The good, the bad, and the ugly of UPI transactions

The good, the bad, and the ugly of UPI transactions

We live in the age of ‘Insta-Everything,’ and the payments industry has responded well with real-time payments using platforms like the Unified Payment Interface (UPI).

UPI has simplified and democratized payments to such an extent that there is no friction in anyone entering the digital payments space. Organizations can quickly build a brand new UPI payments app.

UPI has opened up a lot of opportunities for fintech companies in the digital payments space. Firms like WhatsApp pay, GPay, PhonePe, PayTM, and Cred have become verbs in the digital payment space.

What is good about it?

The scale and the speed of UPI is 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 the digital innovation in terms of payments, with India and China emerging as the flag bearers. China is powering the digital payments with AliPay and WeChat, and India is powering it with PhonePe, GPay, and PayTM, all running on the UPI platform. While the payment systems in China are seamless, they aren’t comparable to the simplicity that UPI brings in towards achieving scale and performance.

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

What is bad about it?

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

Banks do all the severe lifting to process QR payments, VPA verification, and fund transfers to ensure user data security. The third-party apps ultimately tie-up with a Payment Service Provider to enable transactions for its customers. Every user in all of 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 saloon to the chaiwala to the auto driver accepting UPI payments. This adds to the unprecedented transaction volumes that the banks will have to factor in and plan their infrastructure.

What is ugly about it?

The cost per transaction remains high for a bank, even for low-value transactions. Banks see no incentives as the transactions carry no margins, and the ones that do are in the order of less than a rupee.

On top of it, the finance ministry announced that no merchant discount rates (MDRs) would be charged starting the 1st of January, 2020, on UPI and RuPay transactions. Whatever little that was there for the banks were 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. There has to be a way to adequately compensate the acquirers, lest the entire brouhaha will be short-lived.


Indranil Chakraborty

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