According to John Kingdon’s policy window model, three things must align for effective public policy: the problem, the solution and the political will.
Digitization and cashless payments are recognized the world over as the first steps to solving the challenges of financial inclusion and access to cheap credit, both essential to poverty alleviation. In April 2016, the National Payment Corporation of India (NPCI) launched a pilot for the world’s most advanced payments system, the Unified Payments Interface (UPI). It took till August 2016 for the first handful of banks to upload their UPI-enabled apps. At the end of October 2016, UPI had just over 100,000 transactions with a total value of Rs49 crore.
In the case of digital payments, India knew the problem and, for once, was actually ahead of the world in designing a solution. What was lacking was that it was not a political priority.
Demonetisation, announced on 8 November 2016, and the subsequent urgency to find alternatives to physical cash brought digitization and cashless payments into sharp focus.
Suddenly, ministers and bureaucrats alike were asking themselves: “What can we do to unblock cashless payments?” Incredibly, steps that would have taken years, were completed in weeks. A 13-member committee, with six chief ministers, was formed under the leadership of Andhra Pradesh chief minister Chandrababu Naidu in early December to suggest ways to push cashless transactions. After extensive consultation, the committee published its recommendations in six weeks; most of them were implemented with the same alacrity.
Given the hesitant adoption of UPI, the government got NPCI to build, test and launch the Bharat Interface for Money (BHIM) app, all in less than four weeks on top of what is now UPI BHIM. The Telecom Regulatory Authority of India (Trai) cut the USSD charges (levied on mobile banking transactions) from Rs1.5 to Rs0.5, encouraging feature phone users to transact digitally. Aadhaar Pay was launched in April this year, enabling even those without a phone or debit card to transact digitally. The merchant discount rate (MDR), i.e. the fees that card networks charge on transactions, was dramatically lowered by 75% and 50% for transactions below Rs1,000 and Rs2,000 respectively. With lower MDR for card users, BHIM app for smartphone users, BHIM-USSD for feature phone users and Aadhaar Pay for those with neither phone nor card, India had laid the foundation for the world’s most advanced and inclusive digital payments system serving over a billion people—and all in less than six months.
For the first time, the three card networks: Visa, Mastercard and NPCI’s own RuPay, came together to launch the Bharat QR (quick response), a virtual replacement for legacy debit cards and point of sale (PoS) machines. The number of traditional PoS machines, which had reached only 1.6 million in 20 years, jumped by 62% to 2.6 million in the six months from October 2016 to April 2017.
E-wallets stepped up to the opportunity and in the same six months, went from 10 million transactions to over 32 million transactions. Combined with other digitization catalysts, such as the 900% increase in mobile data consumption since the launch of Reliance Jio Infocomm Ltd in September 2016, India suddenly became a hot-bed of payment innovation. Domestic champions such as PhonePe are now competing with Google’s Tez on the homegrown UPI BHIM platform. WhatsApp is expected to launch its first ever payment product in the world, on top of UPI BHIM.
This is because UPI BHIM is truly revolutionary, and you can see that story in NPCI’s numbers. From 0.1 million transactions worth Rs49 crore just before demonetisation, UPI BHIM completed 76.7 million transactions a month worth Rs7,057 crore, and is on track to cross 100 million by the end of November. To put that in perspective, debit and credit card PoS volumes are 377 million a month, a number India has taken 20 years to reach. UPI BHIM will be a quarter of that in less than 20 months. The Reserve Bank of India, which has played a stellar role in this whole digital transformation, issued guidelines for interoperable wallets using UPI BHIM, on 4 October.
This is just the start. UPI BHIM 2.0 will have eMandates, which will ease collections, and further boost flow-based lending. In years to come, payments powered by UPI BHIM will be dominant.
Digital payments are only the first step. Now that people can move money with ease, we will see services and products being built for the unseen majority in this country. We’re already seeing an explosion of start-ups in cashflow-based lending. These start-ups are enabling credit to individuals and small enterprises that could not access it before, based on their data. The business case is finally in alignment with social objectives. Who knows what other use case is around the corner? All we can say is that innovators are finally building for Bharat!
While 8 November 2016 is etched in our collective memories as the day we switched to cashless, it was just the start. Digitization was always going to be a long process, and we still have a way to go. But, demonetisation was definitely the defining moment in India’s journey to a less-cash economy.