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Changing currency

14 Sep 2016 By Una Galani

India is setting a new global standard in fintech. A new instant online payments system, tied to national biometric identity data, launched in recent weeks. Together with an explosion in smartphone usage, this could help the world’s fastest-growing large economy skip traditional financial infrastructure like cash machines, debit cards and point-of-sales machines – speeding up a move to a cashless economy.

The so-called “Unified Payment Interface” is unlike anything available in China or the United States. It enables secure, real-time transfers from one person to another, or to a company. UPI enables individuals and businesses to manage money held across multiple accounts at various banks through a single mobile application – and not one that necessarily belongs to the customer’s own bank. Already 29 big lenders have signed up.

UPI has the power to turn every smartphone into a bank. It enables a user to pay for vegetables at a market stall and settle dues for goods bought online. It can also facilitate domestic remittances, allowing users to both send and receive money from friends and family within the country. The platform caps single transactions at 100,000 rupees – around $1,500 – but the limit on the number of transactions a user can make is up to the bank.

It is a powerful proposition in a country where smartphones, on sale for as little as $45, account for almost half of handset sales and traditional banks have yet to reach the masses. A user just needs to download any UPI-linked bank app, create a virtual identity – similar to an email address – and share that with friends and vendors. To verify a payment request, a simple PIN number is required – and even that authentication system will probably soon be replaced by a simple iris scan.

The new payments process could win public trust quickly because the system does not require a user to share bank account details with other parties.

Billion-person database

India’s innovation stands out for two reasons. The first is that it relies on a national digital identity database called Aadhaar, which means foundation. This already covers more than 1 billion Indians and allows verification of a person’s identity in real time, providing they give their consent, without relying on reams of paper. This process is not possible in many other countries, even the United States, because such schemes are seen as an infringement of civil liberties or governments closely guard such information.

The second unique feature is that UPI is not controlled by a large private enterprise. It is, instead, part of a not-for-profit organisation championed by the central bank to facilitate affordable payments and compete against the likes of Visa and Mastercard . The system is open for almost any local bank to use.

Authorities are keenly aware that making transactions simpler and cheaper is fundamental to promoting financial inclusion, or bringing financial services to the poor. In turn, this should curb corruption and increase the country’s meagre tax base. Debit and credit card penetration is very low. Cash still accounts for around 95 percent of consumer payments in India.

A team of analysts led by Ashish Gupta at Credit Suisse make bold predictions for how the technology might change the competitive landscape. They argue persuasively that the cost of transactions could head towards zero. And access to retail deposits will no longer depend on a bank’s branch network, but instead on the sophistication of a customer interface, or app. In other words, big banks can no longer take customers for granted.


There may be other casualties too. It could deal a big blow to the country’s burgeoning mobile wallet companies, for example. UPI effectively allows a user to transact conveniently and directly from their bank account, without transferring money into a separate digital wallet. These regulated entities can hold or spend no more than around $1,500 per month.

The most prominent wallet operator is Paytm, which has more than 135 million users. Its parent, One97 Communications, is valued at about $5 billion and counts China’s e-commerce giant Alibaba and its $60 billion affiliate Ant Financial as its largest shareholders.

A big head start, other services, incentives like cash-back programmes, and the sheer size of the available market will ensure mobile wallets do not disappear from India in the short term. Further out, though, diversification or new partnerships may be required. That might help to explain why Paytm founder Vijay Shekhar Sharma now has a licence to launch a “payment bank”, a small deposit-taking institution, and is investing significantly in the project.

Global technology companies will also have to adapt. The government is pushing Apple and Alphabet’s Google to embed Aadhaar authentication technology into devices. Samsung has already built an iris scanner into a tablet designed specifically for the country’s bureaucrats and technologists.

What is clear is that India is suddenly a testing ground for financial innovation. IT billionaire Nandan Nilekani, a key champion of Aadhaar and UPI, compares the infrastructure to GPS, or the Global Positioning System – an open system built by the U.S. government that is now used by private companies to provide services such as mapping.

India has laid the foundation for a financial revolution. It might even end up lighting the way for other economies to follow.


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