The Unified Payments Interface (UPI) has for the third consecutive month clocked record monthly volumes, processing over 1.5 billion transactions in August for the first time since its inception.
The latest Reserve Bank of India data showed that 1.56 billion transactions worth Rs 2.85 lakh crore were recorded on NPCI’s popular digital channel as on August 30, smashing the previous record of 1.49 billion transactions worth Rs 2.90 lakh crore for the whole of July.
At the same time, cash withdrawals in August through ATMs and micro-ATMs at Rs 1.36 lakh crore is less than half of payments through UPI, the central bank data showed.
Industry experts said that while the surge in UPI-based micro-transactions could help India achieve its stated objective of transforming into a less cash economy, banks would be nervously monitoring the rising volumes of low-ticket digital payments.
This is because the incremental costs of processing such “low-value, high-frequency” payments are rather high as these banks must constantly upgrade their backend systems and monitor fraud risks in line with the rising transaction load, and that too without any fee as these transactions are free.
“It is likely to increase the server load on banking systems as UPI transactions continue to grow at a significant rate. This could lead to high infrastructure costs for banks,” said Vivek Belgavi, fintech leader, PWC India.
To be sure, banks cannot charge customers for UPI payments as per the zero MDR policy introduced in the Finance Bill of 2019. This was reiterated in a circular by the Central Board of Direct Taxes (CBDT) on Sunday after it came to notice that some private sector banks had introduced caps on free UPI transactions.
HDFC Bank, ICICI Bank, Axis Bank and Kotak Mahindra Bank are among those that have introduced charges on UPI transfers beyond 20 transfers a month. These banks have now been asked to refund their customers the fees in 2020 on the grounds that such charges are in violation of the law.
“Processing refunds and not imposing levies in the future on transactions could mean an added burden on the banking system. However, from the perspective of overall digital payments adoption, the move to remove UPI fee for P2P transactions would have a positive impact on the growth of UPI transaction volume,” added Belgavi.
The surge in transactions on UPI since May could be on the back of a range of factors including a shift in conventional modes of paper-based or branch-based money peer-to-peer (P2P) transfers to the more convenient smartphone-based UPI transactions.
“Transfers made through conventional modes such as cheques, RTGS and Demand Drafts are now moving to UPI as first-time consumers are realizing the convenience of UPI and related digital channels,” said Vishwas Patel, the chairman of Payment Council of India.
“Just in the month of August we saw 18% rise in new customers on our channel for netbanking, UPI and BBPS based transactions,” said Patel, who is also the CEO of CC Avenues – a payment gateway.
As per a banker in the know, the share of P2P transactions as against the P2M transfers on UPI continued to hover in the range of 70-75% despite an increased push by payment companies to adopt more small merchants on their platforms.
Meanwhile, experts also suggested that the record volumes on UPI could also be an indication of reviving consumer sentiment leading up to the festive season month of September to December in India.
They also added that the volumes on digital channels could again significantly increase by 2021 when spend-heavy sectors such as travel, tourism, hospitality, and entertainment would resume operations with mandatory contactless payment services.
“We definitely see the surge continuing heading into the festive season,” said Hemant Gala VP Payments & Financial Services, PhonePe. “The surge will continue not just due to the organic growth from the existing user base but also due to the large-scale efforts put in by us in onboarding new-to-digital customers…”