National Payments Corporation of India's growing clout: How NPCI is setting itself up to conquer the globe

Five years ago, the National Payments Corporation of India (NPCI), a lesser-known organisation pioneering financial infrastructure in the country, held an offsite meeting for senior management under Dilip Asbe, the newly appointed MD & CEO .

The mood was one of optimism, as NPCI was celebrating the success of the Unified Payments Interface (UPI) in achieving 1 billion transactions per month. UPI, introduced in April 2016, facilitates swift, 24/7 money transfers between bank accounts in India via a QR code. Not content with that milestone, Asbe—an engineer by training who has had stints with BSE, global money transfer giant Western Union, and payments player Euronet Asia Pacific—surprised everyone by announcing a target of processing 1 billion transactions a day within five years.

At that time, NPCI was handling approximately 25 million transactions a day, a considerable 37 times lesser than Asbe’s ambitious goal. Fast forward to today, and though the target hasn’t been met, UPI transactions are breaking records, registering a remarkable 393 million transactions each day, just three times shy of the initial target. Enter the disruptors: The pandemic, which accelerated digital payments; non-bank giants like GPay and PhonePe pushing boundaries with cashbacks; and distributing ubiquitous QR codes to small merchants, from chaiwallahs to vegetable vendors. New use cases, which Asbe was banking on, also emerged, ranging from paying utility bills and investing in the stock market to global remittances and beyond.

This juggernaut is now charging towards meeting the goal of 1 billion transactions a day in the next two years. What will fuel the next phase of UPI’s growth? It’s not just debit transactions; it’s about credit on UPI, which is the next big thing. There is also a global expansion underway into over half a dozen neighbouring countries.

To put UPI’s achievements in context, San Francisco-headquartered Visa reigns supreme, swiping 212 billion debit and credit transactions annually; not far behind, New York-based Mastercard boasts 170 billion transactions; then comes NPCI, which has already registered 150 billion transactions per year. At the current growth rate, NPCI is expected to surpass the combined volume of both Mastercard and Visa in the next two to three years.

Considering NPCI’s stellar growth, it doesn’t seem out of reach. A crucial distinction lies in UPI’s composition, predominantly debit transactions, unlike the global networks that encompass both debit and credit card transactions. But here again, the next big product is the credit line on UPI without any plastic card, which will push small-ticket digital loans on the fly. Second, NPCI’s success shows that it could change how the whole world makes payments. And do it at a far lower cost to customers.

Still, there’s more to India’s highly sought-after payments firm. The NPCI aspires to join the ranks of leading tech giants such as Microsoft, Google, Amazon, Apple, Meta, and other industry powerhouses, by embracing cutting-edge deep-tech advancements. Asbe says although NPCI is currently engaged in open source, AI, and distributed ledger technologies like blockchain, the ultimate objective is to excel in these domains.

Kunal Kalawatia, who heads the product function at NPCI, and is responsible for a range of products including Aadhaar-based payments, BHIM, RuPay, NETC, NFS and UPI, stresses the crucial role of deep human anchoring within the organisation. “We call it deep human and deep tech,” says Kalawatia, stressing that the demand for most of the products stems from consumers.

The NPCI follows a systematic approach that integrates design thinking. This involves articulating the problem, engaging with the ecosystem, gathering diverse ideas, filtering them, conducting a feasibility check, and then developing them. “It’s a very deep human process. It takes its own time and pace,” says Kalawatia.

Some of these principles were formulated by Infosys Founder N.R. Narayana Murthy, the first chairman of the 15-year-old NPCI. In the first five years, NPCI was primarily a buyer of technology, with complete dependence on outside vendors. NPCI was promoted with the support of the Reserve Bank of India (RBI) by several banks as a non-profit organisation. The new team, with Asbe as the first employee and A.P. Hota as MD & CEO, operated from two modest rooms within the Indian Banks’ Association’s (IBA) offices.

It initially got charge of the National Financial Switch (NFS), which runs the ATM network in the country. It also developed the Cheque Truncation System, or CTS, which clears cheques electronically. The NPCI also oversees FASTag, driven by RFID technology, ensuring smooth passage through toll gates. In fact, NPCI is working very closely with RBI on its central bank digital currency (CBDC).

In August 2013, Murthy had to exit the NPCI after taking charge as Executive Chairman of Infosys. But another Infosys Co-founder, Nandan Nilekani, stepped in to lend support as he was the Chairman of the Unique Identification Authority of India (UIDAI) then. Being a technology expert, Nilekani encouraged NPCI to think bigger. It is he who motivated the young organisation to create UPI. Interestingly, he advocated the idea of NPCI using open-source networks, allowing external developers to contribute to software development.

It was Murthy who fostered a culture of profitability and self-sufficiency. NPCI today makes annual revenues of Rs 2,225 crore, a surplus of Rs 809 crore, and has created assets of Rs 5,571 crore. (See graphic ‘Empowered and Autonomous’.)

At present, UPI allows bank customers to link their savings or overdraft accounts, prepaid wallets, and RuPay credit cards for payments. But it is now expanding UPI use cases to include credit card linkages and digital credit lines. This promises not only to expand UPI’s capabilities but could also provide a boost for credit cards, since just 6% of Indians use plastic cards.

The credit card customer base is around 100 million, with credit outstanding at Rs 2.51 lakh crore, compared with home loans where it is `26.40 lakh crore, vehicle loans at Rs 5.83 lakh crore, and personal loans outstanding of Rs 13.33 lakh crore till December end.

The first step in the path towards credit card linkage was RBI’s June 2022 decision allowing the linking of government-backed RuPay credit cards. In fact, the proliferation of QR codes (50 million and counting) in every nook and corner and payment apps makes it possible to scan the QR code and pay, unlike the high-cost card infrastructure of POS machines—there are about 8 million machines.

“The integration of RuPay credit cards with UPI has transformed these cards from physical to virtual, boosting card spending by at least 30% where UPI is adopted. Over time, it’s expected that a significant portion (more than 10% of total credit card spending) will shift to UPI, moving away from traditional RuPay, Visa, and Mastercard channels,” says Naveen Chaluvadi, Chief Digital Officer of private sector lender YES Bank.

“Banks are leveraging RuPay even though there are no MDR (merchant discount rate; the fee charged for processing transactions) charges. In the past seven-eight months, we have observed RuPay credit cards linked to UPI, resulting in additional credit spends via RuPay credit cards. These are very initial days, but the numbers are growing,” says Sanjeev Moghe, President and Head of Cards and Payments at Axis Bank. Asbe, too, admits that the RuPay credit card is experiencing significant growth on UPI, with daily spending reaching around `150 crore. “We anticipate achieving a 10% market share within the next few months,” says Asbe.

Will POS machines vanish then? Most experts don’t think so. Parag Rao, Country Head of Payments, Consumer Finance, Digital Banking, and Technology at HDFC Bank, says POS machines will still play a role. “Traditional POS systems have evolved, and the new ones are based on the Android platform. They function like mobile phones, allowing you to integrate value-added services and run loyalty programmes,” says Rao.

POS machines are also becoming smaller, and costs are declining due to higher usage. The POS cost has reduced from `15,000 when it was started to Rs 1,500. “Higher UPI usage may not hasten the end of the card or cannibalise credit cards. Credit cards come with rewards and free credit periods,” says Moghe of Axis Bank.

Last September, RBI introduced another innovative use case, allowing banks to offer pre-sanctioned credit lines on UPI without any cards. This product provides both retail customers and businesses access to low-ticket, pre-sanctioned credit lines from banks.

“We have started underwriting by using UPI data. We operate a third-generation model, which has been refined over the years. New models evolve every 24 months. We are seeing interesting results even before the credit on UPI officially begins,” says Moghe.

Mohit Gorisariya, Co-founder of fintech platform SalarySe, highlights the low penetration of revolving credit in India. Only 35 million Indians, less than 4% of the population, have access to the product, compared to 40% in China and 65% in western economies. Gorisariya believes that credit-on-UPI can bridge this gap.

While banks have focussed on big-ticket loans, the introduction of micro- and small lending, and lending at the point of consumption through credit on UPI represents disruptive innovation. According to Saumeet Nanda, Founder of SalarySe, “Credit-on-UPI will help sachetise the credit market, which is a key expectation of the middle class, given high small merchant adoption and the UPI-based digital form factor.”

Chaluvadi of YES Bank feels this could lead to new use cases and customer segments entering the credit ecosystem. “The ultimate success of these initiatives will largely depend on robust credit assessment and collection strategies. Early applications may emerge under co-lending agreements involving collaborations between banks and non-banking financial companies (NBFCs).”

Per NPCI, major lenders like SBI, HDFC Bank, ICICI Bank, Axis Bank, and Punjab National Bank have already gone live with the credit lines feature on UPI, and others are working on it. Of course, many aspects of this feature need to be explored. Asks Moghe: “Can a credit line on UPI be credit-free for a certain period?” Currently, most loans are chargeable from day one. Moghe explains, “The credit card is the only product where there is a credit-free period. The industry is working on issues like interchange fees, MDR, and the credit-free period.” Asbe says this initiative is still a work in progress. But there are challenges here, because small-ticket loans are considered risky. RBI’s recent decision to increase risk weights on unsecured loans highlights this.

Asbe often talks about achieving 100 billion transactions per month by 2025. However, the critical question is: where will this growth come from? At the moment, two tech giants, Walmart-owned PhonePe and Google Pay, together account for 80% of transaction volumes. In January 2021, NPCI implemented a cap of 30% on the market share of third-party players like GPay and PhonePe to prevent monopolisation, reduce systemic risk, and encourage innovation. But, globally, digital markets tend to be monopolistic, like with WhatsApp in messaging and Google in the search engine space.

NPCI believes that the market will balance itself over time. Kalawatia of NPCI says options are continually expanding. NPCI has introduced a UPI plug-in that allows direct in-app payments on merchant or e-commerce platforms.

Besides, in the capital market, UPI is now available for investments in initial public offerings (IPOs) and secondary market transactions. In IPOs, investors can instruct their brokers to use their UPI IDs for payment when completing applications. Many retail participants, helped by digital investment platforms such as discount brokers Zerodha and Groww, are increasingly opting for the UPI route for IPO applications.

The big challenge is the zero MDR in person-to-person (P2P) transactions. In the payment chain, everyone bears a cost. NPCI charges banks for interchange services. The banks, in turn, receive partial reimbursement from the government under incentive schemes. There is, however, no direct revenue stream available for payment service providers or PSPs because of zero MDR. They do make some money in person-to-merchant (P2M) transactions or by distributing third-party products like deposits, mutual funds, or insurance. In fact, there is a set-up cost to acquiring offline merchants, and banks have to create additional capacity to process high-volume and low-value UPI transactions. But who will bear the cost of achieving 10x growth? Moghe says, “We are migrating some of the PSPs to the cloud. We have realised that continually investing in servers builds significant costs, and the resilience will not be optimal. We continue to make these investments.”

At present, the majority of UPI transactions are P2P, contributing 60% in volumes. This raises the question of whether a small or reasonable MDR on them could fund the payment infrastructure or the ecosystem. Interestingly, P2M transactions play a crucial role in funding the entire system, especially for small merchants.

But UPI’s use cases go beyond transactions within India. That was evident during India’s presidency of the G20, when it showcased the India Stack, of which the UPI was a crucial element. Though that expansion will take time, having a digital connection with 15 countries among the Top 30 in the next 15-20 years would be a game changer. NPCI has already initiated operations in seven nations: Singapore, the UAE, Bangladesh, Thailand, Nepal, Sri Lanka, and Bhutan. (See interview of Ritesh Shukla, CEO of NIPL.)

At present, cross-border charges are as high as 5–6%, and NPCI aims to disrupt this. The usage of the India Stack in the developing world will not only reduce cross-border charges but also provide interoperability of UPI with these countries. Over the next decade, India aims to be self-sufficient in remittances, especially in the Middle East and other neighbouring countries.

In sum, NPCI, under Asbe, is pursuing three key tracks for the next decade. First, reach 100 billion transactions per month, a 10x increase. Second, become a manufacturer of deep technology. Third, promote worldwide interoperability.

NPCI has its task cut out. But considering what it has achieved, you wouldn’t bet against it.

 

@anandadhikari