Growing Retail Digital Payments: The Value of Interoperability (IMF Fintech)

Summary

• Unified Payments Interface (UPI) processes more than 18 billion transactions per month in India.p.6
• The cost of mobile data in India fell by roughly 96 percent during the mid-2010s, supporting digital payment adoption.p.11
• In August 2017, a single app accounted for 45 percent of UPI payers and 29 percent of aggregate transaction value.p.17
• A one percentage point lower transaction decline rate in a given quarter is associated with a 4 percent higher transaction value processed in the next quarter.p.16
• Public provision played an initial catalytic role, with the BHIM app accounting for over half of payer-side total transaction value in late 2016.p.19
• Districts experiencing a larger increase in de facto interoperability saw peer-to-merchant transaction value per person increase by an average of 8 Rupees per month more.p.21
• The three largest apps facilitate more than 95 percent of payer-side transactions on the UPI network.p.18

Key insights

1. Interoperability causes network effects to operate primarily at the aggregate platform level rather than at individual payment provider levels.p.6
2. Users benefit directly from interoperability by selecting preferred apps and indirectly through heightened competition among app providers.p.7
3. The UPI architecture allows third-party application providers to offer services while underlying funds remain secured in user bank accounts.p.8
4. Interoperability enables new providers to enter a network market by servicing a single subgroup without needing simultaneous two-sided adoption.p.17
5. During UPI's early phase, more than half of users accessed the platform through their existing bank's app due to institutional trust.p.15
6. Users progressively migrated to nonbank fintech apps that offered lower decline rates and enhanced functionality.p.15
7. Following India's 2016 demonetization, adoption of interoperable UPI continued growing while non-interoperable closed-loop platforms plateaued.p.20
8. Greater de facto interoperability increased overall digital payment adoption relative to cash usage measured via ATM withdrawals.p.21
9. Regulatory prohibition of non-interoperable QR codes was necessary to prevent dominant providers from building proprietary network effects.p.23