Context

India has crossed the target of a billion monthly digital payments. Now, to a billion transactions a day.

The story of payment revolution and financial inclusion in India

• Progress on the financial inclusion: India was long a financially excluded nation –only 17 per cent of Indians had a bank account in 2011.
  • 50 more years estimate: The World Bank suggests it would have taken 50 more years for 80 per cent of Indians to get a bank account at the pre-2011 speed.
  • Yet, we reached that milestone in 2018.
  • How? A magical combination of
  • Political will (Jan Dhana Yojana and Aadhaar embedding).
  • A proactive central bank (creating a non-profit market participant entity and levelling the playing field between non-banks and banks).
  • And a technology stack with three layers (identity, payments, and data).
• The rise of UPI
  • The swift rise in use: The digital payment transactions on the Universal Payment Interface (UPI) platform rising from 0.1 million in October 2016 to 1.3 billion in January 2020.
  • Result of working together: This represents the magic of entrepreneurs, nonprofits and policymakers working together.
  • And gives us a new target — a billion transactions a day.
• India’s Payment revolution
  • What are the components of the payment revolution: India’s payment revolution comes from-
  • A clear vision: Shifting the system from low volume, high value, and high cost to high volume, low value, low cost.
  • A clear strategy: Regulated and unregulated private players innovating on top of public infrastructure.
  • And trade-offs balanced by design: Regulation vs innovation, privacy vs personalisation, and ease-of-use vs fraud prevention.
• What consumers wanted?
  • Consumers wanted a payment experience that was mobile-first, low-cost, 24/7, instant, convenient, interoperable, fintech friendly, inside banking, and safe.
• Answers lies in UPI.
  • What did UPI achieve?
  • Interoperability: UPI created interoperability between all sources and recipients of funds -consumers, businesses, fintechs, wallets, 140 member banks.
  • Instant settlement: UPI settles instantly inside the central bank in fiat money -state-issued money declared by the sovereign to be legal tender.
  • Blunted data monopolies: Big tech firms have strong autonomy but weak fiduciary responsibilities over customer data, it was taken care of by UPI.

5 Policy lessons from the success of UPI

• First- how the India stack: Interconnected yet independent platforms or open APIs — are a public good that-
  • Lowers costs, spur innovation and blunts the natural digital winner-takes-all.
  • Replication in other areas: Replicating this in education, healthcare, and government services are likely to be a harbinger of large scale multi-domain collaborative innovation.
• Second-collaboration: Collaboration can create ecosystems that overcome the birth defects of its constituents–
  • The execution deficit of government, the trust deficit of private companies, and the scale deficit of nonprofits.
• Third-policy intervention: Complementary policy interventions are important.
  • Demonetisation and GST are changing the stories that firms and individuals tell themselves around cash and informality.
• Fourth-human capital and diversity matter: This revolution needed career bureaucrats to partner with academics, tech entrepreneurs, venture capitalists, global giants and private firms.
• The final lesson-Western model is not needed always: India doesn’t need to be Western or Chinese to be modern. If our policymakers had copied Alipay or US banks, we wouldn’t have leapfrogged their birth defects.

Way forward

• Fix the deadline: The central government must deadline digitising all its payments.
• RBI implement 100+ action items: The RBI must implement the 100-plus action items arising from its own Vision 2021 document and the Nandan Nilekani Committee for Deepening Digital Payments.
• UPI for inward remittances: RBI must also make UPI and RuPay fit for use in our $70 billion inward remittances that currently come through exploitative financial institutions which don’t have clients but hostages.
• Replication of UPI in bank credit: The RBI must replicate the core design of UPI — fierce but sustainable private and public competition in bank credit-
  • Our 50 per cent credit-to -GDP ratio is one of the reasons India is poor.
  • China’s 300 per cent is the wrong number, but reaching the OECD average of 100 per cent needs the RBI to do many things-
  • Raising its human capital and technology game in regulation and supervision.
  • Catalysing an ecosystem for lending against the rapidly expanding digital exhaust of small firms and individuals.
  • Issuing more private bank licences, facilitating management changes in old private banks with market caps that signal questions about book value, and shepherding governance and human capital revolution at PSU banks.

Conclusion

Converting the collective independence our citizens got in 1947 to individual freedom surely involved universal financial inclusion. The gap between this aspiration and reality was not a lie but a disappointment because our capital got handicapped without labour and our labour got handicapped without capital. Change has begun -the RBI, the finance ministry, and many individuals deserve our gratitude and dues for a billion digital payments a month. We now ask you for a billion digital payments a day.

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