Behind the Lite touch regulation for UPI

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The Reserve Bank of India (RBI) proposed on August 10 to increase the UPI Lite payment limit for a single transaction from Rs 200 to Rs 500. The raised limit will also apply to offline payments through UPI Lite, which does not require a personal identification number (PIN) for payments.

The central bank also proposed the idea of enabling conversational payments for UPI, which would mean that payments would be processed without the need for a PIN. This feature would likely be enabled for UPI Lite first.

Over the past four to five months, the top three UPI players have launched UPI Lite on their platforms. While there is no data on adoption from the National Payments Corporation of India (NPCI), which runs UPI, the RBI's move is a clear indication that the initial adoption and feedback have been positive.

Paytm Payments Bank, an associate company of Paytm, has nine million users and 50 million transactions on its UPI Lite platform. Paytm did not independently disclose its overall UPI Lite users and is the third-largest UPI player with a 13 percent market share. While Paytm was among the first to integrate UPI Lite earlier this year, the largest UPI player, PhonePe, only launched Lite in May. With its size being more than three times that of Paytm, PhonePe is likely to have a more significant impact over the next few months.

Many restaurant bills or ride-hailing payments often exceed Rs 200, and the Lite payment limit being set at Rs 200 automatically restricted the potential to use the platform more widely and frequently.

"With the introduction of Near Field Communication (NFC) technology through ‘UPI-Lite’ on-device wallet, offline payments will become more secure while being seamless and fast. UPI offline payments shouldn’t hinder the capacity to make payments above Rs 200 per transaction. The move to enhance the transaction limit for small value digital payments in offline mode from Rs 200 to Rs 500, addresses this issue and thus will eliminate the need for multiple transactions for users," says Mandar Agashe, founder and managing director of Sarvatra Technologies.

Aggressively promoting UPI Lite is essential for NPCI to achieve its target of one billion transactions per day. The platform already processes close to 10 billion transactions per month and is growing at more than 40% annually. However, unless UPI Lite enhances its use cases, adoption will not grow as much as expected.

A significant proportion of UPI transactions, possibly around half, fall below Rs 200, and over 80 percent of merchant transactions are below Rs 500. Due to the absence of a merchant discount rate (MDR), which is the commission paid to payment facilitators like banks, for UPI transactions, banks are hesitant to allocate resources towards enhancing the core banking solution (CBS).

"Oftentimes it is not about the server capacity alone, but the legacy CBS applications cannot support the volumes and concurrency that UPI as a platform does these days. Card systems were built for a large volume of transactions," says a senior executive with a UPI app who worked with card companies in the past.

Small-ticket transactions, which were typically paid in cash a few years ago, are now clogging up banks' CBS. SBI, HDFC Bank, and several public sector banks experienced significant technical declines (TD) due to server unavailability and were  pulled up by the regulator as well as the NPCI. Banks come under scrutiny from the NPCI whenever the TD rate exceeds one percent.

One of the key solutions to reduce the load of every one of these transactions hitting the banks' CBS is to create an on-device wallet, a product that UPI replaced a few years ago. Freecharge, Paytm, and Mobikwik used to be the leading mobile payment companies and used prepaid wallet, until Google Pay and PhonePe came to the scene with UPI payments. However, UPI Lite brings the best of both worlds together, and that is why the product has been finding acceptance among users.

While the central bank has been cracking down on wallets for lax Know Your Customer (KYC) measures, UPI gives RBI the comfort of a full bank account. "Since most of the transactions happen through NPCI and bank servers, RBI feels confident about tracing those accounts and payments better than other measures. For instance, international merchant card payments are difficult to track or monitor," says a fintech consultant, who has worked with banks in the past.

Recently, RBI issued a directive through the NPCI to firms like DreamX to halt their UPI services carried in a co-branded arrangement. RBI had also blocked Mastercard and American Express from issuing new cards for over a year on data localisation mandate.

"UPI being a domestic system developed by NPCI under the RBI's aegis, the central bank is more confident about regulating and monitoring the system more closely," adds the fintech consultant.

While the wallet can be loaded up to Rs 2,000 as of now, with an increased per transaction limit, this could also be raised sooner than later.