By Nandan Nilekani
Now that people can move money with ease, we will see services and products being built for the unseen majority. We’re already seeing an explosion of startups in cash flow-based lending
According to political scientist John Kingdon’s policy window model, three things must align for an effective public policy: The problem, the solution and the political will.
World over, digitisation and cashless payments have been recognised as the first steps to solve the challenges of financial inclusion and access to cheap credit, both essential to end poverty. In April 2016, the National Payment Corporation of India (NPCI) launched a pilot for the world’s most-advanced payments system, UPI (Unified Payments Interface). But it took four months for the first few banks to upload their UPI-enabled apps. At the end of October 2016, UPI had just over 100,000 transactions worth ₹49 crore.
In the case of digital payments, India knew the problem, and for once was ahead of the world in designing a solution. But it had not political priority. But demonetisation and the urgency to find alternatives to cash brought digitisation and cashless payments into sharp focus. Suddenly, ministers and bureaucrats started asking what they could do to unblock cashless payments. Incredibly, steps that would have taken years were completed in weeks. A 13-member committee was formed under Andhra Pradesh chief minister Chandrababu Naidu in December to suggest ways to push cashless transactions. The committee published its recommendations in six weeks; most of them were implemented quickly.
Given the hesitant adoption of UPI, the Centre got NPCI to build, test and launch the BHIM app, all in less than four weeks on top of what is now UPI-BHIM. Telecom regulator TRAI cut the USSD charges (levied on mobile banking transactions) from ₹1.5 to ₹0.5, encouraging feature phone users to transact digitally. Aadhaar Pay was launched in April, enabling even those without a phone or debit card to transact digitally. The MDR —- the fees that card networks charge on transactions —- was dramatically lowered by 75% and 50% for transactions below ₹1,000 and ₹2,000 respectively. With a lower MDR for card users, BHIM app for smartphone users, BHIM-USSD for feature phone users and Aadhaar Pay for those with neither phone nor card, India laid the foundation for the world’s most advanced and inclusive digital payments system serving over a billion people – and all in less than six months.
For the first time, three card networks —- Visa, Mastercard and NPCI’s RuPay —- came together to launch the Bharat QR, a virtual replacement for legacy debit cards and point-of-sale (POS) machines. The number of traditional POS machines, which reached 1.6 million in 20 years, jumped by 62% to 2.6 million in the six months from October 2016 to April 2017.
In the same period, e-wallets went from 10 million to over 32 million transactions. Combined with other digitisation catalysts such as the 900% increase in mobile data consumption since the launch of Reliance Jio in September 2016, India suddenly became a hot bed of payment innovation. Domestic champions such as PhonePe are now competing with Google’s Tez on the homegrown UPI-BHIM platform. Whatsapp is expected to launch its payment product in the world on top of UPI-BHIM.
This is because UPI-BHIM is revolutionary; you can see that story in NPCI’s numbers. From 0.1 million transactions worth Rs 49 crore before demonetisation, UPI-BHIM completed 76.7 million transactions a month (₹7,057 crore) and is on track to cross 100 million by November-end. To put that in perspective, debit and credit card POS volumes are 377 million a month, a number India has taken 20 years to reach. UPI-BHIM will be a quarter of that in less than 20 months. On October 4, the Reserve Bank, which has played a stellar role in this digital transformation, issued guidelines for interoperable wallets using UPI-BHIM.
This is just the start. UPI-BHIM 2.0 will have eMandates, which will ease collections and boost flow-based lending. In years to come, payments powered by UPI-BHIM will be dominant.
Digital payments are only the first step. Now that people can move money with ease, we will see services and products being built for the unseen majority. We’re already seeing an explosion of startups in cash flow-based lending. These startups are enabling credit to individuals and small enterprises that could not access it before, based on their data. The business case is now in alignment with social objectives. All we can say is that innovators are finally building for Bharat.
While November 8, 2016, is etched in our memories as the day we switched to cashless, it was just the start. Digitisation was always going to be a long process, and we still have a way to go. But, demonetisation was a defining moment in India’s journey to a less cash economy.
Nandan Nilekani is chairman, Infosys Ltd, and former chairman, UIDAI
The views expressed are personal