India’s ₹1 trillion mobile payment system

What happens when millions of people in the world’s sixth largest economy start moving billions of dollars via their mobile phone or Internet device?

What if these people were primarily used to a cash economy, had some time ago witnessed a major disruption in the form of currency note withdrawal, and has an ever-soaring population accessing the Internet?

These are some of the most important, and perhaps least discussed, questions in India today, because, of course, this economy is India. In December 2018, the Unified Payments Interface (UPI) in the country saw more than 620 million transactions worth ₹1.02 trillion (nearly $15 billion). The volume of transactions grew 18% month-on-month.

There are a few things here that are astonishing. First is that the UPI is a digital platform built and operated by the state-run National Payments Corporation of India in a country where even today most people find it hard to believe that something built by the government can work smoothly. There are reasons aplenty for them to not change their perception: the national airline, Air India; and all kinds of municipal crises which make India home to some of the worst maintained cities in the world marred by the bad roads; severe air pollution; abysmal sewerage and waste management, and shaky water supply. The only thing that has improved considerably is electricity supply.

However, the UPI process, monitored by the Reserve Bank of India, grew from nearly 150 million transactions to 620 million transactions in one year. This kind of volume also means millions of people have active bank accounts. This had not been the case. By the middle of 2018, around 80% of more of eligible Indians had procured a bank account thanks to Jan Dhan Yojana, a government scheme launched in 2014 to propel the formalisation of the Indian economy which would boost everything from tax collections to financing of startups for growth. But a sizeable number of them seemed to be inactive or rarely used.

But clearly, some of this is changing as the growth in the number of transactions, which are bank-to-bank, indicate. This kind of scale and efficiency is rare even at global levels. The only other country with this kind of scale, albeit much larger, is China, where almost half of the world’s digital payments were made in 2017 via apps like Ant Financial-owned Alipay and Tencent’s WeChat. These companies now do business in one month more than what PayPal (the biggest U.S. online payments operator) does in a year.

India is quickly catching up, even though volumes are a fraction of that of China at the moment (digital payments are now a $16 trillion market in China). According to the EY FinTech Adoption Index, China leads with 69% whereas India is number two at 52%.

A combination of an easy to verify identity system in the form of Aadhaar, wide use of bank accounts, and a digital payments system that actually works is obviously pushing India’s cash-only economy to hitherto unknown heights of formalisation and digitisation. Whatever else its failings, some of the push towards mass use of digital payments came from India’s demonetisation, which happened in 2016, the same year when the UPI was launched within weeks of one another.

So, what happens when digital payments start to rise? All kinds of things. The first is that corruption declines. It is just tougher to hide monetary transactions or not pay tax on them. For a country like India, with shaky physical infrastructure, the cost of transporting cash is huge; for example, around ₹1,764 crore was saved by paying cooking gas subsidy directly into bank accounts. Digital payments also cut out last-mile exploitation which is rampant and brutal in India. “Evidence from India shows that making social security pension (SSP) payments digitally via smart cards compared to manual cash payout at the village level by a government official results in a 1.8 percentage point lower incidence of bribe demands for obtaining the payment (compared to an incidence of 3.8 percentage points for manual cash payments: a 47% reduction) and the incidence of ghost recipients fell by 1.1 percentage points,” said a 2014 World Bank Research Group report.

It should be remembered that India is still only at the beginning of this curve—which is why everyone from Google Pay to WhatsApp Pay is keen to get a slice of the action. This could well be the start of a revolution as transformative as the arrival of mobile phones in India.