It comes as a welcome surprise that, within a few weeks of one another, there have been two ringing endorsements of India’s approach/work in the field of financial technology.
Dominated as the discourse is by big US tech firms like Google/Alphabet, Tesla, and Facebook/WhatsApp, few think of India, or Indian firms, when it comes to delivering top-class tech solutions, though Isro is the obvious exception here. So, it comes as a welcome surprise that, within a few weeks of one another, there have been two ringing endorsements of India’s approach/work in the field of financial technology; in these days of intense political acrimony, the good news is the work on this was started by the UPA and used effectively by the NDA. Last week, Google recommended that the US Fed use a UPI-based system to build a new inter-bank real time gross settlement service (RTGS), and now, the Bank for International Settlements (BIS) has come out with a report that recommends other countries emulate the Indian four-pillar approach of providing digital financial infrastructure as a public good, encouraging private innovation by providing open access to this infrastructure, creating a level playing field through the regulatory framework, and empowering individuals through a data-sharing framework that requires their consent. Not surprisingly, earlier this year, Singapore announced an integration with UPI, while NPCI said that it will be rolling out its UPI service in UAE.
Through Aadhaar—which was started by then prime minister Manmohan Singh and former Infosys chief Nandan Nilekani—India developed what BIS calls the “identity rail,” which was then used by prime minister Narendra Modi to dramatically increase financial inclusion through both the Jan Dhan Yojana as well as by getting banks to open low-frill accounts for them; more Indians now have bank accounts than the global average, and BIS quotes studies that show financial inclusion also helps boost income levels. On top of this, though not only related to Aadhaar, India created “payment rails”; NPCI’s UPI is not based on Aadhaar, but was built as an open system by releasing the APIs so that anyone could build on its technology. That is also the reason that apps like PhonePe and Google Pay were able to score so well and make financial transactions accessible. Interestingly, unlike debit/credit cards or bank transfers that allow others to get access to your card/account numbers, UPI allows money transfers while masking the bank account number or even your name; the bank, of course, has these details, so this is not an invitation to money laundering. A big government push that went way beyond the initial demonetisation jump, and UPI’s open architecture ensured that in January this year, barely 29 months after its launch, at Rs. 109,932 crore for the month, UPI transactions beat both debit and credit card transactions at merchant outlets—at Rs. 191,359 crore in October 2019, the number is a third more than that for cards. It is true that just 30% of these are P2M transactions of the type that debit/credit cards are, but the ramp up in volumes is a huge achievement.
If this wasn’t enough of a revolution, BIS also speaks of the “data-sharing rails” that are designed to prevent data capture by the state or the private sector, and instead empower consumers and businesses to benefit from their own data. In 2016, RBI, which owns NPCI, established the legal framework for a class of regulated data fiduciaries, called account aggregators, which allows customer data to be shared within the regulated financial system with the customer’s knowledge and consent. If the cost of the payments via UPI is much lower than other systems, the approach has also dramatically lowered the KnowYourCustomer costs, and also allows integration with other databases like the data on a merchant’s sales via Flipkart or through the GST network. As a result, customers who were, till now, unbankable can now be profitably served by banks, generating new business for the banks, and lowering costs for the borrowers. Add to this, other low-cost innovations like DigiLocker, where you can get digitally signed certificates/records, and the Aadhaar-based eSign; and like the Aadhaar Stack, a Health Stack can, over a decade or so, completely change how public health services are delivered. And, all of this is in the public domain, unlike in several countries where the payment systems aren’t interoperable and the data is owned by the payment company instead of the consumer.