| Aug 15, 2022

The UPI Story: Is Financial Inclusivity on the Cards for India?

Fintech companies face an uphill battle winning consumer trust in rural India, traditionally a cash-driven economy, but a homegrown digital payments initiative may help bridge the gap.

India has been in the news for all the wrong reasons lately. The country’s controversial stance on the Russia-Ukraine crisis, deepening religious fault lines, rising income and gender inequality, and periodic massive natural disasters paint a troubling picture. Despite the image these issues project and the persistent myths about India lacking infrastructure for business, the country has registered enormous growth in digital payments, especially in the aftermath of the pandemic. 

India’s overall fintech adoption rate stands at a whopping 87%, well above the global average (65%), despite being concentrated largely in urban centers. However, these numbers hide more than they reveal. With 65% of India’s population still living in rural areas and only 28% of people having access to internet-enabled smartphones, can digital payments bridge the enormous chasm in financial inclusivity? And what would it mean for businesses looking to the enormous Indian consumer base to spur their next stage of rapid growth?   

Strategic Digital Transformation

The huge growth in digital payments can be partly attributed to the success of UPI (United Payments Interface), which recorded 4.61 billion transactions in January 2022 with a total transaction volume of $111.3 billion (INR 8.31 Lakh Cr). In 2021, 40% of all global real-time digital payments took place in India. At 48 billion transactions, that number was triple that of China and more than six times that of the U.S., Canada, U.K., France, and Germany combined. 

The homegrown UPI Initiative, developed by the National Payments Corporation of India (NPCI) in 2016, has proved exceptionally popular. Currently, there are at least 282 banks linked to the digital payments system, not counting NBFCs and fintechs. The country also has access to some of the cheapest mobile data in the world (9 cents per GB) and is undertaking one of the world’s largest rural connectivity programs, BharatNet. The project promises to deliver optical fiber cable at a minimum broadband speed of 100 mbps to all 250,000 local governing councils (village panchayats). 

It is common for street vendors to accept payments through QR codes, and the government’s Direct Benefit Transfers to farmers, pensioners and others are increasingly facilitated through digital systems. The government has also made UPI available on feature phones (which lack internet connectivity) and are widely used in rural areas.


Staunch Government, RBI and Business Support

The Indian government has stood staunchly by its commitment to digital transformation with initiatives like UPI (with $188.33 million or INR 1,500 Cr allocated to boost the penetration of digital payments), digital banking services in rural and semi-urban India, and the Open Network for Digital Commerce. 

The ONDC is a nonprofit project championed by Indian billionaire entrepreneur Nandan Nilekani that aims to level the e-commerce playing field between vertically integrated global retail giants and local mom-and-pop stores. If realized, it would support cross-platform and cross-application interaction and commerce, and reduce the chokehold of retail monopoly on e-commerce. 

Both UPI and ONDC are built on open standards — an adapted version of the Beckn Protocol. The hope is that since open standards are transparent and free, it could effectively lower the barrier of entry for others to build on and foster fair competition. Among other measures to improve financial literacy and deepen the digital payments ecosystem:

  • The Reserve Bank of India (RBI) has opened 1,199 Centers for Financial Literacy across the country. 
  • The government has launched the Payment Infrastructure Development Fund and the Digital Payment Index (DPI). 
  • Although reach has suffered due to the pandemic, the RBI is aiming to make a banking outlet available within a 5km (3.1 mile) radius of every village with more than 500 households in hilly areas.

Rural-Exclusive Solutions Are Needed

In a country as diverse and nuanced as India, the limits of traditional banking solutions have become painfully obvious. While increasing levels of data democratization, internet penetration, and innovative fintech solutions — such as Buy Now Pay Later (BNPL), digital credit cards, digital share broking, and digital asset management — hold great promise, there is a pressing need for solutions exclusive to the problems of rural India. 

Recent field research by 1Bridge, a village commerce network, found that only 3-7% of rural consumers are actively using UPI. 

These consumers are also more interested in adapting UPI to unique-use cases such as tendering change when cash is not at hand or conducting transactions on behalf of others. Biometrics-driven Aadhaar Enabled Payment System (AePS) and money-transfer services (DMT) have gained popularity, but many avoid UPI due to low bank balance, inactive accounts, lack of financial literacy, or the fear of losing hard-earned money. 

True financial inclusivity requires rural populations to have access to easy credit. Rural customers lack documented credit history that makes it difficult to determine their creditworthiness. This is one glaring area where traditional solutions and microfinancing have proved inadequate to support MSMEs (Micro, Small and Medium Enterprises), while marginal and small farmers, and street vendors are even more unlikely to be approved for credit. 

While rural India has traditionally been a cash-driven economy, the growth of access to the internet at three times the rate of urban areas and doorstep digital services are resulting in a tremendous overhaul. Fintech companies and digital solutions face an uphill battle in winning consumer trust, but targeted and creative tech-driven solutions adapted to rural needs can bridge the gap

Innovations for Equity Have Enormous Potential

Many businesses have focused on stimulating adoption through hiring potential customers and developing “nanopreneurs” that can handhold hundreds of others to adopt digital services. 

The needs and demands of rural customer bases are changing. Businesses and digital banking, lending and insurance services based on video KYC, and paperless processes that focus on developing accessible and approachable digital services have enormous headroom for growth. 

Fintech can also leverage technologies like AI & ML to find workarounds for problems such as determining creditworthiness. Businesses that leverage technology-based interventions to empower people to drive India’s enormous rural growth engine through digital payments and services are going to win out.

Anindita Biswas
Anindita Biswas

Opinion Contributor, Strixus

Anindita (Andy) is a writer and communications lecturer with over a decade of experience in B2B enterprise technology, specializing in thought leadership content for Fortune 100 executives. view profile


Related Posts