In today’s fast-paced world, technology has become an integral part of our daily lives, revolutionising how we handle various tasks, from bill payments and online shopping to seamless money transfers. Embracing the digital realm has become the new norm, providing unparalleled convenience at the mere click of a button.
Amidst this tech-driven transformation, India has been making significant strides towards becoming a cashless economy, thanks to the game-changing Unified Payment Interface (UPI). This real-time payment system has enabled instantaneous fund transfers between lenders and banks through mobile applications, ensuring the utmost transaction security.
As the influence of UPI continues to grow, its significance in the realm of digital lending has only intensified. The digital lending space is witnessing the rising prominence of UPI, further solidifying India’s position as one of the leading fintech markets on a global scale. With UPI streamlining financial transactions, the future of India’s cashless economy and digital lending seems brighter than ever before.
India’s current UPI market
In 2022, India witnessed a record Rs 159.5 trillion in UPI and card transactions. The data from the National Payments Corporation of India (NPCI) shows that the value of transactions using UPI rose over 7.82 billion in December alone. Bengaluru topped the list of cities with 29 million digital transactions worth Rs 6,500 crore, followed by Delhi and Mumbai. UPI played a significant role, accounting for over 74.05 billion transactions valued at Rs 126 trillion, nearly doubling in volume and value compared to the previous year. Physical merchant categories contributed to 43 per cent of volume and 40 per cent of value, while e-commerce and online services constituted 85 per cent of volume and 25 per cent of value. Kerala, Maharashtra and Tamil Nadu were among the top states, while Bengaluru, New Delhi and Mumbai were the leading cities. This growth reflects India’s rapid progress, driven by the success of UPI and other digital instruments. The usage of UPI is further highlighted in the following pie chart, which shows UPI transactions in India across different platforms during FY 2022.
India’s digital lending market
Digital lending is swiftly emerging as a superior alternative to traditional lending, revolutionising the sourcing, underwriting and servicing processes with its agility and scalability, thus enhancing the overall lending efficiency. The digital lending landscape in India is poised for remarkable growth, projected to soar from $31 billion in 2021 to $84 billion by 2025, at a Compound Annual Growth Rate (CAGR) of 22 per cent. Looking ahead, India’s dynamic digital lending market is anticipated to reach a staggering $515 billion by 2030. Embracing digitisation, the lending industry has welcomed innovative digital lenders that harness cutting-edge technologies, seamlessly integrating them into their lending and NBFC software to offer customers unparalleled experiences and unleash the true potential of the digital domain. To thrive in this digital era, lenders must integrate their Loan Origination System (LOS), Loan Management System (LMS) and other related technologies, ensuring their growth and success in the digital lending sector.
Role of UPI: Paving its way into digital lending
UPI has emerged as the top digital payment mode for India’s tech-savvy customers, and its growth is expected to continue, revolutionising the digital payments landscape and transforming the potential of digital lending in India. Below are some key ways and facts in which UPI is revolutionising the digital lending scene in the country.
- UPI for business and merchants
With UPI, multiple bank accounts come together in a single mobile app interface, offering seamless integration of banking features, efficient fund transfers and hassle-free business payments. For businesses and merchants, UPI streamlines payment acceptance, eliminates the need for multiple logins, and ensures faster fund collection. It covers customers without debit or credit cards, making it ideal for e-commerce and m-commerce transactions while also addressing cash-on-delivery challenges with in-app payments. UPI’s single-click 2FA facility ensures a seamless payment gateway, completing transactions within minutes. Moreover, with no charges for person-to-person and person-to-merchant transactions, UPI proves to be a cost-effective choice.
- UPI helps credit
UPI proves to be a game-changer for digital lenders, offering access to vast consumer data that aid in potential consumer profiling and credit scoring. Overdraft credit lines via UPI facilitate flow-based lending, allowing customers to link their accounts and request instant credit for purchases. Lenders can provide better lending options based on customer behaviour, offering more credit at favourable terms to those with regular overdraft payments. By collating customer profiles through UPI’s transaction data, lenders can evaluate credit behaviour before granting loans. With UPI linking to specific banks or lenders, it enhances the overall digital lending process, enabling data-rich insights and seamless decision-making. This shift towards cash-flow-based credit is backed by the Reserve Bank of India’s (RBI) Public Credit Registry, aggregating payment and credit information. UPI’s credit facility acts as a virtual credit card with a ‘scan now, pay later’ feature, allowing businesses and merchants to make instant online transactions effortlessly after fulfilling KYC requirements. UPI’s frictionless process revolutionises the digital lending landscape.
- UPI lending
Traditional banks and financial institutions are embracing partnerships with fintech organisations to streamline the customer loan lifecycle efficiently and cost-effectively. By adopting digitisation, they aim to enhance the overall customer journey and retention. Collaborating with entities like the Digital Lenders Association of India (DLAI), lenders are leveraging digital lending technology like UPI to optimise loan management and origination systems. UPI lending has gained prominence in India’s digital lending landscape, enabling institutions to analyse customer data from UPI transactions and overdraft usage for credit profiling and granting need-based, short-term credits. UPI’s one-time mandate activation and overdraft account linking make it a valuable platform for frictionless small-ticket digital lending, eliminating the need for tedious credit risk assessments.
- UPI for collections
In the field of collections, UPI plays a pivotal role, particularly through the Bharat Bill Payment System (BBPS). Digital lending platforms, including banks, leverage BBPS to offer customers convenient bill payment facilities. Whether it’s settling utility bills or EMIs on loans, BBPS allows businesses to collect payments through both cash and digital mediums, including UPI. For businesses providing bills to their customers, opting for BBPS payments ensures a seamless collection process. UPI’s involvement in BBPS expands its reach, making it an increasingly indispensable tool for effortless and widespread payment collections.
- UPI for MSME sector
The growing adoption of UPI is significantly impacting the Micro, Small and Medium Enterprises (MSME) sector in India, as revealed in a study by NeoGrowth in May this year. The study, which surveyed nearly 3,000 retailers across over 25 cities and 70 industry segments, found that 70 per cent of MSMEs expect more than half of their retail sales to be facilitated by UPI. This trend is driven by the ease of use and customer convenience that UPI offers. Furthermore, the study indicates that seven out of 10 retailers believe that UPI will account for over 50 per cent of their sales in the next three years. Interestingly, the digital transaction data is also enabling new-age lenders to assess the creditworthiness of retailers, potentially revolutionising how MSMEs access credit.
Conclusion
Digital lending is revolutionising the lending landscape, redefining the very essence of borrowing through cutting-edge technologies LMS, LOS, lender software, NBFC software and cloud banking. With its cost-effectiveness, profitability and seamless experience, digital lending caters to the demands of the tech-savvy customers of today. As the digital lending space, especially in the fintech arena, continues to flourish in India, the role of UPI is poised for exponential growth. As a catalyst in this transformative journey, UPI is set to propel digital lending to new heights, shaping a future where convenience and innovation converge to redefine the way we borrow and lend.
