DPI Design Principle #1: Unbundling

There are 4 design principles behind India’s DPI (Digital Public Infrastructure). The first one is unbundling, writes Rahul Matthan in The Third Way. What this means is that DPI didn’t just digitize existing workflows. Instead, it broke down existing workflows into their constituent elements and then restructured them to be resilient and interoperable. Then it assembled things back in entirely new ways.

 

An example helps understand how big an impact this can have. Take the old way of transferring money to someone. 

This is why checks took time to encash. Banks had to perform checks and communicate with each other. Unbundling in this case started from scratch. It didn’t look how to accelerate the above system. Instead, it looked at the easiest form of money transfer. Yes, cash. The giver and sender don’t need to know anything about each other; nobody needs to check and confirm if the giver has enough in the account; you just hand the cash. Could payments be digitized to something as easy as cash transfer?

 

The solution India came up with was by taking advantage of the fact that everyone has to link their bank accounts to a phone number for OTP’s. (1) DPI came up with a category of mobile apps called TPAP (Third Party Application Provider). The most popular ones today are PhonePe and GPay. The app could “ask” for the list of all bank accounts linked to that phone number. (2) The user could then select which bank account(s) he wanted to link to the app. (3) The bank could then authorize the linking of the bank account to the TPAP (after an authorization check). (4) That still left the question of identifying the person you wanted to send money to. Enter VPA (Virtual Payment Address). It is that xxx@abc style UPI id each of us gets when we use the TPAP. It is like a new virtual ID for your bank account. Notice this VPA does not have your bank account itself in it – rather, it is linked to the bank account. TPAP’s can freely share this TPAP with each other to enable money transfer.

 

The government owned NPCI (National Payments Corporation of India) operates the central switch through which money is actually transferred. But the workflow is so seamless the user doesn’t know all the steps behind the scene (enter recipient’s phone number -> VPA used -> request to NPCI -> checks with sender’s bank if he has the money -> if so, initiates transfer to recipient’s bank). 

Each entity in the chain knows only as much it needs to know. The mobile app, for example, doesn’t know anyone’s bank account details and so on. This is easy when you transfer money to people you know and whose phone numbers you have. But what about a shop? Typing in the VPA is a nuisance and error prone; so the system was designed to support QR codes. Just scan the shop/vendor’s QR code, it contains the recipient’s VPA and from there on, the steps are the same.

 

The entire setup is a combo of deep knowledge of Indian usage and problems, Indian scenarios, and exceptional knowledge of how to design software systems. Nandan Nilekani obviously had the last of those, but as so many of his books (from pre-Aadhar times) show, he always had a deep interest and awareness of the common man’s day to day economic problems and he had been listing possible solutions in those books. The UPI system is a culmination of that.