Digital Payment Systems - Differing Views

Why is it that India is the only country with a government created smartphone payment system (aka UPI upon which all mobile payment apps from from PayTM to PhonePe to BHIM to Google Pay are built)? How come China’s private sector payment apps (WeChat and AliPay) are now so ubiquitous that cash is not even accepted in more and more places across the country? The other side of the coin – and the very curious one – is that no Western country has built any such smartphone based digital payment system. What’s going on?

 

I thought the answer lay in the fact that MasterCard, VISA, and the banks of the West lobby against any such system since it would eat into their commissions. While that’s definitely part of the reason, Anirudh Suri’s book, The Great Tech Game, reminded me that there are other reasons as well.

 

An additional reason why countries like India and China took the move, writes Suri, is that the current banking system to move money across countries, the SWIFT system, is controlled by the West. If and when the West locks out the banks of any country from SWIFT, money cannot be transferred to or from the banks of that country. In effect, that means nobody can trade with that country – an economic sanction can be imposed at the whim of the West.

 

If you feel this is just a theoretical risk, think again. America has repeatedly locked out Iran’s banks from SWIFT – they don’t need to worry about a Russian or Chinese veto on Iran at the UN when they control SWIFT. In fact, America did the same to Russian banks in response to the Ukraine invasion.

 

China in particular, and India to a lesser extent, says Suri, don’t want to be at the West’s mercy on this front. Ergo, they are both entering the digital currency space ahead of others. After all, if the payment system is owned by them, nobody can lock them out, like when MasterCard and VISA stopped operations in Russia.

 

In addition, a digital currency system can be “exported” to other countries, the way India has expanded UPI into Bhutan, Cambodia, Malaysia, Philippines, Singapore and Vietnam. China is trying to build its digital currency for the same reason – to make its currency acceptable in others. Of course, the rise of new currencies like the Indian rupee and Chinese yuan, even if limited at first, will eat into the dominance of the US dollar.

 

Those then are the other reasons why the West hasn’t jumped onto smartphone based payment systems – the existing systems (SWIFT, the list of international currencies) suit them perfectly. The newer one – smartphone based digital currencies – threaten their dominance.

 

While Japan, the only other Asian country with a huge economy until recently, has always played by the rules of the West, both India and China intend to create their own rules…

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