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First Principles | UP(I) and away

There was much to celebrate on the tech policymaking circuit this week when Singapore integrated the Unified Payments Interface (UPI). The system moved one more step to challenge the hegemony of Mastercard and Visa as a global payment system. But this narrative went untold in the political optics of it all.

“The closest analogy I can think of is that transacting money with Singapore just got as easy as sending an SMS,” says Sanjay Swamy, managing partner at Prime Venture Partners. In an earlier avatar, he worked with Nandan Nilekani to implement Aadhaar and India Stack that makes such transactions possible. How this has happened ubiquitously is a narrative most Indians are unfamiliar with. People now don’t bat an eyelid when sending money to each other on their phones — or for that matter scanning QR codes using apps such as GPay, PayTM or PhonePe.

So, why does Singapore matter as much? It would appear there is nothing in this for Singapore, or any other advanced economy. This is because banks do not have the incentive to add UPI to what they must already manage. Adding another payment mechanism to their systems means adding pain. In any which case, current systems to transfer money does the job just fine. Why add UPI as well? Long story that one.

The infrastructure to accept the cards we now use such as Visa and Mastercard was built in an altogether different era points out Swamy. “It is at least 50 years old,” says Anuradha Rao, former deputy MD at the State Bank of India. Both point out to how outdated and expensive it is to transact on it.

Then there is cash that is even more expensive for governments if citizens continue to use it. This is because the cost of paper, printing it, getting it transported, and disbursing it, among other things costs much. They would much rather citizens go digital. “In UPI, from a beneficiary’s perspective, cash is the enemy,” says Swamy. In India, how to go cashless and get digital has been worked out over the years under the aegis of the National Payments Corporation of India (NPCI), a not-for-profit backed by a consortium of banks.

This is similar to the early years of card issuing companies that built the infrastructure, so businesses accept cards as a payment mechanism. When someone swipes to pay, there was an element of risk. This risk was borne by companies that issued cards. To bear the risk, they charged the customer a fee. “Money always operated in a low-trust environment,” says Swamy. “But that system was built in a time when money transfer was not possible in real-time. Now, technology allows real-time transfer and fees make no sense. Perhaps, it makes sense for credit cards because there is a risk of defaults. But how do you explain the fees you charge on debit cards?”

Fair enough. So, how do you recoup the money that has been spent until now on building the infrastructure that is UPI? “Wrong question,” says Rao. “Remember that creating card infrastructure took huge investments globally several decades ago.” Her larger point is that “encouraging people to try a new system and getting them to go digital so they switch to a more contemporary form of payment such as UPI is a journey.” So, just the savings on printing and circulating currency are immense and will help pay for infrastructure. “When you do the math, the loss of revenue is peanuts as compared to what you gain,” says Swamy.

All fair points. So, how then are we to think about UPI five years down the line? “Until now, it has been a domestic sensation. It has started to step outside the country and that is good,” says Rao.

“Like with Singapore, as inter-operability comes in, where an Indian can pay in INR and a Singaporean citizen can pay in their currency, you won’t have to worry about forex when travelling or making any other transactions,” says Swamy.

But other hurdles need to be crossed as well that no one is willing to acknowledge. The First World countries led by the United States have a problem accepting a first-class solution that has emerged out of India. But it’s a matter of time. Money talks!

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