UPI Lite: Filling the Gaps in UPI (#61)
UPI's attempt to fight transaction failures, user experience gaps in low value transfers
Welcome to the 61st issue of Unit Economics. In this article, I share a short promising note on the new kid on the block - UPI Lite. Dive in!
We have been overly bullish on UPI for some very good reasons. In Feb ’23, UPI processed over 8,000 Mn transactions, with more than 70% of them ₹500 (~$6) or less in value.
This scale demands high optimism. But wearing the hat of a skeptic, we can notice the trade-offs this growth comes with. Most visibly, the increased costs borne by platform stability, a guardrail many payment methods rarely compromise on.
For UPI, this translates into a low transaction approval rate than desired. For instance, in Feb ’23, the average transaction approval rate for the top 50 remitter banks was 91.76%. The majority of the failures were accounted by Business Declines (BD, 6.07%), i.e. “due to a customer entering an invalid pin, incorrect beneficiary account etc., or due to other business reasons such as exceeding per transaction limit, exceeding permitted count of transactions per day, exceeding amount limit for the day etc”. The business declines are risk measures that are placed to ensure proper user authentication, and to limit misuse.
Take these away, and the Technical Declines (TD), i.e. “due to unavailability of systems and network issues on bank or NPCI side”, still accounted for 2.07% of failures in absolute terms. To give more weight to the number, the percentage converts to >174Mn transactions that were termed as Technical Declines in Feb, or >6Mn on an average day.
Those who have worked on UPI systems would take a huge sigh reading this. The pains of both scheduled and unscheduled remitter downtimes, the constant follow-ups with the PSPs, the transaction statuses that stayed Deemed, the reconciliation headaches - all systematic realities many have had to adapt to.
For the customers on the other side, the few anxious moments every time we enter our UPI PIN and wait for the transaction to turn into success, hoping that it doesn’t get stuck in the 45-sec pending loop, have become a regular part of our UPI experience.
This break in the experience did not go unnoticed by the regulators. NPCI has released tens of circulars with processes to optimise approval rates. But we are yet to reach any definite solution to the problem that could allow a 99%+ confidence.
Until, in Sept ’22, the RBI launched a solution that would improve approval speed and resolve success rate worries for low-value transfers - UPI Lite.
How does UPI Lite work?
UPI Lite is designed as a virtual on-device wallet that could be used to store upto ₹2,000 at any single instance and allow transfers upto ₹200 in value. Think of it along the lines of a regular Prepaid Payment Instrument (PPI) issued for digital wallets or prepaid cards.
UPI Lite maintains the convenience of payments acceptance of QR offered by UPI, while not requiring the transaction to be routed through your linked bank account. Instead, the amount is deducted from the UPI Lite balance allocated to a particular user – taking away any technical declines that may otherwise happen due to the remitter bank.
But isn’t the transaction limit too low?
Not as per the evidence. The UPI statistics suggest that more than 84% of all P2M transactions are of ₹500 or lower in value. I assume a power law in the distribution basis some previous experience on UPI consumer apps and would estimate ~50% share of UPI P2M transactions within the ₹200 boundary, indicating a healthy enough coverage. A similar estimate was shared by an NPCI circular in May ’22.
For a subset of customers, mainly within tier-2 and tier-3 cities, the proportion of transactions within ₹200 may be 90% or more. With UPI Lite, they would be entertained by the lack of transaction count limits that they otherwise face on UPI. Here, the user is given a free hand to perform as many transactions as they want to, operating within the overall wallet limits. Further, UPI Lite allows for upto ₹4,000 daily transaction value, indicating upto two top-ups of ₹2,000.
To make the experience of small-ticket payments more hassle-free, UPI Lite does not require the customer to enter a 4- or 6-digit PIN. No-PIN transactions are usually double-edged swords balancing both user experience and security. But with a transaction limit of ₹200, the risk is partly mitigated. For the rest of the apprehensions, the flexibility of a user-level selection for PIN/no-PIN may counter the doubts.
A welcome consequence of moving from the UPI to an on-device wallet is a reduction in the account statement clutter, where the statement is otherwise filled with tens of non-customer-friendly entries. With UPI Lite, only the withdrawals towards the wallet will show up in the statement – and the low-ticket transfers would not. We only need to look into the valley of dead expense management apps that have spent years to solve this to understand the merit.
Within the first three months of its launch, UPI Lite had seen only 0.66Mn transactions. This low adoption was largely due to the absence of the functionality on the popular UPI apps, and a low push for adoption of the same by the leading issuers, apps, or regulatory bodies.
However, by Feb-end, Paytm had ventured to offer UPI Lite on its application – which gave the method its first true push. Since, Paytm has claimed an adoption of >2Mn users on UPI Lite within its first three weeks – who altogether process more than half a million transactions daily.
The UPI statistics suggest that Paytm processes >40Mn transactions daily, which would imply a 1.25% share of UPI Lite on Paytm within its first month. Early days, but the numbers are encouraging.
What next for UPI Lite?
The benefits of (a) high approval rate, (b) seamlessness of no-PIN, (c) low statement clutter, and (d) interoperability with existing UPI QR - all signal an improvement in payment experience for anyone that frequently does low-value UPI transactions.
I imagine that the next phase for UPI Lite would require that,
Other popular third-party application providers (TPAPs), particularly PhonePe, and GPay, launch the functionality on their apps, which I assume they would already be in the advanced stages of developing,
Activation campaigns are run for onboarding users to UPI Lite, especially campaigns designed to drive the critical actions of top-up and merchant transactions, in addition to marketing campaigns educating users of the benefits,
The amount-specific auto-switch of payment methods is designed to encourage the usage of UPI Lite for lower transaction values. For example, when entering the amount – the default payment method should automatically switch to UPI Lite when the entered figure is less than ₹200 and switched back to the primary account on UPI when the amount breaches the boundary,
A separate MDR structure be devised for UPI Lite to help merchants that largely accept low-ticket size transactions. Perhaps a zero-MDR on UPI Lite for a couple of years, and otherwise differentiated MDR on UPI may be enough push to bring it into the mainstream.
As a user, I personally champion the experience of UPI Lite and would want to imagine a 20-25% market share for it of all UPI transactions within the next three years. I will keenly observe and cover the progress, and if you have any alternate thoughts or insights on the topic – happy to hear and discuss them. Until next time!
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 few weeks!