Credit on UPI: UPI gets new wings (#51)

Launch of credit on UPI calls for a new phase for the payment system

Welcome to the 51st issue of Unit Economics. Some personal news before starting: I joined the small team at CheQ last month to build something I am super bullish on. More details on what the team is working on will become public soon, but if you feel you want to join a highly motivated team working at the intersection of payments & lending, please write to me on prince@cheq.one.

As for today’s write up, I discuss credit on UPI - an area I worked closely on over the last ten months at Jupiter, and which promises a new phase for already-successful UPI. Dive in!

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UPI is used to seeing wins.

In FY-22, the system processed over $1 trillion in transaction value. In Apr-22, it saw over 5.5 Bn transactions, growing 110% year-on-year. This magnitude of real-time transactions volume is almost 3X that of the closest competitor country (China), and more than 6X than those combined in the US, UK, Canada, Germany, and France.

The growth may be surprising, but the success should not be. With immediate Account-to-Account transfer, the delta of change in payments experience with UPI was significant enough to draw consumers and make them stick. For merchants – digital payments acceptance with low-cost static QRs, quick credit settlements, and zero MDR were all-sufficient benefits that made them organically accept UPI and push its distribution. Some estimates put the number of active UPI users at 200 Mn+, including 50 Mn+ small merchants. Without hesitance, for a 6-year-old payment system - UPI is doing exceedingly well.

With these numbers, you can be forgiven for not thinking beyond the existing universe of UPI. But a reflection on the core of the UPI can inform us of a few gaps and opportunities.

For example, UPI – in its simplest form – allows secure and immediate transfer between two bank accounts, but puts restrictions on who can send money, how it can be sent, how much, and where it can be received. We can do a short exercise on all four areas and notice the immediate potential of UPI for (A) improving the transaction limits for B2B, (B) enabling popular banks outside India on UPI for overseas payments, and (C) solving for when millions don’t have internet.

This is only to say that there is room for making UPI more inclusive, and a few things go along as well with inclusion as credit. Just as users today find alternatives of debit cards in credit cards, of prepaid wallets in credit-line backed co-brand cards, it is valid to question why all UPI continues to run on debit still – requiring users to link their bank accounts on a PSP or third-party app.

It is not that NPCI has not tried to make lives easier with credit on UPI. In Aug ’18, UPI 2.0 was launched with lots of fanfare by suggesting a way to allow credit payments on the system. The limitation, however, was that the credit had to be a drawdown from an overdraft account, and – to make it worse – this account had to be issued by the same bank that issued the UPI handle, i.e. by the UPI payment service provider (PSP). The barriers were crippling enough to keep the traction close to none for the overdraft feature.

Unfortunately, the attempts since have been almost non-existent despite calls for clarity from the industry. All while the credit industry has had an explosion of unsecured short-term loans with the low-cost BNPL.

With the growing affinity to credit for the unserved and underserved populations, and the large-scale acceptance & distribution of UPI - there are fewer cross-sections where the opportunity is so obvious. This has only made the fintech companies more desperate to find a way to provide credit on UPI.

Few, including our team at Jupiter, made attempts previously to find a middle ground but none fell on the right side of the grey to continue operations. Even PostPe, which inaccurately positions itself as a credit on UPI app, only allows bank-to-bank transfers within its closed ecosystem of BharatPe registered merchants.

This changes with the RBI regulations for PPI interoperability. For instance, bank accounts and prepaid payment instruments (PPIs) were long considered accepted underlying accounts for UPI transactions. However, there always remained questions on how a PPI Issuer would act as a PSP and allow UPI transactions from virtual wallets to bank accounts. But the mandate from RBI to make wallet-based PPIs work in conjunction with UPI now provides a viable path to credit.

With the interoperability mandate, the push from PPIs for UPI PSP certification came fast. And we, at Jupiter, closely watched LivQuik become the first in the market to achieve the distinction. With the understanding of how big and real the market opportunity is at the center of UPI and credit, over the last ten months - the team at Jupiter & LivQuik derived and oversaw a path to get the first-compliant credit-on-UPI app out in the market (Jupiter Edge).

This required, quite overwhelmingly among other things, that the team

• Build a full-KYC compliant onboarding,

• pass tons of NPCI test cases to make the app PSP-compliant,

• partner with an NBFC to lend, and

• partner with LivQuik to issue interoperable wallets

Given that the market now has a PPI issuer that can act as a PSP, issue UPI handles, and allow amount kept within a virtual wallet to be used over UPI – there is an opportunity to increase credit penetration for 200 Mn+ active UPI users, and drive higher engagement for a ready merchant base.

Close to the launch, we noted that many deeply understand the opportunity and are vying to become next in line to issue a similar offering. With this, it should not be surprising to see the space get crowded within the next year.

However, given the experience of the last year - until the market evolves, there are a few chinks that hopefully get more attention from the RBI and NPCI.

Zero MDR hurts innovation

More than half of the country’s population stands absent from formal credit today, and with NPCI hoping soon to take the UPI offline and to the remotest corners of the country – there is a large prospect to utilise the payment system for the uber goal of credit inclusion.

The absence of MDR, however, continues to hurt issuers. These issuers, without the revenue on transactions, have to take higher risk with credit on UPI and rely on stronger collections and underwriting. As a second-order effect, this limits the loan issuance to a smaller group as lenders adopt more risk-averse underwriting, and acts as an entry barrier to those without the risk appetite or capital to enter.

In this regard, as the use cases for UPI expand from debit to credit, from online to offline, and from domestic to international – the industry demand for fair interchange rates and fees on UPI should only get louder.

Need remains for regulatory clarity

There have been attempts from NPCI to seek clarity from fintech companies and to persuade RBI on credit on UPI, and although the PPI route appears safe – there is a need for immediate clarity on KYC, fund-flow, audit requirements, and other parts as the model soon extends to tens of others.

Otherwise, as we see often, the assumptions and varying interpretations of the same laws give room to negligence, conflicts, and immature execution.

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We can, however, be certain that credit suggests a new phase for UPI and that this should be looked at with hope and ambition, rather than with fear. For all on the sidelines, go on and get your hands on Jupiter Edge to see its power in action.

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If you have any views or feedback to share on the topic, feel free to add a response below or to share your thoughts with me over Linkedin. In case you feel your friends or family would be interested in reading about payments, feel free to share the blog with them as well. See you in a couple of weeks!