What U.S. banks can learn from payments in India

India launched its Unified Payments Interface, a real-time digital payment system, in 2016, and in the latest fiscal year, the value of transactions processed through UPI crossed $1 trillion. American bankers who pay attention to the benefits of a real-time payment system can help bring those benefits to their institutions.

Established by the National Payments Corporation of India (NPCI), UPI facilitates interbank, consumer-to-consumer, and consumer-to-merchant payments. Users get a virtual payment address (VPA) linked to their bank account to send money to or receive money from any other user.

The most revolutionary feature of UPI is that it eliminates the need for both parties to be on the same digital payment system, or know the other party’s banking details to send or receive money. Knowing a user’s VPA is enough. There are no transaction fees, nor any lag time in the transaction. The money is debited and credited simultaneously.

Four key reasons for American bankers to consider a UPI-type system:

Increased economic activity: The U.S. payment system has too much friction and time delay in settling transactions. A UPI-like platform can potentially lower friction and makes payment processing widely accessible, stimulating new economic activity. Real time payments can also increase the flow of capital, the pool of potential customers, and transaction volume available to banks and financial institutions. According to a recent ACI Worldwide report, Indian businesses and consumers saved roughly $12.6 billion in 2021 because of real-time payments, and that such savings will balloon to $92.4 billion in 2026. A real-time payment system can have an impact on the American economy that can be likened to the creation of the interstate highway system. Small businesses could conduct business from anywhere, whether they sell from the roadside or an urban pop-up shop. U.S. banks can be enablers and beneficiaries of this kind of economic growth.

Lower costs for financial institutions: Financial institutions that participate in real-time payment systems like UPI can lower their transaction costs as a result of the immediacy of each transaction and the strong security within the system. Because there’s no float time between removing and adding money to bank accounts, the real-time payment slashes the maintenance and reconciliation costs to track transactions among institutions. An open-source system like UPI can foster collaboration between tech companies and financial institutions.

Fraud control: The security around each real-time transaction minimizes the opportunity for fraud, reducing risks and costs. Besides having a VPA, UPI users set up their own PIN and each UPI account is associated with a mobile phone through its international mobile equipment identity (IMEI) number. All three elements must be present to complete a transaction. A bad actor who gets someone’s PIN can’t make any UPI transactions without the physical phone. If the phone is stolen, the thief can’t complete a transaction without the account holder’s VPA and PIN.

Leadership in payments space: Companies outside India are connecting to UPI, improving the global flow of capital. Western Union partners with UPI to enable real-time payments from the United States to India. NPCI’s international arm set up a partnership with Worldline to facilitate transactions for Indians throughout Europe. If the United States doesn’t take steps to adopt a real-time payment system, it risks getting left behind in the payments space.

The United States can learn from India’s success with UPI. Providing consumers and merchants access to a simple, secure, instantaneous universal payment system injects a level of digital trust that makes it easier for people and entities to engage in financial transactions even when the parties know little about each other. Bringing a UPI-type system to the United States would increase banks’ access to a larger customer base, grow transaction volume, and deliver faster and easier flow of capital on a global scale.

Nayan Ramani is a product manager at Google with expertise in payments infrastructure.