Recently, I worked with India's leading Payment Gateway company and was involved very closely in architecting and implementing the NetBanking aggregation platform for them. We worked like crazy in shaping this up for almost 6 months along with drafting a future roadmap for this project. Yes, it's in production and working as expected.
After going through UPI architecture, I felt surprised and was like, what the hell? Why are they doing such aggregation? What's an aggregator supposed to do then? Not that it's all over as UPI will take its own time to mature, however, I realized that they have started it right. Anyway, I thought of comparing both, from architecture, implementation, and usage point of view as well.
I am also curious to seek feedback from the technical, business, and sales community on what they think about these two platforms?
Let me start by giving some background on Netbanking.
NetBanking
Almost all banks in India now provide online banking facilities along with features to shop online using the same banking user id and password. Usually, as a consumer, we select the Netbanking payment option and select the desired bank and proceed with the payment.
Aggregation
Now what is a Netbanking aggregation platform and why is it required? A typical payment gateway company provides merchants the ability to accept online payments via Debit/Credit Card, NetBanks, and Wallets. Netbanking does not require the user to have a card for payment purposes. Online payments using Netbanking is somewhat similar to debit card payments, where you pay from the money that already exists in the user's current or savings account. For completing the purchase the consumer needs to put in their Netbanking userid and password/pin. The transaction flows from a merchant website to the selected bank portal and then redirects back to the merchant website confirming your purchase. Obviously, there are some secure handshakes involved in making sure this transaction is valid and secure.
To me this is a very bad way of performing an online transaction and architecting and implementing such systems is a real challenge, only silver lining is that this payment option is one of the top used platforms in India for online payments.
There are almost 60+ banks in India which provides online Netbanking facility to their consumers. For an online merchant, it's almost impossible to integrate directly with all these banks and perform transactions. The transaction is just one aspect, there are other post-transaction processes like settlement, refunds which makes it more difficult for a merchant to follow with each of these banks.
Architecture
So typically an aggregator creates an orchestration layer around all available Netbanks and presents this in a unified form for seamless integration with the merchant portal. Below architecture diagram will depict a typical Netbanking aggregation platform and its usage
Aggregator takes special account with each bank and integrates with each one of them and provide some kind of common API interface to the merchant for integration. The integration method of each bank is different and integration techniques are also not standardized. Money is debited from the consumer account and credited to the merchant in the typically T+2 processing cycle. An aggregator collects all the money from the bank on behalf of the merchant and credits it back to the merchant. A real painful and error-prone process that requires a lot of manual post-processing efforts.
What is UPI?
Unified Payment Interface is an initiative by the National Payments Corporation of India (NPCI), set up with the support of the Reserve Bank of India and Indian Banks Association (IBA). In technical terms, UPI is NPCIs orchestration layer above various payments instruments available in the market primarily around Netbanking.
UPI Architecture
UPI comes with a set of backend interface which helps in transferring money from one account to another in real-time. Currently, it only allows banks to act as UPI providers and use their interface. Multiple banks have come up with their own App to provide UPI facilities to their consumers.
So how money transfer works? First of all, the bank needs to participate in UPI by conforming to its standards and integrate UPI with their banking systems. Yes, you can only transfer money between UPI participating banks, but don't worry very soon almost all of the banks are going to be a part of UPI.
From a usage point of view, do I need to remember the account number and IFSC details of another person to whom I wish to transfer money? The answer is No, not necessary, UPI also works on the virtual address. Now, what is a virtual address? It's like a unique user id and somewhat similar to an email address.
A person enrolling for UPI account via his bank's mobile app can opt for a unique virtual address. You can directly use his virtual account address to send money, so you can send money to sachin@axisbank, and in turn, it will credit my bank account linked with this virtual address, similarly, you can also receive money on your virtual address. You don't need to share your bank details with others while receiving payments.
Advantages
Hassle-Free Payment - Pay without getting into the hassle of registering account number and IFSC code, directly pay to a friend, relatives etc using a virtual address
Real-Time Settlements - Real-time cash settlements like IMPS, this is a boon for online merchants who have to wait currently for a day or two to get money into their accounts
Better Success Rates - Better transaction success rate, transaction speed is super fast and works even on a 2G network, obviously due to pure backend integration and server to server connectivity between banks and UPI servers, for buyer paying is simple, just enter your MPIN and pay. Current Netbanking architecture hops you from one URL to another with bank's non-responsive web pages.
Replacement of Cash on Delivery (COD) - Click a button and pay at your doorstep instantaneously and/or remotely one's goods are received
In-Store Payments - Shop and pay directly to a merchant at his/her store using his virtual address
Disadvantages/Limitations
As of today, UPI has the following limitations
No Wallet integration - You cannot load your digital wallet using UPI, you need to do it via your wallet provider.
No Credits - As of today you cannot transfer money using your credit card
Refund & Chargebacks - No refunds and chargeback mechanism as of today
Security - I don't wish to give any bad pointers here :), UPI uses two-factor authentication but let the hacker community have a close look at this
Infancy Stage - Still lot of work needs to be done to be at par with services offered by current payment gateway aggregators
Conclusion
Now let's assume, if a merchant like Flipkart somehow gets a chance to integrate directly with UPI, why will he go to a payment aggregator for Netbanking integration where charges are high and settlement is slow? Also what if UPI integrates with Visa/Master and/or Wallets in the future?
The reason for Wallet's popularity is to provide consumers hassle free payment instrument where consumer can perform a transaction with a single click. If UPI provides similar capabilities and in fact better that too with deeper acceptance (very soon), I don't see a need to load my wallet and check for merchants accepting the same. I am sure digital wallets will be dead in a year anyway unless they keep on offering heavy discounts and cashback offers.
Too early to come up with a conclusion but surely a game-changer. UPI has done the hardest part of the integration with ease and with a standardized approach, all at the backend. As of 1 Sep 2016, almost 25+ banks are part of UPI and almost all banks are keen to join the bandwagon. Let's see how banks catch up to this after one year, I am sure everyone will and has to.
I want all readers of this post to provide your views based upon their experience in the industry or from a user's point of view. Would strongly recommend you to download App from Axis (Axis Pay) and/or ICICI (Pockets) and give it a shot, also try to educate and onboard your milkman who is anyways using a smartphone.
And don't be surprised if he asks you to pay your next bill on his virtual address "milkyway@axisbank" :)
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