We have all the technology ingredients to accelerate our drive towards a cashless economy

The world is slowly warming up to the digital revolution being unleashed in India. Even trenchant critics of globalisation feel that India is doing the right thing by trying to reduce cash in daily transactions. The country is at the cusp of a breakthrough orchestrated by several initiatives all anchored to digital technology and Aadhaar.

The world is slowly warming up to the digital revolution being unleashed in India. Even trenchant critics of globalisation feel that India is doing the right thing by trying to reduce cash in daily transactions. The country is at the cusp of a breakthrough orchestrated by several initiatives all anchored to digital technology and Aadhaar.

Venkatesh Hariharan, Director of FinTech at iSPIRT, explains to tech2 how different pieces of technology are coming together for a #CashlessRepublic.

Since the demonetisation announcement on 8 November 2016, India has seen a concerted effort to move towards a less cash economy. A lot of things have been put into place for that to become a reality, some of the fruits of which we are already witnessing in the form of digital wallets, bank to bank transactions, forward looking policies by the government and national payments council of India (NPCI) and more.

No parallel to UPI anywhere in the world

When we talk about debit/credit cards and PIN, to quote Nandan Nilekani, what you have (cards) and what you know (PIN for security) becomes your two-factor authentication in the offline world. Now in the online space, mobile phones becomes what you have and the One-Time Password becomes what you know – thereby being the two factor authentication to identify you. In the future, the need for debit and credit cards will come down significantly.

One of the main reasons is Unified Payments Interface (UPI). There is actually no parallel to UPI anywhere else in the world right now. This feature of bank to bank inter-operable immediate transactions feature is unique to UPI. It is also a very simple way to make payments. We have spoken to fintech experts and regulators from around the world, and all of them say that there is nothing like UPI in other countries.

I was part of a banking conclave where the arguments hinted at pushing forth for the UPI transactions and making them more mainstream. Yes, there are still some challenges which we are ironing out. But the fact is that it is still a powerful technology.

Getting more people in the formal financial systems

 We have all the technology ingredients to accelerate our drive towards a cashless economy

A man counts Indian rupee banknotes after withdrawing them from an ATM in Agartala, India REUTERS/Jayanta Dey

If you look at the evolution of the mobile payment technologies around the world, with initiatives such as m-Pesa in Kenya for instance, we realise that these are proprietary technologies and have a closed-loop ecosystems. Even with digital wallets, inter-operability is an issue. On the other hand, cash is highly inter-operable. So that ability to inter-operate is important and that is enabled by UPI.

The other factor is if you have a large inter-operable payments framework like UPI, once you start seeing people's transaction history, they can be eligible for being offered small-ticket loans. The concept of micro-credit is heavily offline in the times we live in. For instance, say you go to a vegetable vendor outside a railway station in Mumbai, in the evening you will see that there is a person who comes with a small notebook and he is writing some numbers in it. These are the informal money-lenders. But if you enable small loans to these sectors – to the tune Rs 7000 to Rs 30,000, so people who earlier didn't have a credit history will start building one. They will start coming into the formal banking eco-system. To again go back to m-Pesa in Kenya, it has been observed that in 20 percent of the cases, the users end up taking a loan from the digital wallet provider.

In India, even if we take a conservative estimate and say that UPI will reach a million people for instance. Of them say even if only 10 percent take small loans – that itself will add up to a significant methodology for going towards a less collateralised loan ecosystem.

The next big growth opportunity for the financial sector is going to be 'flow-based' lending, a move away from collaterallised lending. Current banking system relies heavily on collateralised lending, and that is time consuming. If you look at this from the lens of a local kirana-store owner, he or she wants a loan quickly and does not have the luxury of waiting for the process to complete, for the small amounts.

India Stack leverages Open API standards

One of the things to look at is the India Stack, which is a set of Open APIs with multiple layers to it. The overall India Stack will enable cashless, paperless, presenceless layer with a consent layer on top.

One layer is the Aadhaar layer on top of which eKYC and eSignature is built. Then you have the cashless layer which includes UPI payments. Then you have the Digital locker layer which stores all your documents. The topmost layer is the consent network.

INdia stack 2

So a use case for this would go something like this: Say you want a small Rs 10,000 loan. You issue a token which you give to the bank, which gives it consent to look at your financial records, with a very specific purpose for a narrow period of time. The bank will then look at your records, use their algorithms and give you a specific type of loan plan which is suited for your needs. Then you either accept or decline it. It will be a dynamic pricing model: if you have a better history of repayment, you will get a better rate of interest and so on. If you accept the offer, you will then sign it using eSignature and once the bank accepts it, the money will then be credited to your account using UPI. So it's an end-to-end digital infrastructure for cashless, presenceless, paperless transactions with a consent layer on top. Again, nothing like this exists anywhere in the world.

So of these, the eKYC layer is well established. Reliance has used that to get on board close to 50 mn users for the Jio services. This is convenient, because by rough estimates, the cost of doing a paper-based KYC which involves logistics, a professional taking down your details, manually verifying documents and feeding it into a system and so on, roughly works out to Rs 1,000 per person. Whereas with an eKYC, there are service providers who do it for as low as Rs 60 per person, and with higher volumes it could even go down to Rs 5 per person. This gives incentives to lot of players to move towards eKYC.


Now think about this from a Mutual Fund operators perspective. If it is going to cost Rs 1,000 to do a KYC for a customer who is going to invest a small amount, then there is little incentive. Whereas eKYC which brings down such costs, allows more people irrespective of invested amounts, to get financially included in the mainstream banking ecosystem. We believe that almost 100mn individuals can be immediately brought into the gambit of the formal financial system.

This will have a huge impact on the financial sector of India. Because so far there were a lot of impediments such as paperwork, long times for loan approvals, long transaction times, no visibility into how the funds are utilised and so on. Once these whole bunch of systems such as Bharat Bill Payment System, UPI, Goods and Services Tax come into play then what you will have is an ecosystem where you can provide instantaneous credit, transfer the money immediately, minimal paperwork and the ability to monitor the usage of the funds through people's UPI transactions.

Open API allows you to pull data from multiple sources. So for instance today if you use Uber or Ola, then you have the GPS APIs that are being pulled in on a real time basis, then there is a Google Maps API which shows you the map, then there is a payments API which is pulled up the moment the driver ends the ride, so that money can be transferred. This is a clear indicator of the fact that innovation happens if you have access to these Open APIs. You can pull these different things and combine them in one place.

So all the layers of the India Stack, have been built using Open APIs. So say if you want to implement something like an Apple Pay system for your business, it can be done out of a garage because at the back end you have the India Stack.

The UPI player offering more value and better experience will win

Now in the UPI ecosystem, there are multiple banking players, each with their own UPI apps. This can get a bit overwhelming. But whoever provides the best app and consumer experience will win in the end. For instance, there are multiple email clients and you pick and choose which one you want to use based on your comfort level. Similarly, with UPI apps there should be a choice for consumers and there shouldn't be only one app as such.

Mobile apps supporting UPI payments in the Play Store.

Mobile apps supporting UPI payments in the Play Store.

For the banks, UPI will become a kind of a cost centre, but through it they can acquire customers. Basis that they can start providing micro-loans. So in a sense it becomes a customer acquisition strategy in the long term. Therefore banks who provide more value added services over just plain UPI will be seeing more traction.

Factors other than security that need to be looked into

It's not just about security, but also lot of other factors such as dispute resolution, insurance for the transaction and so on. So it's like if you face any problem while transacting who will you approach to get the issue resolved. And in that interim, who will reimburse you. So these mechanisms are being put into place. The latest Chief Ministers' committee headed by N Chandrababu Naidu are working towards it. The most important thing right now is to build trust into this new type of transaction method. Because if you have people who are entering the digital realm for the very first time, you cannot expect them to immediately start off with online financial transactions. There has to be a significant amount of trust in these methods for a lot of people to accept it and start using it. This is a significant challenge - getting them to have a smartphone, then get them on the internet and so on.

The JAM trinity

I wouldn't be able to give an exact timeframe as to by when cashless transactions will get mainstream, but it has already started happening in my locality. I have heard from friends in Bangalore that local vendors have started accepting Bhim payments and so on. So the start towards cashless transactions has begun.

Going back to what Nandan Nilekani said – what you have and what you know – with the mobile phone and internet connectivity, your mobile number becomes your identity. Then your fingerprint, your PIN number becomes the second factor of authentication. Also one of the main reasons that debit and credit cards have not really taken off in India is to do with the associated costs for the merchants. Along with the transaction fee, there is the cost of ownership of the POS machine, then there are the operational and maintenance costs and so on. This again could give a push to mobile based transactions which have minimal additional costs associated with it.

From what I've heard from interactions in the industry, the Indian regulators have been far ahead of the curve. I think they have really understood the power of these technologies. The prime minister himself is a very tech savvy person. Add in the fact that there are so many mobile phone users, JanDhan accounts were being opened everywhere, then you have Aadhaar. So basically, the JAM trinity as we call it – JanDhan, Aadhaar, Mobile – lets you reach millions of users at a price point that was never possible before.

The other thing that needs mention is that from a technology architecture perspective, we have some of the best brains in India. I was reading an article on the cost of providing identity around the world: In the US it's about $100 per person, in the UK it is about 100 British Pounds per person whereas in India it is around Rs 70 using Aadhaar.

So definitely, a lot of thought has gone into building this amazing technology architecture and frameworks.

As told to Nimish Sawant

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