India’s hugely popular payment system attracts fraudsters

For seven years, Arun Kumar has been setting up his fruit stall every day on a busy street in Mumbai.

It’s not easy to make a living.

“Being a street vendor is challenging. You are afraid of being robbed and since I am not a licensed vendor, the local authority can come and evict my shop at any time,” he says.

But at least one aspect of his job has become easier over the past four years.

“Before Covid, everything was paid in cash. But now everyone pays with UPI. Scan the code and the payment is done within seconds.”

“No problems with handling cash or giving change to customers. My life and business have been running smoothly,” he says.

UPI, or its full name Unified Payments Interface, was launched in 2016 as part of a collaboration between the Reserve Bank of India and the country’s banking sector.

It’s an app-based instant payment system that allows users to send and receive money, pay bills, and authorize payments in a single step – without having to enter bank details or other personal information. And, perhaps most importantly, it’s free.

In May, UPI recorded 14 billion transactions, compared to nine billion a year earlier.

However, due to its popularity and ease of use, it has become a lucrative breeding ground for scammers.

“While digital payments are convenient, they also come with vulnerabilities,” says Shashank Shekhar, founder of the Delhi-based Future Crime Research Foundation.

According to Mr Shekhar, fraudsters use a variety of methods to trick people, including persuading them to reveal their UPI PIN number, which is required to authorise payments.

Some scammers have also created fake UPI apps that are clones of legitimate banking apps and then steal login credentials or other valuable information.

“The speed at which digital transformation has taken place in the country has unfortunately meant that digital literacy and internet security have not been able to keep up,” says Mr Shekhar.

He says that between January 2020 and June 2023, almost half of all financial frauds used the UPI system.

According to government data, there were more than 95,000 UPI-related fraud cases in the fiscal year ending April 2023, up from 77,000 in the previous year.

Shivkali was one such victim. She always wanted to own a scooter, but they were too expensive for her.

But earlier this year, the 22-year-old, who lives in the state of Bihar in northeast India, discovered a property for sale on Facebook that seemed like a great deal.

“I took the chance without thinking,” she says.

A few clicks later, she spoke to the owner, who said he would send her the vehicle documents for $23.

Things went smoothly, and Shivkali continued to send money to the owner via instant bank transfer. She eventually paid $200, but the scooter (also called a scooty in India) was never delivered.

Shivkali realized that she had been deceived.

“I didn’t think I could be scammed because I have some education and know what’s going on in the world. But scammers are smart. They have an art form that they can use to convince the other person,” she says.

The government and the central bank are looking for ways to protect UPI users from fraudsters.

However, if victims currently want compensation, they must contact their bank.

“The problem has deep roots,” says Dr. Durgesh Pandey, a financial crime expert.

“The banks and telecommunications companies bear the brunt of the burden. They are negligent in identity verification, which is why the fraudster cannot be tracked down.”

“But the challenge for banks in particular is that they have to find a balance between inclusivity, ease of doing business and enforcing identity verification. If they are too rigid, the most vulnerable part of society will be left unbanked.”

However, Dr. Pandey argues that in most fraud cases, the bank is not solely to blame.

“It’s a complex question because the problem lies with the banks, but in most cases it is the victim who reveals their credentials. I would say both the victim and the bank should bear the loss.”

Despite these problems, UPI is being promoted in rural areas where access to banking services may be difficult.

Poonam Untwal from Rajasthan runs a counselling centre that helps people use the internet and digital banking.

“Most of us are not that educated and don’t know how to use smartphones properly. I teach them that phones are no longer just devices to talk to people, but that they always have a bank at their fingertips with their devices,” she says.

She believes that UPI will contribute to the development of the local economy.

“Many women like me have small businesses that we run from home. Now we can receive and send money using UPI. People who don’t have smartphones come to my centre to do their transactions,” she says.

UPI is not only conquering rural areas but is also spreading abroad.

Retailers in Bhutan, Mauritius, Nepal, Singapore, Sri Lanka and the United Arab Emirates accept UPI payments.

And this year, France becomes the first European country to accept UPI payments, starting with tickets to the Eiffel Tower.

Back in Mumbai, Mr Kumar is happy that he no longer has to use cash, but remains cautious.

If he cannot establish a good internet connection, customers may accidentally or intentionally get away without paying.

“For a small trader like me, it (UPI) was very easy to receive money. But I am always afraid of fraud. I keep hearing in the news that UPI frauds are on the rise. Hopefully, mechanisms will be invented so that a small trader like me does not suffer any losses.”