Path Dependent


Some time back, Google asked the US government to follow India’s UPI scheme, a part of the India Stack, to enable digital financial innovation. Ernst and Young reports indicate that India and China lead the rate of fintech adoption (87%) while the highest ranked developed country was Holland (73%).

So why is the rate of fintech adoption lower in the West? A big part of the answer is that India has the UPI system that is part of the India Stack. Whereas the US (and the West) don’t have any equivalent system.

Let me explain the difference that makes. In India, when you install, say Google Pay, your phone number is already seeded with your Aadhar number. So too are your bank accounts. Ergo, the app can query for all banks seeded with the same Aadhar number as the phone on which the app is installed. Without the app ever knowing your Aadhar number: the stack is designed that way! You select the bank account from the list the query threw up, and bingo! The app can now access and transfer money from the selected bank account via the phone.

See how seamless all this was? You didn’t have to key in your Aadhar number or your bank login details at any point, and yet everything is good to use via the app. And since you didn’t enter any of those details, you don’t have to worry if the app might be stealing your data either.

Now contrast that with how an equivalent app works in the US, as Ben Thompson explains. Banks in the US don’t always provide a mechanism for 3rd party apps to access their accounts. Whereas in India, the government pushed for just that as it aggressively pushed the India Stack idea. Without the equivalent of Aadhar seeded phone + bank accounts, how would an app in the West know your bank account details? Er, you type in the details. Next, you give the app your bank login details for money transfers. See how that terrifying that sounds – giving your bank login details to an app who, for all you know, may be stealing it? And last but not least, the Western banking system wasn’t designed for frequent access via apps or for transfer of small amounts all the time.

No wonder then that Google is suggesting the US build something similar to UPI/India Stack. But Thompson feels the West won’t move in that direction anytime soon. Why not? Well, their credit card system is ubiquitous in the physical world. And Apple is making it easier to use credit cards online via the phone. In other words, the West has an existing system (credit cards), so any fintech solution is likely to build on top of it, not create a new system from scratch. Whereas India and China had no existing systems; and so they created a different path from cash to cashless. It is all, to use a term from physics, “path-dependent”.

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