Daybreak - Is UPI ready to go international?

Episode Date: February 20, 2023

With its phenomenal success, UPI has changed the way Indians interact with money. Now, the NPCI along with other fintech platforms are making efforts to launch UPI for international use.But the government needs to ensure UPI remains secure and reliable as it expands beyond the country's borders.Note: In the previous version of this episode, the host mistakenly referred to NPCI as NCPI. The error is regretted and has been corrected.

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With that, back to your episode. It was in 2016, the year of demonetization, when UPI or the Unified Payment Interface was launched in India. This instant real-time payments system was developed by the Retail Payments Operator, National Payments Corporation of India, a government body. And now it powers two-thirds of India's online merchant payments. It is easily one of the most successful startups that have come out of India.

It has transformed the country's digital payments landscape forever. Last year, 2022 was the biggest year for UPI in its more than six-year history. According to NPCI data, transactions worth $126 trillion approximately were conducted using UPI. $126 trillion rupees, that is $155 billion. UPI has changed the way Indians interact with money.

There is no need to make those last-minute runs to the ATM anymore. In fact, you can even forget your wallet at home and still go about your business. Now, with its phenomenal success, UPI is looking to expand its reach. So last month, the NPCS, ACI allowed NRIs to link their international mobile numbers with UPI for payments and fund transfers.

And then earlier this month, phone pay became the first fintech platform in India to allow international payments via UPI in the UAE, Singapore, Mauritius, Nepal and Bhutan. Now, all these without doubt are steps in the right direction, but there are still some important questions that remain unanswered about UPI going international. Welcome to Daybreak, a business podcast from the Ken. I'm your host Nick Das Sharma and I don't chase the news cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time.

Today is Monday the 20th of February. Let me start by taking you through the first development, which is UPI for NRIs. This move by the RBI or the Reserve Bank of India will essentially let NRIs link their non-Indian mobile phone numbers to make payments through UPI. This involves the use of a repeat denominated PPI or prepaid instrument which will be offered in the virtual form to foreign nationals or NRIs who are visiting India. The PPIs can be issued in the form of wallets linked to UPI like Google Pay or Phone Pay and can be used. used for merchant payments only. The RBI says that loading and reloading of such PPI will be against the receipt of foreign exchange by cash or through any payment instrument.

It can cover retail as well as wholesale transactions. The user will have to link their mobile number with an NRO which is non-resident ordinary or NRE which is non-resident external account. The member bank whose accounts are linked will have to make sure that, they comply with the KYC rules, the Foreign Exchange Management Act or FEMA, and the Anti-Money Laundering Act. The first phase of the rollout is extended only to the G20 countries, namely Singapore, Australia, Canada, Hong Kong, Oman, Qatar, the US, Saudi Arabia, United Arab Emirates and the UK. Now, this for sure will be less of a pain for NRIs compared to, say, travellers, cheques or even cash.

But will it be cheaper or more efficient than using a foreign credit or debit card in India? Ashish Tanka, a former head of merchant services for City N.A., says not really. As a keen observer of the payments landscape in India, Tanqa says that buying a digital prepaid instrument involves funding a mobile wallet. And in this case, it would involve loading a UPI wallet via a credit card, debit card or foreign currency. For any of these methods, there are fees that will have to be paid. Not just to the banks, but also to the issuers of the digital PPI or prepaid instrument and maybe even wallet owners. For example, a person who uses a US credit card to load the UPI wallet will, with a few exceptions, be charged with a foreign transaction fee along with currency conversion fee by the foreign card issuer.

This may be 3 to 4% of the value of the transaction. top of this, the foreign tourists will also most probably need to pay a one-time fee to the issuer of the digital PPI along with a loading charge. Now, the RBI says that at the end of the tourists stay in India, any unused funds can be encashed or transferred back to the source. But this will also attract some of the same fees. Again, since there are limits on how much you can load onto the cart at any point of time, reloading fees will only add to the overall cost of the solution. Which is why, for now at least,

it seems like a credit or debit card would be a cheaper option for NRIs or foreign tourists. It would be less expensive, more convenient, and probably even more secure. Another important question that Tanca has raised is this. Why is this option only for G20 nationals? Because after all, of the top 10 nationalities that visit India by the number of travel,

Bangladesh stands at number one. Malaysia is at number nine and Sri Lanka is at number 10. These countries have low card usage anyway. So this solution would suit them much more compared to a Western traveler. This is of course based on the assumption that these South and Southeast Asian tourists

need a mobile wallet payment solution in the first place. Coming up next, we look at the other development with regard to UPI, which is phone-based decision to allow Indian tourists to pay through UPI in Singapore, Mauritius, Nepal and Bhutan. With this new offer to allow Indian tourists to make payments via UPI in other countries, it seems that phone pay is trying to catch a share of the huge forex market. Phone pay's move is also in line with what the NPCI thinks,

that within this year, in many foreign cities, Indians will not need to use any other payment method. This move also makes strategic sense. Think about it. Indians are the highest number of foreign tourists that visit Dubai and the second highest that visit Singapore. But what is not clear yet is if the Indian traveler will have to pay Forex charges. If they have to, then how will it work? Will this be done through the issuing bank,

which is the one connected to the consumer's UPI? Or will phone pay or some other merchant entity conduct the currency conversion. We asked phone pay about who can accept payments through UPI in these countries. And it told again that merchants have been onboarded through various country-specific tie-ups which NPCI International has made with acquirers. But it is still not clear how many merchants will be allowed to accept payments via UPI. Also, what kind of a formal relationship, if any, will phone pay have with these merchant acquirers? But why should we care about phone pay's relationship with its merchants abroad?

Actually, it is quite important. And that is because it directly affects the rules that govern chargebacks, fraud and other disputes. India is right on top when it comes to receiving international remittances. Based on data from the World Bank, it was for the first time in 2022 that a single country, that is India, was on track to receiving more than a hundred billion dollars in yearly remittances. And if you remember, in one of the recent episodes of daybreak on tax on foreign holidays, I also told you how more and more Indians are travelling abroad every year.

So to extend the convenience of UPI to both foreign nationals traveling to India and Indians going to foreign countries is a great move without doubt. But there is one very important thing that we have to remember about UPI. UPI is not the result of innovation and work by a private startup. The government of India developed it. So the responsibility of keeping it safe, secure, seamless, process-driven and cost-effective while scaling it up also lies with the government. The government cannot afford to not pay attention to these details.

Like TANCHAS says, reputational damage in the payments industry is brutal. So is rejection. So while it may be tempting to advertise the poster child of India's digital payments revolution abroad, it may also be judicious to first ensure that every new use case is vetted for relevance and reliability at scale. Daybreak is produced from the Newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form features. stories, newsletters, subscriber-only apps and podcast extras.

Head to the ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.