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The value of reducing customer friction: Understanding RBI's recurring payments

The RBI recently announced a move to allow recurring payments to known merchants for up to 2000 INR. The move will allow you to make payments to merchants you have approved directly without the additional factor authentication for upto a maximum of 2000 rupees and is believed to reduce transaction friction substantially. In today's post we analyze why the friction is sometimes necessary, how this move carefully balances the tradeoffs, and how India is slowly setting the standards for finance and payments globally.

Why is friction necessary?

The first question folks might have is why was the friction necessary in the first place. The multi-factor authentication in India is a cheap but extremely reliable way to ensure a certain amount of safety in a country where financial literacy is still extremely low and servers at a lot of institutes are not completely unpenetrable. The verification basically relies on one of three things 1. Something you know (your pin for UPI transactions) 2. Something you have (Your phone to send you a pin) 3. or something you are Bloomberg (B-Unit that requires your fingerprint) to add an extra layer of security. While this does create one layer of friction it is a tradeoff the regulators have to impose to ensure security.

How does the move strike the perfect balance?

When we look at the move with that lens, things make perfect sense - striking a tradeoff between security, which is still very important, by restricting the maximum transaction value at 2000, and convenience which will be key in further enhancing the growth of digital transactions in India. Seeing the central bank in such a large country taking such a brilliantly customer-centric step is reassuring to see to say the least.

India setting the global standards

Probably one of the most successful initiatives in recent times, UPI has become ubiquitous as a means of payment across the country today. India’s retail digital transaction volume has grown at a CAGR of 61% since 2015. More than 131 cr transactions worth 2 lakh crore were processed in December through UPI. With conscious steps taken to further increase the ease of use of the payment method, we could expect huge customer migration towards UPI as a payment method. The fact that Google recently recommended the US Fed to develop its gross settlement service in line with India's UPI, only goes to prove how far we've come in setting the global standards on issues.

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