDAI), a statutory authority to create a biometric identification scheme for all residents known as a “Aadhaar”. With a view to increase the enrolment demand and promote government-to-person (G2P) payments, NPCI in discussion with UIDAI launched Aadhaar Enabled Payment System (AePS) in 2011 to enable bank customers to access their respective Aadhaar-enabled bank account and carry out fundamental banking operations using Aadhaar as their identity. In the same year, RBI shifted its Check Truncation System (CTS), an image-based check clearing system for rapid clearing of cheques, to NPCI for its operations. Under the system, the details of beneficiaries were encoded into the cheque and distributed digitally to avoid physical transit.

Despite all these initiatives, India continues to be a cash-based economy. Cash was predominantly used in over 97% of transactions. Payment using cards such as debit and credit cards had risen during the 2010-20 decade due to growing consumer awareness and internet penetration and the Indian card market was dominated by International Cards – Visa and MasterCard catering to the needs of higher-income group customers. However, due to the lack of a native pricing regulator, Indian banks had to pay a hefty affiliation fee to foreign card organisations for availing the card services. There were also increasing concerns from the regulators and corporates that these cards weren’t scaling well enough for people with lower incomes. The “Payment Systems in India – Vision 2005-08”, the RBI’s vision document had also highlighted the need to launch a domestic card targeted at the mass market. With the above context in mind, NPCI launched “RuPay”, the first domestic card payment network in India to facilitate electronic payments using debit, credit, or prepaid cards. It was expected that RuPay would act as an alternative for MasterCard and Visa in March 2012. During that period, the unbanked population in India was also very high as the majority of them were unable to afford a bank account due to the minimum balance constraint, and difficulty involved in the process of depositing and withdrawing from banks. According to the report by PricewaterhouseCoopers India, there were 557 million unbanked people in India in 2011[1]. Measures were needed from both the supply and demand sides to bank the unbanked population as it would be financially feasible for the commercial banks to have more customer base.

To increase the population with bank accounts, the government introduced Pradhan Mantri Jan Dhan Yojana (PMJDY), the biggest financial inclusion initiative in 2014. It also initiated connecting people’s Jan Dhan accounts, mobile phones, and Aadhaar cards to stop government subsidy leaks. The concept was popularly known as “JAM Trinity”. PMJDY intended to provide bank accounts for the unbanked population in India. This radical movement by the Indian government helped to reduce the size of the unbanked India population to 233 million in 2015.[2] NPCI also took several measures to promote the RuPay card in India with the support of RBI and the Government of India. The cardholders were offered Insurance coverage for performing their first transaction using a RuPay card. People who had opened bank accounts under the PMJDY scheme were issued RuPay debit cards with an inbuilt accident cover of Rs 1 lakh. Banks integrating RuPay were not required to pay a quarterly fee or entry fee to integrate with the card network. With the growing need of e-commerce transactions, NPCI strengthened the features of RuPay cards by introducing India’s payment gateway in 2014 that enabled the card holders for ATM withdrawals, payments at merchant locations, and online purchases, similar to the widely used Visa and MasterCard gateway.

Later, NPCI implemented two important web-based solutions – National Automated Clearing House (NACH) and Aadhaar Payment Bridge System (APBS) to facilitate bulk transfer of funds like subsidies, dividends, interest, salary, pension, etc. across bank accounts. NACH was implemented in December 2012 to replace Electronic Clearing Service (ECS), a system that was in use to handle bulk and repetitive payments across bank accounts. ECS was provided at more than 60 centers during that time, and recipients had to keep an account with one of the local banks to take use of the service. It took 3 to 4 days for Settlement in case of ECS. However, settlement in NACH happened within a day. Furthermore, in contrast to ECS, NACH had a distinct mandate registration reference number that could be utilized for subsequent transactions. Another special payment system implemented by NPCI was APBS which used Aadhaar number as a master key to electronically transfer government benefits and subsidies into the Aadhaar Enabled Bank Accounts (AEBA) of the intended recipients. Government Departments and Agencies utilise the APB System to transfer benefits and subsidies such as home subsidies under the Direct Benefit Transfer (DBT) program launched by the Government of India in 2013.

India was rapidly advancing in the technological space in 2014. The country had the fastest rate of smartphone subscriber growth among the top 30 smartphone markets in the world, with a growth rate of 55%. However, the smartphone penetration rate was at just 10% of all mobile subscribers.[3] To offer the last mile consumer in semi-urban, rural, and remote places with spotty or no internet access the most basic financial services, NPCI introduced “*99# service”, an Unstructured Supplementary Service Data (USSD) channel-based mobile banking service. This mobile banking facility is aimed at enabling users to use mobile banking without smartphones or an Internet connection. Customers could access financial services by just dialing *99# from their mobile registered with the bank. The service could work across all GSM service providers and handsets. It united several ecosystem partners such as Banks and Telecom Service Providers. The growth of digital banking in India was further accelerated when the government of India introduced the Digital India program in 2015.

[1]India’s unbanked population halves to 233 million“, October 15th 2015
[2] Ibid.
[3] Rai Anand, “India had third largest smartphone base with 117M users in 2013; to grow 45% in 2014: Mary Meeker Report“, May 29th 2014

The Emergence of Fintech and Mobile Wallets

The Emergence of Fintech and Mobile Wallets

For a very long time, banks have been India’s traditional gateway for developing payment systems. Over time, India had to be proactive in redefining the way ahead in the financial services sector allowing non-bank entities to enter into the payment sector due to the need for a variety of payment services and the rapid speed of technical advancements. These non-banks could collaborate with banks while also vying for customer loyalty by offering them technical services or by offering their retail electronic payment solutions. This led to the emergence of technology-enabled financial innovation “FinTech” in India.

The Prepaid Payment Instruments were one such technical advancement (PPIs) by the non-bank fintech players. RBI as per the guidelines provided under the Payment and Settlement Act, 2005 defined “PPIs as instruments of payment that facilitate buying of goods and services, including the transfer of funds, financial service, and remittances, against the value stored within or on the instrument”. PPI-enabled purchases of products and services using the value that has been saved on the instrument. The holder had to pay for the value held on them using a medium (cash, debit card, credit card, etc). PPIs could be in the form of Smart cards, mobile wallets, paper coupons, and online accounts. The mobile wallet was the most popularly used PPIs as they could be used for anything from shopping to bill payments to movie tickets. The mobile wallet was a digital account equivalent to a physical wallet. Users of mobile wallets may add up to ₹10,000 to their digital wallets using net banking, debit or credit card recharges, or other methods, and then use that wallet to make purchases like train, bus, and airline tickets, pay utility bills, and transfer money. With more people in India owning smartphones, the market for mobile wallets could soon become effective due to the fact they provided easy access, discounts, different payment options, and a vast merchant reach to their users. Due to the cheaper transaction costs and setup requirements compared to conventional card-based payment systems, merchants were also quickly adopting mobile wallets.

Although the concept of mobile wallet/e-wallet was introduced way back in 2004, it gained momentum only during 2015 with the new-age financial revolution driven by FinTech players like Paytm, PhonePe, Google Pay, etc. However, the biggest boost to India’s digital payment market came from demonetization process adopted by the Government of India in November 2016 to prevent the market’s use of black money. This move caused a severe money shortage because the majority of transactions in India were cash-based. Since the government demonetized ₹500 and ₹1,000 currency notes, over 86% of the country’s currency was removed overnight from circulation and caused India to experience its worst-ever cash crisis, has turned out to be the biggest win for mobile wallet businesses. The value of transactions through mobile wallets increased to ₹20,600 crores in 2016 from ₹ 8,200 crores in 2015.[4]

However, concerning laundering and leakage through the new digital payments infrastructure, RBI devised guidelines to follow “know your customer” (KYC) requirements for PPIs stringently. Those Mobile Wallet users who fulfilled the KYC norms were permitted to increase their wallet limit to ₹1 lakh instead of ₹10,000. Subsequently, the number of transactions made using mobile wallets increased dramatically in 2016—from 537 million to 2,407 million—a 348% rise.[5] However, interoperability among banks and non-bank fintech players was a challenging one. Every time, the user had to preload the mobile wallets with the preferred amount of money to do online transactions. This needed for a technology that would facilitate interoperability among banks and fintech players whereas users could directly pay from their bank accounts using mobile wallets. While IMPS was successful in P2P transactions, P2M digital transactions were the major issue till 2016. Concurrently, NPCI sought methods to enhance the compatibility of its ever-growing range of products. There was a need for a unified system that could automate and standardize the various payment systems like RTGS, IMPS, and NEFT which were in use in India before 2016. While researching best practices internationally, a tailored solution was created to address regional demands. NPCI collaborated with the open-source developer community ‘iSPIRT’[6], to design and develop a technological solution. This led to the emergence of the Unified Payments Interface in 2016.

[4]Volume of digital transactions climbed to 84 percent in 2015-16, says RBI“, 30th December 2016
[5]Post-Demonetisation, Mobile Banking & Wallet Transactions Skyrocket while Card Usage Increases“, November 7th 2017
[6] iSPRIT – the Indian Software Product Industry Round Table was set up to help Indian startups and companies create and market great software products

Unified Payment Interface (UPI)

Unified Payment Interface (UPI)

On April 11, 2016, UPI, an instantaneous real-time payment system, was introduced by Raghuram Rajan, former RBI Governor, and Nandan Nilekani, Co-Founder of Infosys. It allowed users to transfer money instantaneously between two bank accounts via a smartphone app. Built over the IMPS technology, UPI was a single-window mobile payment system that could be completely interoperable between banks and non-bank fintech companies to facilitate inter-bank P2P and P2M transactions. The intention was to improve user experience and promote interoperability by streamlining and providing a single interface for all NPCI services. As a unique payment system in the world, UPI technology had been designed in such a way that it could work on a pillar push-pull interoperable model where there will be a remitter/beneficiary front-end PSP (payment service provider) and remitter/beneficiary back-end bank that settles the monetary transaction for the users (Exhibit II). Using this interoperability feature, Card issuers, PPI issuers, payment system providers, and participants in different payment systems could settle payment transactions across systems without participating in multiple systems. It facilitated the users to do a payment transaction across payment networks irrespective of the service provider. Payments could be made using multiple identifiers, such as a bank account number, an Aadhaar number, IFS Code, and a customized Virtual Payment Address (VPA), etc. Users could use their Virtual ID to “pay” (push) and “collect” (pull) money without providing their credentials like bank account number, IFS Code, etc. when they make a payment every time. It ensured multi-layer security by following one-click, two-factor authentication protocol where users could transact using two passcodes – one for initiating transactions using smartphone and the other one for authorising the payment.

NPCI was also very keen on making UPI so reliable and affordable. Its team had recognised that building a platform with commercial software for more than one billion people would be very expensive and resulting in depending on special partners. According to Sathish Palagiri, Chief of Mobility Solutions at NPCI, “Use of commercial software for UPI would have increased costs a lot, and over time you would have dependency on special partners. You can’t run a citizen-scale platform if the cost of system is too high. We can’t have a vendor lock-in for a critical national system. Our board decided UPI should be completely built on open source, and use of commodity hardware”. Open-source technologies and commodity hardware such as Java, TDB Cassandra etc. were used by the UPI team to reduce the cost and make the system more reliable and scalable. For security purposes, it made sure that the transactions go to two different servers for processing, in case one is down or slow. Because UPI technology was the most accessible and advantageous to banks and payment system providers, UPI transactions were only ₹0.50 or less in cost compared to NEFT and IMPS, which had minimum transaction fees of ₹2.5. As the transaction fee was so tiny, most banks and payment applications completely waived of merchant discount rate, the cost that merchants must pay banks for them to accept digital payments from their customers. This caused merchants to drive UPI.

NPCI also collaborated with card institutions like Mastercard and Visa to develop BharatQR which would serve as an interoperable and low-cost acceptance solution for merchants. According to Sathish Palagiri, “The Merchant needed only his mobile phone and the printout of a QR code.” UPI was also considered a cheaper alternative to Point-of-Sale Machine (POS) as the merchants had to pay a service charge of around 1.25% to 2.5% of the transaction value when debit/credit cards were used by end-users. While UPI was made free for end-users and merchants, the UPI stakeholders had to incur costs for every transaction done. According to RBI, the total cost incurred by all parties for a P2M UPI transaction ticket priced at Rs 800 was around ₹2, or 0.25% of the transaction value.[7] Add to it, the uncertain cost of UPI P2P transactions was also an added burden to the stakeholders. NPCI was very particular in not charging charges on UPI transactions by merchants and users.

However, in the initial stages, UPI was primarily meant to provide interoperability infrastructure for the banks. NPCI restricted the UPI service only to banks that tied up with NPCI for the launch of UPI. In the pilot program, only 21 banks became members for availing of UPI technology. Later larger banks like SBI and HDFC joined the system helped the nation to move towards its cashless journey further. Every bank that joined the UPI launched their own UPI apps and engaged in promoting them to their customers. The customers of these banks could link their multiple bank accounts into the single mobile UPI app run by these banks. The task was a challenging one for the customers who were maintaining more than one bank account. They had to download multiple bank UPI apps for a variety of their needs. Nevertheless, Non-banking companies like mobile wallets were still not given the interoperability facility.

[7]Who should bear the cost of UPI?“, September 4th 2022

Integration of Mobile Wallets and UPI

Integration of Mobile Wallets and UPI

Later in 2018, the guidelines issued by RBI “Prepaid Payment Instruments (PPIs) – Guidelines for Interoperability” enabled the non-bank fintech PPI issuers to operate on the UPI platform. As per the RBI guidelines, Interoperability of PPIs could be enabled in three stages. Firstly, the interoperability of PPIs issued as wallets via UPI, secondly interoperability between wallets and bank accounts via UPI, and thirdly interoperability of PPIs issued as cards via card networks.[8] Following these guidelines, many mobile wallets started operating on UPI platforms. UPI payments increased dramatically from over Rs 69 billion in 2017 to Rs 1,524 in 2019. UPI had a market share of more than 80% in categories such as person-to-person payments, bill payments, and cashbacks, and a market share of around 50% in retailers and recharge in 2019.

Exhibit 2: Payment and Settlement Process using UPI Technology Source: William Cook and Anand Raman, “National Payments Corporation of India and the Remaking of Payments in India“, Working Paper, May 2019

[8]Prepaid Payment Instruments (PPIs) – Guidelines for Interoperability”, October 16th 2018

Launch of BHIM

Launch of BHIM

When NPCI initiated to promote of UPI during its initial period in 2016, not all Indian banks were involved in the UPI plan because of the potential threat of performing banking transactions through non-bank fintech platforms. Smaller banks were not ready to onboard as they did not have adequate resources for adopting UPI technology. NPCI had realised that more banks had to join the UPI movement in order to migrate to fully cashless economy. With a view to encourage more banks to adopt UPI, it wanted to create its own UPI app that could be used by banks who would become members of UPI and banks who were unaffordable to UPI adoption. With the help of the iSPIRT, NPCI moved forward with this goal and developed an app. The software was named BHIM in remembrance of Dr. Bhim Rao Ambedkar, a respected advocate of deprived people and a chief architect of the country’s constitution. The app was launched by NPCI in December 2016 as an aggregator of UPI services across various banks. The governmental declaration of banknote demonetisation in November 2016, which left 86 percent of cash notes invalid, boosted BHIM.

Powered by UPI, BHIM was built as a standardised and interoperable system that could easily interface with various banks and fintech apps for instantaneous real-time transactions. Banks and fintech firms could incorporate BHIM app’s features and functionalities into their own applications by using the APIs that BHIM offered. These APIs made it simple to integrate BHIM-powered transaction features into other applications. Because of its multibank compatibility, customers could link their accounts in different banks to the BHIM app. NPCI developed the app by integrating the USSD technology into BHIM. Through this integration, the variety of services offered to consumers is further expanded by enabling smooth interaction between USSD-based and UPI-based transactions. With the use of text based USSD codes, users of this system could conduct digital transactions even in the absence of a smartphone or internet connection. On their mobile phones, users could start transactions by dialing USSD *99# code.[9] Sharad Sharma, co-founder of iSPIRT claimed that “It is one of the most limited apps in terms of functionality. In terms of smoothness, it is well-designed. But it is meant to be a reference app.”[10]

According to Praveena Rai (Rai), COO of NPCI, “BHIM was introduced when digital payments started getting encouraged by the Government. UPI Was also at an early stage. A partner for UPI was necessary for a disruptive payment experience and to move forward. Discussions have happened between banks and non-banking financial firms to participate in the digital payment ecosystem. It gave the notion that Government should set the first example of a digital payment initiative. That was the genesis of BHIM. BHIM also provides a direct consumer payment interface that showcases the best example of user experiences, and all other NPCI products are B2B products. BHIM is the only B2C product of NPCI. BHIM has an interface and product that directly engages with the customers.”

BHIM UPI app was available on both on iOS and Android platforms and as a biometric enabled payment app, it facilitated the users to make payments using their Aadhaar card details linked with their bank account. As a payment service provider, the app enabled a range of cashless transactions through bank account number, mobile number, QR code and VPA. The app was made accessible in 13 languages. Both direct payment using UPI ID and online shopping with Pay by UPI and BHIM options were available to users. Launching the app, the then Prime Minister Narendara Modi remarked, “Right now, business happens by way of [currency] notes and coins. That day is not far when all business transactions will be conducted through the BHIM app”.[11] The app was downloaded by 1.1 crore users in a short span of 20 days of its launch.[12] By September 2017, BHIM accounted for about 42% of UPI transactions in India. The value of BHIM transactions further increased to 1.64 crore in July 2018, estimated at ₹6,692 crore, from 43,000 transactions in December 2016.[13] According to Ritesh Pai, Chief Digital Officer, Yes Bank, “Overall, BHIM was a very positive move. It also helped penetrate the digital payments ecosystem. A lot of smaller banks, like cooperatives, use BHIM as they may not have the wherewithal to develop their own apps.”

[9] Talgeri Kunal and Singh Shelley, “BHIM app: ‘A technology ecosystem for the poor“, January 12th 2017.
[10] Ibid.
[11] Panchal Salil and Balachandran Manu, “UPI 2.0, BHIM and the new shape of payments“, September 3rd 2018
[12] Choudhury Aparajita, “BHIM app vs. existing UPI integrated apps: which will propel cashless payments in India?“, 24th February 2017
[13] “UPI 2.0, BHIM and the new shape of payments”, op.cit

The Road Ahead

The Road Ahead

The improved version of the app “BHIM 2.0” was released on October 1 2019 with new features like a Donation gateway, the ability to link multiple bank accounts, the ability to apply for upcoming Initial Public Offering (IPOs), the ability to gift money, etc. Along with automated payment capabilities, BHIM 2.0 also included the ability to pay bills via an integrated bill-paying system called Bharat Bill Payment System (BBPS). It provided customers with interoperable and accessible bill payment services via a network of registered agents known as Agent Institutions (AI). This network allowed for different payment modalities and rapid payment confirmation. Besides 13 languages that were already supported by BHIM, the new version of the BHIM app was launched with additional features of supporting three more languages: Konkani, Bhojpuri, and Haryanvi. The ₹20,000 cap under BHIM 2.0 had been raised to ₹1,00,000 for approved merchants. To increase the usage of BHIM app, the government launched many referral and incentive programmes as well. Through the referral programme, the existing users could receive rewards for introducing new users to the BHIM platform. These promotions aimed to attract more users and boost the number of transactions made using the BHIM UPI app.

The Indian government actively involved in promoting BHIM app by adding more partnering bank. By 2019, the BHIM app had been accepted by 102 partnering bank and been downloaded over 36 million times.[14] These partnering institutions were gearing up to align their digital payment solutions under the umbrella of BHIM. Henceforth, BHIM featured as a prefix to the UPI application of partnering banks – AXIS BHIM and HDFC BHIM etc. According to Rai, “Co-Branding happened early in introducing digital payments. The government had policies relating to the promotion of digital payments. So, BHIM has to take part in co-branding with these banks. Once the UPI evolved and other apps started growing in the ecosystem, the banks that have built their independent payment apps, like BHIM Axis, merged with their original banking app. BHIM also encouraged this integration, and converging these apps continues.”

The widespread use of digital payments and transactions was further spurred by the COVID-19 epidemic. During the pandemic, contactless payment methods like BHIM became more crucial in lowering the possibility of virus transmission via physical cash. Users could make contactless payments safely and securely just by simply scanning QR codes. Lockdowns and other limitations caused many people to purchase online for necessities. BHIM enabled customers to buy groceries, medications, and other necessities from e-commerce platforms with more ease by facilitating online transactions. By eliminating the need for in-person visits to service centres, the app enabled users to conveniently pay their mobile recharges, utility bills and other regular payments from the comfort of their homes. BHIM facilitated easy fund transfers, which was very helpful for those who wanted to receive or send money to friends and relatives during the lockdown period. BHIM UPI was used by Indian government for the purpose of providing financial assistance and support to pandemic-affected people and families. During the pandemic, BHIM and other UPI-based platforms were used by government to transfer funds directly to the bank accounts of beneficiaries, ensuring a quick and effective distribution of money. The pandemic hastened India’s shift to a more digital economy by driving up the use of BHIM and other digital payment systems. This change made it simpler for consumers to obtain and use digital financial services, hence promoting financial inclusion in both urban and rural areas.

In spite of spectacular development in Indian fintech industry and the initial surge in UPI transactions, BHIM appeared to be falling behind competing apps. Companies like Google, Paytm, and PhonePe had been at the forefront of this boom with their apps. Paytm processed more than 94 million transactions, compared to over 100 million handled by Phonepe.[15] By March 2020, the market share of BHIM app by volume dropped to 5.37 percent. In the Indian UPI payments app industry, Google Pay, Walmart’s PhonePe, and Alibaba-backed PayTm were vying for top spot. On the word of Rai “the App and UPI are entirely independent. BHIM must compete with other apps. BHIM has the trust of the ecosystem for not taking any unfair advantage. The market is enormous; it is growing at a fast pace. BHIM certainly has its market share and is taking the competition in a positive spirit.” According to Bipin Preet Singh, co-founder, MobiKwik, a leading UPI mobile app, “At events like the Olympics, you have a mascot. BHIM was mascot for UPI. It created awareness and trust among users at the peak of demonetisation. Others followed.”[16]

Analysts were sceptical about the promotion of just one app rather promoting caseless economy as a whole. According to Damandeep Singh Soni, Vice President, Mobikwik, “When demonetisation happened, we were quite happy because we aligned with the cashless economy. Now the government has launched an app called BHIM, which has really helped create awareness about the various apps in the country. For me, BHIM has really helped me get more users because cashless is quite popular among consumers in India. So in that way, it has been positive. However, the fact is that the government is promoting just the BHIM app; it should have been done differently because government should focus more on promoting cashless society rather than promoting just one product.”

The Indian government continued to market BHIM services in neighbouring countries through partnerships with respective central banks as part of its aspirations to expand its digital presence globally, Bhutan was the first country to implement BHIM UPI QR-based payments. Later, India collaborated with authorised Payment System Operators in Nepal to develop interoperable real-time P2P and P2M in Nepal and to implement BHIM UPI for the greater digital public good. Later, Oman, UAE, UK and France also joined making BHIM UPI live in their countries. It also partnered with countries such as South Korea, Japan, Hong Kong, Taiwan, Malaysia, Philippines, Thailand, Singapore, Vietnam, and Cambodia for implementing BHIM UPI QR-based payments. India was also in talks with 30 countries to expand its presence.

In a pan-India study conducted among 213 BHIM end users across India, it was evidenced that majority of the users were able to access the service of more banks through BHIM app, the speed of BHIM App was faster than other UPI Apps, the billing and transaction processes were accurately handled, availed banking service without requiring internet connection and BHIM cash back, referral bonus schemes were attractive. Majority of the respondents were of the opinion that the risk associated with using BHIM App was low, their privacy was protected through three-level authentications. They had a trust that the app would not lead to any transaction frauds and their confidential information was delivered safely to customers. They also accepted that they prefer BHIM UPI as it was the official app from NPCI (Government-backed App) and it was flexible and convenient to carry out their tasks as it was convenient to carry mobiles for making payment to the place of their trade. It also helped them to locate nearby UPI Enabled Shops and to understand terms of service of using digital payments through BHIM App as it was available in different languages and there were adequate helplines in case customer faces any issue with BHIM Application. The end users were of the opinion that NPCI should take adequate efforts to familiarise the BHIM app among general public and to give more cash back rewards to make it more competitive in the UPI market.

According to Rai, “NPCI is constantly trying to spread awareness about digital payments. The enormous leap in India’s digital payment ecosystem happened through word of mouth. It is not through advertisements or other media. They also try to reach people through Bank Seva Kendra and Common Service Centers. The team is also associating with certain NGOs. The BHIM app is available in more than twenty native languages to make it more accessible to people. The 2047 vision of BHIM is to make digital payments available to every person in India. NPCI promotes digital payments regardless of age group and focusses on the pain points as well to understand the hindrances. The debit card linking was a hurdle for some people, so the team is trying for an Aadhaar-based payment system. NPCI continues to research improvising user experience, and enormous technology updates are coming.”

As India pushed forward with further opening up the market for various companies to engage in the UPI ecosystem, NPCI declared the open-source licencing mechanism for BHIM App. With the launch of the model, NPCI planned to bridge the gap by allowing entities that did not have their own UPI app to develop their own UPI app to conduct online inter-bank transactions in real time utilising the source code of the BHIM app. By 2021, more than 60% of all retail payments made in the nation were made through NPCI. In order to mitigate the risk associated with India’s rapidly developing payment infrastructure ecosystem and encourage competition to NPCI in developing new products and improving customer convenience and safety, RBI decided to open window for private companies with a minimum paid-up capital of ₹500 crores and net worth of ₹300 crore to establish NPCI-like umbrella organisation.

The proposed New umbrella Entities (NUE) would set up, operate and manage its payments system. They would also be responsible for payments and settlement system for its banking and non-banking fintechs partners. Further they would also be interactive and interoperable with systems operated by NPCI so that consumers would not be affected. The scope of activity of NUE would be comparable to that of NPCI, but with the possibility of doing business ‘for profit’. The proposed entities have the option to be either not-for-profit or for-profit as such terms are defined in Section 8 of the Companies Act. According to RBI, “Availability of NUE offering products which will lead to the redundancy of existing systems can, besides addressing concentration risk, also encourage competition and innovation, thus contributing to financial stability”. However, analysts were of the opinion that RBI’s decision to permit private entities as new umbrella entities to run nations’ retail payments and settlement system would entail great risk. They were also skeptical about whether the digital payments would still be available as public good.

[14]In 2016 the shareholding was broad-based to 56 member banks to include more banks representing all sectors“, 27th September 2019.
[15] Ibid.
[16] Singh Shelley, “BHIM app behind country’s digital payment ecosystem?“, January 4th 2018  

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