We live in the age of 'Insta-Everything,' and the payments industry has responded well by enabling real-time payments through platforms like the Unified Payments Interface (UPI).

UPI has simplified and democratized payments to the point that there is no friction for anyone entering the digital payments space. Organizations can quickly build a brand-new UPI payments app.

UPI has opened up many opportunities for fintech companies in the digital payments space. Firms like GPay, PhonePe, Paytm, and Cred have become verbs in the digital payment space.

The reduction in payment friction that UPI achieved is worth pausing on.

Before UPI, digital merchant payments in India required the customer to enter card details, navigate multiple authentication steps, and trust the merchant's checkout window with their sensitive data.

Shopping cart abandonment at checkout was high because the checkout conversion rate suffered whenever a customer encountered an unfamiliar or cumbersome payment flow.

UPI replaced all of that with a single VPA or QR code scan, removing payment friction and cart abandonment as problems for merchants and the platforms built on top of it. The simplicity of the interaction was the point. A payment method that requires less from the customer at the moment of transaction will always convert better than one that requires more.

What is good about it?

The scale and speed of UPI are unimaginable. About 150 Indian banks are on the UPI platform. In October 2019, UPI crossed 1 billion transactions with over 100 million active users on its platform. Such numbers have never been achieved in the digital payment space on a single platform.

Asia is leading digital innovation in payments, with India and China emerging as flag-bearers. China is powering digital payments with Alipay and WeChat, and India is powering them with PhonePe, GPay, and Paytm, all running on the UPI platform. While the payment systems in China are seamless, they are not comparable to the simplicity UPI brings in achieving scale and performance.

UPI makes utility, merchant, and peer-to-peer payments effortless and secure.

The interoperability that UPI delivers across banks and apps took years to build and is genuinely difficult to replicate. A PhonePe user can pay a GPay merchant without either party having to think about which app the other is using. That kind of seamless cross-platform experience is not a given in digital payments. It is the result of a well-designed infrastructure standard that all participants must comply with. Most countries building real-time payment rails look at UPI as the benchmark precisely because interoperability at scale is where most similar systems fall short.

The checkout payment conversion improvement that UPI enabled for Indian e-commerce and in-store merchants has been real and measurable. Merchants who previously saw customers drop off at the payment step because of card entry complexity or unfamiliar payment pages saw those drop-off rates fall sharply as UPI QR adoption grew. Reducing payment abandonment was no longer a problem that required a complex technical solution. A QR code on the counter solved it. For small merchants who had never accepted digital payments before, the barrier to entry dropped to near zero, and the checkout conversion rate followed.

What is bad about it?

While the poster boys like Paytm, PhonePe, and GPay take all the credit for their mobile-based payment apps, it is the banks that do the hard yards in enabling UPI.

Banks do all the heavy lifting to process QR payments, verify VPAs, and facilitate fund transfers, ensuring user data security. The third-party apps ultimately tie up with a Payment Service Provider to enable transactions for their customers. Every user across these mobile apps is a registered customer of a scheduled bank in India.

Digital transactions with UPI platforms have become omnipresent in India, with local salons, chaiwalas, and auto drivers accepting UPI payments. It adds to the unprecedented transaction volumes that banks will have to factor in and plan for in their infrastructure.

The pace at which UPI has scaled has left some banks struggling to keep up. Infrastructure that was adequate at 500 million monthly transactions becomes a bottleneck at 5 billion. Upgrade cycles that banks plan over years are being overtaken by volume growth that happens in months. The result is that the weakest links in the UPI chain, typically smaller banks with limited capacity for infrastructure investment, become the points where the system shows stress.

The infrastructure burden on banks is not trivial. Every UPI transaction that completes seamlessly for the customer passes through core banking systems that must be maintained, scaled, and kept current with NPCI's evolving platform requirements. Third-party apps gain brand recognition. The banks absorb the infrastructure cost. As transaction volumes have grown into the billions per month, the gap between what banks invest in enabling UPI and what they earn from it has widened considerably.

The shopping cart abandonment payment problem that UPI solved for merchants created a different problem for the banks enabling those payments. Lower friction at checkout means more transactions. More transactions mean more infrastructure load. And without a revenue model that adequately compensates banks for that load, the sustainability of the infrastructure that enables frictionless UPI checkout is under constant pressure.

What is ugly about it?

The cost per transaction remains high for a bank, even for low-value transactions. Banks see no incentive, as the transactions carry no margin, and the ones that do are on the order of a few rupees.

On top of that, the finance ministry announced that no Merchant Discount Rates (MDRs) would be charged on UPI and RuPay transactions starting January 1st, 2020. Whatever little was there for the banks was also thrown out the window.

Zero MDR is as good as killing the acquiring payment industry. Payment Service Providers are the infrastructure creators for the digital payment ecosystem. A zero MDR means there is no business case for them to invest in the infrastructure.

The consequences of zero MDR extend beyond the banks themselves. If Payment Service Providers cannot justify continued infrastructure investment, the quality and reliability of the UPI experience for merchants and customers will eventually be reflected in that. The seamless checkout that has driven UPI's adoption depends on infrastructure that someone has to build and maintain. When the economics of maintaining that infrastructure are removed, the risk is not that payments stop working immediately. It is that investment in improving and scaling the infrastructure slows, and the cracks appear gradually rather than all at once.

There has to be a way to compensate the acquirers adequately. Without a sustainable revenue model for the infrastructure providers who enable UPI at scale, the entire ecosystem's growth story risks being shorter than it deserves to be.