27 Jul 16 Unified Payments Interface, a silent revolution in Indian banking

Really – are you serious?

We’ve just let go of one the best RBI governor’s we’ve had, and banks are awash with bad loans. Stressed balance sheets are limiting growth and the government is unable or unwilling to sell stakes in banks. So where’s the revolution?

Have you heard about the Unified Payments Interface, or UPI?

Probably, yes – given the media attention the UPI received. And like most, your probable first reaction is – so what? We already use PayTM or Freecharge or whatever. We already transact online from our mobile phones. What’s the big deal?

Think of UPI as a network that allows anybody (or any phone) to send money to any other phone. But why is that significant, leave alone revolutionary?

Let’s examine this a little more closely.

From the perspective of merchants, there is no need for cumbersome and costly POS terminals, no need to sign up with a payments company. A simple phone can serve as the recipient of funds! Today, a miniscule percentage of merchants in India accept card payments. Think of the millions of micro-entrepreneurs in India – the  dhobi, the sabjiwala, the kirana shop, the bhelpuri-wala, the home help, the cobbler, the tailor, the corner cigarette shop. These and many, many others can now accept digital cash. For e-commerce and other home delivery players, the hassle of ‘cash on delivery’ disappears.

Stop and think about this. Every person selling a service or product can now receive payments electronically. No need to install a device or understand new technology – all you need is a phone!

What about the consumer, the ordinary Indian?

No need of cards and other paraphernalia. No need to pay the 2% extra demanded by merchants for card payments. Not only can I pay anybody anytime, anywhere (as long as I have telephone connectivity), but I can even pay non-merchants, like family members, friends, employees, whoever. For rural folk – this could eliminate the need to trudge long distances to a branch! This is a fundamental shift – a universal P2P payment system.

More fundamentally, at the core the UPI is a common infrastructure platform – available to all types of financial intermediaries. Traditional payment systems (Visa or Mastercard), new age avatars (like Paytm or Freecharge) as well as successful m-payment systems (M-pesa) – all effectively create islands (or silos) of connectivity.  It’s easy to pay others on the network, but not outside the network. This is not only inefficient – it’s a big economic risk. We don’t want a single company (or a few) to corner our future payment system. In Kenya for instance, M-pesa payments accounted for > 40% of the country’s GDP in 2013 (forcing steps by the government to reduce its monopoly). Incidentally, M-pesa’s success only underlines how the UPI might disrupt banking in India.

Further, the UPI does not exist in isolation – it is but one link in an elaborate chain that includes Aadhar, Jan Dhan Yojana,  the “India stack” and such like. The ability to make and receive cashless payments (to/from anybody), instantly can drive financial inclusion enormously. It’s already happening!

If you don’t believe me, see why Nandan Nilekani calls it a “WhatsApp moment for Indian banking”.