🕹We are using too much UPI. RBI wants to change this.

Insights on RBI's new rule!

I've always seen that UPI IDs are linked with bank accounts. So I was surprised when I saw the news that ICICI is linking UPI IDs with its digital wallet- Pockets.

Linking UPI with bank accounts already works beautifully. So why are they linking it with digital wallets? And who uses digital wallets anymore? How will this move benefit the people? How does ICICI benefit from this? In today's article, we will answer all these questions.

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Wallet365 was India's first digital wallet. It was launched in 2006 by Times Group and Yes Bank. Over the years, several other digital wallet companies came up, with Paytm and PhonePe being the most popular. All these companies were based on the same concept- No need to use cash. Pay digitally using the digital wallet.

Of course, people used to pay digitally even before wallets- using debit cards and credit cards. But these were inconvenient. You could only pay using these at malls and high-end stores. The average shopkeeper didn't accept them.

Digital wallets offered a solution to this- Add money from your bank account into your digital wallet. Use money from a digital wallet to pay for the daily expenses. There was another benefit for people- every shopkeeper could accept payments from digital wallets. All it required was an app on their mobile.

Digital wallet was great for the fintech companies as well- they charged commission from merchants for using their wallet. Plus, they deposited our wallet money into a bank and earned interest on it. Demonetization in 2016 gave a huge boost to digital wallet companies.

But something else happened in 2016 that spelled the doom for wallets- the launch of UPI. UPI made payments even easier- no need to deposit money from your bank account into a wallet. Pay directly from your bank account using UPI. In a few years, UPI became a huge success. And people forgot wallets.

Until now.

You see, for all the success, UPI had some problems. Both for the people and the banks.

In the times of cash, people used to withdraw a big amount of money from their bank account at a time, and keep it in their wallet to pay for the daily expenses. This kept their bank statements neat and easy to manage.

But UPI was soooo convenient that people began paying for all their daily expenditures using it. And UPI is linked to their savings bank account. So people’s bank statements turned into a mess with lots of small, daily expenses. This was a problem. ICICI also noticed this problem in their internal research.

For the banks, UPI turned into a problem because of the same reason. People were using UPI so much, to pay for all their daily expenses. The banks’ systems were overloaded with a huge number of small transactions. Banks couldn't handle this increased load. In fact, banks don’t want to handle so many small transactions.

Enter RBI's announcement on 19th May- new rules for digital wallets.

These new rules have a primary goal- make digital wallets attractive to people. Let’s see how they achieve their goals-

The rules say that digital wallets need to interoperable. That is, digital wallets will be linked to each other using UPI. Currently, we transfer money using UPI from one bank account to another, right? This rule makes it possible to transfer money from one digital wallet to another using UPI. This rule is why ICICI can link its wallet with UPI. I expect more companies to follow this trend.

Further, just like you can withdraw cash from your bank account using ATMs, you can do the same for digital wallets as well. And digital wallets can now store up to Rs. 2 lakhs, whereas earlier this limit was Rs 1 lakh.

RBI hopes that the rules will attract people to start using wallets to make everyday payments. This is beneficial for both people and banks.

Since paying for everyday expenses using UPI messed up the bank statements, people can use wallets instead. People can add money from their bank account to their wallet, and use the wallet to pay for their daily expenses. The wallets are linked together through UPI- so making payments will still be convenient.

Isn't this very similar to the old days of cash? People withdraw cash from their bank account and keep it in their wallet. For daily expenses, they pay using the cash from their wallet.

Banks don't have to deal with the large number of small payments which overwhelmed their systems. This is how ICICI benefits from linking its wallet to UPI.

In its internal research, ICICI saw that people like this solution.

Users are keen to link UPI IDs with digital wallets so that they can directly use the balance in wallets for small transactions while tapping their savings accounts only for bigger transactions.

-Bijith Bhaskar, head of ICICI Bank’s digital channels and partnership

Looking at the larger picture, we can see that RBI's new rule will change people's behavior. It gently nudges them to stop using bank-linked UPI too much and start using wallet-linked UPI for their everyday expenses.

Changing people’s behavior is the primary goal. But the rule has secondary goals as well.

The new rule also hopes to bring basic banking services to more people.

UPI was a revolution, but it required a bank account. But what about the unbanked areas like villages? There are so many places in India that are unbanked. And it's highly unlikely that banks will be able to expand to those areas anytime soon. But fintechs can. In fact, several fintechs are already expanding to rural and unbanked areas. This new rule will be a boon for such areas. People in these areas just have to download a mobile app and complete the KYC- then they can start paying and receiving money.

For urban areas, this rule is an attempt to bring a balance between fintechs and banks. Fintechs will handle the basic banking functions- deposit/withdrawal/transfer. And banks will handle the core banking operations of lending and large value deposit.

Amazing isn’t it? So many positive applications out of one rule!!

This wraps up today’s article- I hope you found it insightful. Thanks to Adwait Pisharody for his valuable insights into RBI’s rules and his contributions to today’s article.

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