Arbitrage Magazine - May 2023 - Finance and Investment Club | IIM Rohtak

UPI:ADominant Player in India’s Payment Landscape

-ByAnkita Mishra from Ravenshaw University

The Unified Payments Interface (UPI) has garnered prominence worldwide as a testament to India’s interest in and experience with technological solutions to pressing policy issues. The ground-breaking idea is not only revolutionizing the payment infrastructure in India, but it has also become a case study for other nations looking to develop an effective, straightforward, and scalable real-time payment system. UPI crossed the six billion transaction threshold in July 2022, marking the most transactions ever since the debut of the digital platform in 2016. Thirty nations have expressed an interest in implementing UPI, showing that UPI’s appeal extends beyond India and into the rest of the world’s financial system.

Evolution of Digital Payments in India

The development of India’s digital economy in less than a decade has been nothing short of a paradigm shift, altering people’s everyday lives. The onset of digital transformation is discernible in the country’s smartphone penetration during the last several years, with about 80 crore Indians accessing the Internet. Observing the ripples of digitization can start with noting how normative digital payments have become, coexisting in tandem with cash payments.

As part of the Indian government’s plan to digitize the economy and financial sector, digital payment transactions have been steadily diversifying in recent years. Furthermore, as one of the country’s fundamental national objectives, substantial investments have been made to bolster financial inclusion. In India, digital payment transactions have shown unparalleled growth during the past three years. Prepaid Payment Instruments (PPIs), Immediate Payment

Service (IMPS), Bharat Interface for Money-Unified Payments Interface (BHIM-UPI), and the National Electronic Toll Collection (NETC) system are among the simple and viable digital payment methods that have experienced significant growth and transformed the ecosystem of digital payments by increasing peer-to-peer (P2P) and peer-to-merchant (P2M) payments.

Debit cards, credit cards, Real-Time Gross Settlement (RTGS), and National Electronic Funds Transfer (NEFT) which are already ubiquitous payment methods, have experienced rapid growth simultaneously. Users’ favorite payment method is now BHIM-UPI. Together, these resources have built a sturdy ecosystem for the digital economy.

Source: IDFC FIRST Bank

What is UPI?

The National Payments Corporation of India (NPCI) – a scheme of the Indian Banks’ Association (IBA) and the Reserve Bank of India (RBI), and an umbrella company for administering retail payments and settlement systems in India created the Unified Payments Interface.

UPI’s primary function is to enable real-time and secure money transfers between two bank accounts. It accomplishes this by integrating numerous bank accounts into one mobile application, enabling frictionless financial transfers and merchant payment from a single location. It also supports P2P and P2M collection inquiries, which can be timed and paid as desired.

Introduced on 11April 2016, the UPI is a single-window payment system that enables users to transfer money across bank accounts in real time. Without revealing any bank-specific information, UPI enables users to transfer money securely, privately, and quickly.

Source: paisabazaar

UPI versus Other Payment Methods

There are numerous digital payment options accessible in our country, which can be divided into four categories: Net Banking (NEFT/IMPS), Cards (Credit and Debit), Wallets, and UPI. UPI is dominating the digital payments landscape. The number of transactions using UPI as a payment method has returned to pre-pandemic levels. This is a striking contrast to debit and credit card transactions, which have seen a decline in volume of over 50%. UPI payments work in real-time, are faster, and are free. Payments are directly from the bank account and are entirely secure as they follow the RBI’s two-factor authentication statute (UPI PIN and device binding)

The adoption of Internet banking gets more difficult with the growth of UPI. The utility value of Internet banking apps decreases further when UPI apps become P2P. The adoption of online banking has never been particularly strong. The data collected by the popular bank applications shows this clearly. While businesses like Google Pay, PhonePe, and Paytm are orchestrating massive victories in customer adoption, banks are losing the plot.

UPI transactions are real-time transfers between two bank accounts, while PPI transactions employ prepaid payment methods like gift cards, mobile wallets, and other online payment methods. UPI is mostly used for merchant payments and P2P transfers, whereas PPIs are widely used for online shopping, bill payments, and other activities. The payment limit for UPI is higher than it is for PPI.

Volume of Digital Transactions (in billions) - FY 2023

Adoption Rates and Future Projections

More than half of all digital transactions in India in FY 2022 involved payments made through UPI, indicating rapid adoption of the technology that was introduced only six years earlier. According to the government’s pre-budget Economic Survey, UPI accounted for 52% of all 8,840 crore digital financial transactions in FY 2022, with a total value of ₹126 lakh

Internet Banking

PPI

UPI Others

Source: Statista

crores. UPI only accounted for roughly 17% of the nation’s 3,100 crore digital transactions in FY 2019.

UPI Transactions Over The Years

It is interesting to note that in FY 2022, the value of all UPI transactions came to about 86% of India’s GDP. Additionally, India recorded 7,404.45 crores of UPI transactions overall in 2022, an increase of 1.91 times year-on-year. The number represents approximately 2,348 UPI transactions per second.

UPI Transaction Volume rose 1.91x, Value increased 1.75x YoY

India had the highest real-time transactions in 2021 (49 billion), according to ACI Worldwide. According to the survey, India outperformed its neighbor China, which totaled 19 billion realtime transactions 6.5 times as many as those recorded by the United States, the United Kingdom, Germany, Canada, and France put together.

Real-time Transactions (in millions) - 2021

UPI has established itself as the country’s fastest-growing payment method. In 2020-21, the volume of UPI transactions was 22 billion. It is predicted to reach 169 billion by the end of 2025-26, with a CAGR of 122% since 2018.

UPI Transaction Volume in India (in billions)

Source: NPCI, PwC

Major Players in the UPI Ecosystem

Nine of the 21 billion-dollar FinTech businesses are payments unicorns, and they have all incorporated UPI solutions for a smooth checkout approach across platforms.Among them are well-known companies such as Paytm, Razorpay, CRED, PhonePe, and Pine Labs.

Source: Inc42

FinTech Payment Unicorns

InApril 2023, the Indian digital payments industry continued to be monopolized by only three competitors, with Google Pay, Paytm, and PhonePe accounting for over 97% of UPI transactions. The top three applications processed 862.54 crore transactions last month, according to the NPCI. In terms of transaction value, the three entities processed transactions of ₹13.39 lakh crores in April 2023, accounting for 95% of the market.

Walmart-owned PhonePe remained the largest digital payments player, accounting for 421.6 crore transactions worth ₹7.10 lakh crores last month. It possessed 50.4% of the market in terms of value and 47.4% in terms of transaction volume.

Source: NPCI

The RoadAhead

Sources predict that India’s digital payments business will soar by more than 300% by 2026

The digital payments growth curve is remarkable, especially given India’s formerly gigantic unbanked population. With a customer-centric mindset, India’s digital payments industry is leveraging innovations from FinTech businesses, banks, and the government to make digital payments as hassle-free and secure as possible.

In the future, there is enormous potential to use UPI 2.0 to establish next-generation digital platforms for payments and lending. There are currently no UPI transaction fees for end users, and experts believe this will remain for another couple of years. While there is still a need to implement a robust regulatory framework that would include transaction flows as well as procedural matters, UPI would continue to grow and play a significant role in the digital payments space in India.

References:

[1] https://www.outlookindia.com/outlook-spotlight/changing-the-payments-landscape-inindia-one-upi-transaction-at-a-time-news-220189

[2] https://timesofindia.indiatimes.com/business/startups/trend-tracking/indias-digitalpayments-landscape-set-to-evolve-in-2023-trends-to-watch-outfor/articleshow/99203645.cms

[3] https://pib.gov.in/FeaturesDeatils.aspx?NoteId=151163&ModuleId%20=%202

[4] https://www.wintwealth.com/blog/what-is-upi-how-does-upi-work-the-complete-guide/

[5] https://www.retirewise.in/upi-how-its-better-than-e-wallets-neft-or-imps/

[6] https://www.bajajfinservmarkets.in/discover/journals/blogs/payments/how-upi-is-betterthan-other-digital-payment-modes/

[7] https://www.goodreturns.in/classroom/what-is-ppi-and-how-is-it-different-from-upi1279563.html

[8] https://www.moneycontrol.com/news/business/economic-survey-2023-upi-accounted-for52-of-indias-total-digital-transactions-in-fy22-9970741.html

[9] https://business.paytm.com/blog/growth-of-upi-transactions-ft/

[10] https://www.pwc.in/industries/financial-services/fintech/fintech-insights/upi-2-0towards-a-complete-digital-ecosystem.html

[11] https://inc42.com/features/can-upi-take-the-next-big-leap-forward-after-ushering-inindias-low-cash-moment/

From Dalal Street to Your Smartphone: How Investing in the Stock Market Has Never Been Easier

-By Kushagra Singh from IIM Rohtak

Introduction:

In the past, stock market investing was frequently associated with wealth or individuals with financial backgrounds. This is no longer the case, however, with the emergence of online investing platforms. With just a few clicks, these platforms have made it simpler than ever for the average person to invest in the stock market. Avariety of advantages, including lower fees and user-friendly interfaces, are provided by online investing platforms, which have helped to democratise the world of stock market investing. In this article, we will look at how these platforms made their own place in the market and what that means for the industry's future.

Problems with traditional investing:

Before the emergence of online trading platforms, buying and selling stocks in India was a laborious and time-consuming process involving days of processing having numerous chances of errors and mismanagement. Means such as hand drawn graphs, stock ticker tape and open outcry yelling were used which were too problematic.

The following were some of the major drawbacks of conventional approach to stock investing in India:

 Lengthy account opening procedures

 High Brokerage Costs

 Limited access to real-time market data

 Limited investment options

 Heavy dependence on manual processes

 Prone to errors due to human judgement

Fig. 1- Stock Market Data used to be transmitted through telegraph lines

(Source: Chrono Historia)

For many people, these drawbacks made the conventional approach to stock investing in India unworkable. With the introduction of online investing platforms, many of these problems were solved thus causing the visible shift in the market trend.

The Rise of Online InvestingApps:

Over the past few years, online investing apps have skyrocketed in popularity in India. Upstox debuted in 2012 after Zerodha, the first competitor, launched in 2010. However, real growth only began after players like Paytm Money, Groww, and others entered the market in 2017–18. With their appealing user interfaces and inexpensive brokerage, these apps catered to young people and novice investors. New investors, particularly those under 35, soared as a result of this. In 2021, there were 74 million demat accounts, up from 32 million in 2017–18, SEBI reports, indicating a significant increase in first-time investors.

(Source: taxguru)

These apps offered robo-advisory, fractional share investing, low brokerage, paperless account opening, and other services to draw in new investors. To gain traction, they heavily invested in marketing using brand ambassadors and influencers on social media. Even cashback and rewards were available through Paytm Money to entice users. Millennials flocked to these apps, proving that this strategy worked. The majority of Groww's and Upstox's users, who total over 15 million and 10 million users, respectively, are under the age of 35.

Lowering the Barriers to entry:

For Indian investors, the entry barriers have been significantly lowered by online investing apps. Traditional brokers' account opening fees, monthly maintenance fees, and lock-in periods were all eliminated. This made it possible for lots of novice investors to open free demat accounts.

Additionally, they did away with minimum balance requirements.As opposed to the earlier requirement of Rs 5,000–25,000, this meant that one could begin investing with as little as Rs

Fig. 2- Toll of all DeMat accounts in India from 2018-2022 as per SEBI

500. With the help of their fractional share investing tools, people could purchase shares in increments of as little as Rs 10. Due to this, even those with small amounts of investable surplus could access the stock market.

These applications provided fixed brokerage fees or zero brokerage on a few stocks. Upstox and Zerodha, for instance, impose a Rs 20 trade fee, while Paytm Money provides free equity delivery and F&O trades. This was more affordable than the Rs 250–500 that traditional brokers charged for each trade. They were able to do this by utilising inexpensive online brokerages and spreading the savings to their customers.

By lowering costs and enabling digital KYC document uploads and trades, online investing apps have made the process of opening an account and conducting trading easier. Additionally, they used virtual trading to gamify investing, enabling users to learn without taking financial risks. These inexpensive, paperless solutions have eliminated access barriers, drawn over 70 million new investors, and made trading in the Indian stock market simpler than ever before, especially for the younger generation.

(Source: comparesharebrokers)

More Money Flowing into Stocks:

Record amounts have been invested in Indian equities through online investing apps. These platforms made it possible to buy stocks frequently and in small amounts. For instance, Groww estimates that each transaction on its platform requires an average investment of Rs 3,000–5,000.According to Paytm Money, 65-70 percent of its users make monthly investments under Rs 10,000. This "micro-investing" craze is a result of how easily small savers can now access the stock market thanks to these apps.

The influx of new investors into stocks increased as a result of the pandemic. Between March and December 2020, Upstox added over 2 million new customers, marking its fastest growth ever. During the 2020 market crash, new SIPs on Paytm Money increased by 52%.

Nowadays, online trading has become a popular source of income, entertainment, and financial education for many people who are stranded at home during lockdowns. This subsequently has resulted in increase in investment from RII’s over the years.

Fig. 3- Comparison of brokerage charges for the topmost online investment platforms

(Source: capitalmind)

The Future is digital (and global):

India's stock market is rapidly going digital. Within the next ten years, analysts predict that 50–70% of all stock market transactions in India will be carried out electronically via mobile apps and trading platforms. The digital investment opportunity in India could reach $40 billion in the following ten years, according to McKinsey.Agreater number of Indians now have access to stock market investing thanks to the convenience of mobile apps. New features like e-learning portals, paid services, and robo-advisory could increase participation even more. The youth and tech-savvy investors in India are the ones who will shape the future of stock trading.

Fig. 4- Statistics released by NSE showing increase in RII investment over the years

Conclusion:

The development of mobile investing platforms has made stock market investing more accessible than ever.Although there are still risks, websites like Zerodha, Groww, and Upstox have enormous potential to increase stock market participation and wealth creation. These apps are expanding access to capital markets across the globe by providing low-cost, simpleto-use trading and new features geared towards novice investors. The future of stock trading appears to be digital and international overall.And while no one can accurately predict where the markets are going, it is evident that smartphone apps and digital platforms will influence stock trading on a global scale for generations to come by providing more people with access to investing.

Fig. 5- Digital Adoption Index around the world for 2017

(Source: McKinsey and Co.)

References:

1. Chillznday. (2021). Stock Trading Before Computers: How It Was Done. Chrono Historia. (https://chronohistoria.com/stock-trading-before-computers-how-it-wasdone/)

2. Taxguru Consultancy & Online Publication LLP. (2021). India’s Demat account holders more than double in 3 years. TaxGuru. (https://taxguru.in/sebi/indias-demataccount-holders-double-3-years.html)

3. CompareShareBrokers. (n.d.). Equity Delivery Brokerage of top 20 Stock Brokers | Compare. (https://comparesharebrokers.com/blogs/equity-delivery-brokerage/64)

4. Shenoy, D. (n.d.). OMG: The Retail Investor is the Biggest Player in the Stock Market - Capitalmind. Capitalmind. (https://www.capitalmind.in/2021/05/omg-the-retailinvestor-is-the-biggest-player-in-the-stock-market/)

5. Digital India: Technology to transform a connected nation. (2019, March 27). McKinsey & Company. (https://www.mckinsey.com/capabilities/mckinsey-digital/ourinsights/digital-india-technology-to-transform-a-connected-nation)

Forget Love there are FINANCIAL Reasons to get married

-By Divyanshi Dongre and Saumya Yadav from IIM Bodh Gaya

Beyond the realm of romance, there exist pragmatic and compelling financial reasons to consider marriage as a life choice. While love is often the primary motivation for tying the knot, acknowledging the financial implications can lead to a more informed decision-making process. Marriage brings forth a range of financial advantages that can positively impact a couple's financial stability and long-term goals. From legal benefits to shared financial responsibilities, the financial partnership forged in marriage can offer numerous advantages. These include tax advantages, such as filing jointly and potentially reducing the overall tax burden, as well as access to various social security and pension benefits. Additionally, married couplesoftenenjoylower insurancepremiums, broaderhealthcoverageoptions, andtheability to make joint financial decisions. Furthermore, the pooling of resources and the ability to leverage economies of scale can lead to cost savings, enhanced financial planning, and improved wealth accumulation opportunities. By recognizing the financial benefits that marriage can provide, individuals can approach their union with a more comprehensive understanding of the potential advantages it offers, beyond the realm of love and companionship.

Economies of Scale:

Upon marriage, couples not only benefit emotionally and relationally but also experience the financial advantage of economies of scale. Economies of scale refer to cost efficiencies gained through increased production or consumption on a larger scale. By sharing a household, couples can reduce expenses previously borne separately. For example, Rahul and Sarah's combined rent decreased from ₹2,000 to ₹1,500, resulting in a monthly savings of ₹500. Additionally, their utilitybills and living expenses decreased from ₹1,100 to ₹800, saving them an additional ₹300 per month. In total, marriage reduced their monthly expenses by ₹800, providing greater financial well-being, disposable income for savings or investments, and a sense of financial freedom. Marriage introduces economies of scale, leading to reduced expenses and improved financial stability for couples.

Tax Exemption for long term capital gain

If a person sells an investment like equity shares or equity oriented mutual fund units, he is eligible for tax exemption on long term capital gain under Section 112A of the Income tax Act in India. To claim this exemption, one needs to pay Security transaction Tax (STT) on the sale transaction. Byjointlyinvestingin the qualifyingshares, married couples can get an exemption of up to Rs 1 lakh on their respective long-term capital gains.

For example Rahul and Sarah sell some shares, making a profit of Rs 1.5 lakhs. By paying the STT, they can claim the tax exemption of up to Rs 1 lakhs, which both the couple can reduce their taxable capital gain to Rs 50,000 each.

Filing Taxes Jointly

Couples can combine their incomes and deductions into a single tax return by filing the tax jointly. This is mainly beneficial if one spouse has significant deductions which will not meet the threshold if filed individually. By combining it, couples can maximize their overall tax deductions and reduce the taxable income.

For example, Rahul has mortgage interest and medical expenses but Sarah has higher income. By filing the tax jointly they can combine their income and deductions. This will reduce their taxable income remarkably. Also if the combined income of the couple places them in a lower tax bracket compared to their individual incomes, they can benefit from a lower overall tax rate.

Inheritance Rights

When a spouse passes away without leaving a legal will, the surviving spouse still has inheritance rights according to The Hindu Succession Act. However, for unmarried couples, there may be tax implications to consider. The surviving spouse is entitled to inherit the deceased spouse's properties without immediate tax consequences. However, unmarried surviving spouses may face taxes on the appreciated value of the inherited assets, necessitating long-term tax planning strategies such as trusts or gifting to minimize their tax liability. It is advisable for couples, regardless of marital status, to establish legal documentation and comprehensive estate plans to ensure a smoother distribution of assets while considering taxefficient methods.

What if you will get divorced?

When you're going through a split, there are some financial factors to keep in mind. First off, division of assets. You'll need to figure out how to split up everything you've accumulated together-from yourfancyflatto yoursharedbankaccounts.Andlet'snotforgetaboutalimony, akaspousal support.Dependingonthecircumstances, oneof youmayhaveto providefinancial support to the other post-divorce. Don't forget to come to a consensus regarding this. Oh, and if you've got kids, there's child custody and support to consider too.

You might have to revisit all your financial arrangements, update beneficiarydetails, and make some changes to your retirement plans. And yes, it's always a good idea to seek legal and financial advice from the pros who specialize in divorce cases. They'll guide you through the nitty-gritty and ensure you're making the best financial decisions for your new solo journey. Remember, divorce can be tough, but taking care of the financial side will help you move on with confidence.

Marriage isn't just about rituals and extravagant ceremonies, it's also about tax exemptions, joint investments, and unlimited marital deductions. Who knew that "tying a knot" could have such financial perks? So, whether you're a hopeless romantic or a number-crunching guru, remember these financial perks of getting married.

References

The Family Matters Law. (n.d.). Case Study: Marital Finances. Medium. Retrieved from https://medium.com/@thefamilymatterslaw/case-study-marital-finances-e42285a98919

Smith, J. (2022, February 11). Economist shares the surprising money benefits of marriage. CNBC. Retrieved from https://www.cnbc.com/2022/02/11/economist-shares-the-surprisingmoney-benefits-of-marriage.html

Blau, F. D., & Winkler, A. E. (2018). Economics of Women, Men, and Work. Oxford University Press.

Dew, J. P. (2008). Marriage and Finance. Brigham Young University, Faculty Publication.

ALL RIGHTS RESERVED

FINANCE & INVESTMENT CLUB

INDIAN INSTITUTE OF MANAGEMENT ROHTAK

For queries/feedback/comments, email to fi@iimrohtak.ac.in

Website: https://fi9522.wixsite.com/home