UPI adoption: UPI enabled significant expansion of credit among underserved borrowers: study

Unified Payments Interface (UPI) has brought in a significant expansion of consumer credit among the underserved borrowers who had no credit history, a study said. Since its launch in 2016, the Unified Payments Interface (UPI) has transformed financial access in India, enabling 300 million individuals and 50 million merchants to perform seamless digital transactions.

By October 2023, 75% of all retail digital payments in India were through UPI, according to a study titled Open Banking and Digital Payments: Implications for Credit Access.

UPI is a payment system built as an interoperable protocol that allows third-party vendors to build apps to provide payments as a service to all customers of participating banks.

It has enabled underserved groups, including subprime and new-to-credit borrowers, to access formal credit for the first time as transaction data was available before the lenders which enabled them to make credit decisions, it said.

UPI is the earliest implementation of an open-banking-based payment infrastructure that is free for customers and enables them to create verifiable digital financial footprints in real time. Importantly, customers own their data and can share their UPI transaction history across financial intermediaries, it said.

Taking advantage, it said, fintech lenders scaled rapidly, increasing their loan volumes 77 times, far outpacing traditional banks in catering to smaller, underserved borrowers.

The study noted that the affordability of digital technology played a critical role, enabling widespread UPI adoption in rural and urban areas alike. A 10% increase in UPI transactions led to a 7% rise in credit availability, reflecting how digital financial histories enabled lenders to assess borrowers better, the report said.

Despite the credit surge, default rates did not rise, showing that UPI-enabled digital transaction data helped lenders expand responsibly, it said.

India’s success with UPI offers a replicable model for other nations, showcasing how combining public digital infrastructure with open banking policies can reduce financial exclusion, foster innovation, and promote equitable economic growth, it suggested.