Pre- and Post-UPI

I was reading this article by Andy Mukherjee about the upcoming PayTM IPO, from which I learnt several interesting things. The focus of this blog though is about one aspect only – how critical the underlying UPI technology layer is, and the importance of government policies wrt the same.

 

Just 5 years back, there was no UPI. Which meant a company like PayTM had a lot to do – create the technology for digital money transfer, convince shopkeepers to accept it, and convince customers to use it. Worst of all? Banks weren’t going to be on its platform on Day 1, and they would only join (if at all) one at a time. Hence, a customer would have to “load” money onto the PayTM app, which would then transfer it to the shopkeeper. This created the nuisance that having loaded some money, one had to find a way to use it. On the other side of the transaction, shopkeepers would get their money from PayTM periodically, not immediately. Not an appealing proposition for them. No wonder digital payments barely caught on. Yes, demonetization did serve as a catalyst, but it was UPI that became a game changer.

 

The government had been forcing Aadhar linkages to everything from banks accounts to phone numbers (We’ll see how this helped soon). The UPI layer was created by the government. It then forced the biggest banks to hook into UPI, thereby in a snap, making millions of bank customers accessible to and via UPI. Mobile apps were encouraged to hook into UPI. And bingo! Since Aadhar was the common link to the bank account and your phone number, the app could query the UPI backend and get the bank account to link to immediately. Without the user having to enter his bank account details. This point was very important – who’d trust some random app on the phone with their bank account details? The auto-linking via UPI, thanks to the existing Aadhar links to both the phone and the bank account, made it seamless and equally important, the bank account details were unknown to the app itself. Best of all? The money is transferred instantly via UPI – the shopkeeper gets it then and there.

 

The fact that UPI is owned by the government meant that the entire infrastructure was/is available to any and all apps e.g. PayTM, GPay, PhonePe, BHIM. It also meant that none of the apps can charge much fees from either the customer or the shopkeeper because hey, they would just switch apps and continue to reap all the benefits. That keeps the fees charged to the shopkeepers low and to the customer at zero.

 

Contrast that with the most common payment mechanism in the West – credit cards. They charge a high fee from shopkeepers, there is a delay of several weeks before the money actually reaches the shopkeeper, and they often have an annual fee. Given all this, I wouldn’t be surprised if VISA and MasterCard are doomed in India and it is UPI that will rule India and maybe even become the role model for other, esp. developing countries, to follow…