India’s economy is at a “fork in the road.” We are at a turning point where India must make choices that will affect its economic growth and the welfare of its citizens for decades to come. In the coming decade, more than half of the world’s new users of digital payments are expected to come from emerging markets like India, Indonesia, and Nigeria.

In developing economies, mobile phones have become an indispensable part of daily life — beyond communication or entertainment. People use them as their primary digital identity and cashless payment device.

The UPI (Unified Payments Interface) is a protocol for interoperable digital payments. It enables users to make simple and secure e-payments directly from their bank accounts without needing a third-party intermediary like PayTM or Google Pay.

The adoption of UPI has led to a massive upsurge in digital payments in recent months; it has also accelerated the adoption of digital payments by small merchants and businesses because they don’t need to install new software or hardware to accept such payments.

The Indian economy is now more services-based than ever before and is projected to continue to grow slightly faster than its global peers. However, structural challenges with the job market, wage growth, and income inequality remain significant issues that require sustained government attention and investment. To tackle these challenges and drive inclusive growth, the Government of India has identified nine key focus areas under their Make in India initiative.

Under this framework, digitization through the UPI (Unified Payment Interface) will be one of the key catalysts for further driving financial inclusion and improving efficiency across all transaction levels.

With Indian consumers embracing digital payments rapidly and consistently, the UPI has emerged as a game changer for the Indian economy. In FY17, India recorded a volume of Rs21 trillion in transactions on its payment networks — Rs7 trillion on IMPS, Rs6 trillion on Unstructured Supplementary Service Data (USSD), and another Rs6 trillion on SMS-based transactions through prepaid instruments such as mobile wallets and prepaid cards. This article will analyze how UPI brings financial inclusion in India by removing intermediaries and reducing transaction friction costs.

Introduction to UPI

UPI stands for “Unified Payments Interface,” an initiative under the Indian government to transform the country’s payment infrastructure by making payments more convenient and easy. The idea behind UPI was to reduce the dependency on cards and enable quicker fund transfers between two bank accounts.

The Unified Payments Interface was launched in August 2017 and proved a game-changer. UPI transactions tripled to more than 300 million in the six months following its launch. As of July 2018, there were more than 60 million unique UPI app users.

Through UPI, customers can directly transfer money from their bank account to another person’s account. The receiver can withdraw the amount from their account using a virtual payment address. UPI allows for instant fund transfers at no extra cost. This means you don’t have to pay for your convenience.

Why does India need UPI for Financial Inclusion?

India is witnessing an accelerated shift towards cashless payments. Customers are growing awareness of technology-driven payment solutions and are willing to adopt better and faster payment channels.

A few years back, India used to be predominantly a cash-based economy, but now it has transformed into a cashless economy. There are a few reasons that have contributed to this change. These include the rise in smartphone penetration, greater internet penetration, the demonetization drive, and increased trust in digital payment solutions.

The demonetization drive of 2016 brought about a significant shift in how Indians transact. The government scrapped the old Rs. 500 and Rs. 1000 currency notes constituted 86% of the Indian currency in circulation. This significantly impacted the Indian economy, resulting in a sudden cash crunch.

People started looking for alternative payment methods as they could not access their money through the traditional method. In collaboration with banks and tech giants, the government launched digital payment solutions such as UPI and Bharat Interface for Money (BHIM).

UPI is the Solution to the Intermediation Problem

Intermediaries are the middlemen involved in the transaction process, and there are two types — market makers and transaction facilitators. In a traditional payment system, there might be multiple intermediaries in the transaction process, which include the sender’s bank, the receiver’s bank, the clearing house, and the settlement organization.

The payment process is not only complex but also involves multiple intermediaries, which add to the cost of the transactions. UPI is an instant, secure, and cost-effective peer-to-peer payment system that does not involve any intermediaries. Since no intermediaries are involved in the transaction process, the transaction cost is also reduced. UPI reduces the cost of transactions by up to 80%.

The transaction process of a traditional payment system consists of multiple intermediaries, resulting in a loss of trust and efficiency. The risk of losing trust is highest in the payment process because two parties are involved in the transaction, the sender and the receiver. Therefore, there is a chance of a transaction fail due to the reason that either one of the parties may not be honest. A transaction can be failed because of various reasons. Some of them need to be corrected account details, wrong IFSC code, mismatch in the account balance, and many others. To avoid such failures, intermediaries are involved, but they are costly and create trust issues.

The Intermediation Problem in Finance

The intermediation problem occurs when a third party is involved in the transaction process, resulting in a loss of trust and efficiency. The third party is the intermediary, who, in this case, is the bank.

The sender, who wants to transfer money from their account to the receiver’s, prefers to use the bank to transfer the money because it is a trusted source. But, the bank adds an extra cost to the transaction and hence, causes a loss of trust and efficiency in the transaction.

The sender must transfer the money to their account first, and then the bank will transfer it to the receiver’s account. This is where the intermediation problem occurs. There is a loss of trust as the money stays in the bank’s account for some time, and the bank charges a fee for transferring the money from one account to another.

Digital Payments and Financial Inclusion in India

Consumers are becoming increasingly comfortable and confident with digital payments. The rise of digital payments can be attributed to several factors, including the convenience of making payments and the ability to track expenses.

Digital payments also have the potential to reduce the cost of financial inclusion. India is where a significant chunk of the population lives below the poverty line. With more and more people getting connected to the internet, financial inclusion is a pressing issue in the country.

The government has been making financial inclusion easier, especially for people in rural areas where access to banking services remains challenging. This has given rise to various digital payment modes, such as the UPI, BHIM, and Aadhaar-enabled Payment Systems (AEPS). These digital payment modes make it easier to transact and help people in rural areas access financial services.

Improved Financial Inclusion with UPI

The Indian government is promoting a cashless economy through digital payments. Several digital payment modes, such as the UPI, have been introduced to encourage customers to move from cash to digital payments. Such initiatives positively impact the economy as they promote financial inclusion.

The government’s efforts to promote digital payments have reduced the cost of financial inclusion. Customers can use their mobile devices to make payments using their preferred digital payment mode.

Digital payment modes also help lower the cost of financial inclusion because customers don’t have to spend money on acquiring expensive banking instruments.

The UPI could significantly change how financial transactions are performed in India. The UPI is the most widely used digital payment service in India. The adoption of UPI has been phenomenal.

Over 90% of the smartphone-using population uses UPI to make or receive digital payments. This significant adoption has reduced the cost of financial transactions and potentially changed the way digital financial transactions are performed in India.

Faster Payments and Reduced Friction Costs

The UPI has reduced the cost of digital transactions and made digital payments faster. The UPI requires two to three steps to complete a financial transaction. The person initiating the transaction selects the payee’s name, enters the amount, and presses enter.

The transaction gets accepted or rejected based on the authentication of the payer and payee. The amount gets transferred to the payee account without delay if the authentication is successful. The transaction is completed in a few seconds and reflected in the payee account almost immediately.

However, the transaction gets rejected if any transaction details are incorrect or if there is a mismatch in the name and account number. The rejected transaction can be initiated again by correcting the incorrect details.

Ease of Payment for Small and Medium Transactions

The UPI has made it easier for people to make small and medium transactions with minimal effort. People used to make small and medium payments through cash or cheques, which is time-consuming and not secure.

Nowadays, people make small and medium payments through UPI, which is faster than the traditional modes of payments and is secure. The UPI has made it easier for people to make small and medium payments, such as paying for groceries, buying tickets, and paying bills.


The UPI could bring significant change in the digital financial transactions of India. The adoption of the UPI has been phenomenal and has reduced the cost of digital transactions.

The UPI has reduced the cost of transactions by doing away with the role of intermediaries. In addition, UPI has made digital transactions faster and easier for small and medium transactions.

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