Funded by IPA’s Financial Inclusion Program, researchers assessed how India’s shared digital payment network—the Unified Payment Interface (UPI)—affected innovation and competition among banks. Banks connected to UPI introduced more updates and saw higher transaction values and volumes than banks that were not. Modeling what the market would look like without UPI shows the payment system has boosted innovation and consumer welfare, though larger banks have captured a higher share of the market than otherwise, suggesting a potential need for complementary policies to better distribute the gains.

The Challenge

Instant payment systems are expanding rapidly across low- and middle-income countries, offering consumers and firms faster, cheaper, and more accessible ways to send and receive money. Yet the impacts of these payment systems are not widely known. The success of instant payment systems, as measured by the proportion of banked individuals connected or the volume of transactions being processed also remains varied across countries. UPI, considered one of the most successful payment systems globally, offer an opportunity to study the effects of an instant payment system on market level dynamics. 

In 2016, the government of India launched UPI, an interoperable instant payment system that allows individuals to send and receive payments instantly across connected providers. By 2023, UPI processed more than 10 billion transactions per month and accounted for more than 75 percent of all digital retail payments in India, with roughly 330 million individual users and 70 million merchants. Evidence from this evaluation can provide policymakers in other countries with tractable insights into building inclusive and effective instant payment systems.

The Evaluation

Researchers assessed how the UPI shared payment system affected innovation and competition among banks in India’s market. They collected data from 662 banks between 2015 and 2023, measuring the banks’ mobile banking transaction activity and how often they released new features in their apps. Then they compared UPI member banks to non-member banks before and after the system’s introduction to measure its impact.

In parallel, researchers built a model to simulate what the banking market would look like if UPI had never existed. This enabled them to estimate the network's overall effect on consumers and on competition across the sector.

The Results

Financial institutions that participated in UPI saw positive effects, with a large increase in mobile transaction activity—both in volume and value— compared to institutions that did not. The effect was the strongest for already-large institutions. UPI participants also introduced new features in their apps more frequently, averaging 0.28 innovations per month compared to 0.08 for non-participants. While financial institutions incurred costs when they innovated, UPI innovations were lower than non-UPI innovations.

The model simulation also suggests that UPI meaningfully improved the market. Without the network, consumer surplus would have decreased by 1.3 percent, and total product innovation among banks would have been about a third lower without it. At the same time, UPI increased market concentration, with larger banks capturing a greater share of the market than they would have otherwise. Smaller banks also retained more market share under UPI than they would have without it.

Altogether, the results indicate that an instant payment system like UPI can increase transaction activity, innovation in the financial sector, and consumer welfare. However, larger institutions and financial technology providers may experience greater benefits from transactions and innovations, suggesting a potential need for complementary policies to better distribute the gains.