November 26, 2016
Cashless India has become quite the buzzword over the past fortnight since the demonetization move was announced. The move toward a cashless India is important for several reasons. India is one of the most cash-intensive economies in the world, and the heavy dependence on cash has several pitfalls for the Indian economy. The much talked-about pitfall has been the existence and growth of a black economy, where large chunks of money in the Indian economy are neither accounted for nor taxed. A heavy cash dependence has also meant that despite large budgetary sanctions through many decades of planning and five-year plans, the intended money has not reached the intended beneficiaries. Cash dependence also costs the Reserve Bank of India and commercial banks a huge expense annually just in currency operational costs.
Making India cashless is not an easy objective to meet. It has been almost a decade since I have been tracking the mobile payments space, and occasionally blogging and presenting on new developments in this space. In September 2014, I wrote about an imagined world where we can catch the sight of payments made via the mobile phone to be as commonplace as the cash (or card) used today to make payments. I imagined a world where riding on the promise of speed, convenience and efficiency, large sections of the population would:
But my imagination met many roadblocks as when and how this would reach critical mass in India was unclear. While the mobile phone had become an omnipresent feature for most of the country, having it replace cash looked not only distant but also difficult as there was little or no impetus for payers (consumers) to move away from cash or to adopt mobile payments. Nor was there a reason for the payees (merchants) who face cost and technology barriers to move away from accepting cash.
In November of 2016, as I look at this space again, my attention is drawn to some key initiatives taking place in India that point to us being on the cusp of making mobile payments a greater reality. These initiatives can take us toward a cashless India. And I think the recent demonetization move has made many Indians – on the payer and payee side – rethink their dependence on cash. And despite the downside of demonetization, it can act as a huge catalyst to bring about change.
To set the context for cashless India, I’d like to first highlight the evolution of India Stack. India Stack is a fascinating concept conceived around 2012 when the Central government realized that it cannot deliver citizen services on its own efficiently. What it strives to be in terms of objectives and scale is unseen in India and perhaps anywhere in the world. With India Stack, we will have the largest Application Programming Interface (API) enabled technology platform that allows massive and transparent data exchange and stronger collaboration between the government, private companies, entrepreneurs and the general public.
India Stack is built on four layers (and each layer has a specific underlying technology that makes it possible):
The fundamental layer underneath all of these layers is JAM, an acronym coined for the trio of elements that India Stack will use. JAM stands for Jan Dhan Yojna (envisages universal access to banking facilities with at least one basic banking account for every household in India), Aadhaar (Unique Identification for all residents of India) and Mobile smartphones, all of which have seen rapid adoption in India.
Let’s now focus on the Cashless layer.
The Unified Payments Interface (UPI) forms the core of the cashless layer of India Stack. In April 2016, the National Payments Corporation of India (NPCI), the umbrella organization for all retail payments systems in India launched UPI as the next generation online and mobile payments solution. UPI is an advanced version of IMPS (Immediate Payment Service) that was launched in 2010 offering an instant, 24X7 tool to transfer money instantly within banks across India through mobile, internet and ATM.
UPI today powers multiple bank accounts into a single mobile application of any participating bank. Mobile payments are at the core of UPI and with the massive adoption of mobile phones in India across all strata of society, this makes it most viable to achieve critical mass and succeed. UPI supports both Push (Pay request to send money using virtual address) and Pull (Collect request) financial transactions. Built on top of UPI and equipped with multiple Indian language interfaces, many new products and services have been and will be introduced in India. Here’s a peek into some of the products and services:
APBS (Aadhaar Payments Bridge System) is a system that facilitates the transfer of all welfare scheme payments to beneficiary residents' Aadhaar Enabled Bank Account (AEBA). APBS will function as a push transaction. AEPS is a system that leverages Aadhaar online authentication and enables AEBAs to be operated in anytime-anywhere banking mode by the marginalized and financially excluded segments of society through micro-ATMs. AEPS will function as a pull transaction. The success of AEPS rests on the availability of a large number of micro ATMs and ATMs equipped with biometric authentication facilities. As the banking and ATM network is limited in India, newer forms of banks and business correspondents (BCs) are expected to step into service the population (more on this in the next blog post).
APBS and AEPS will play a huge role in disbursements of government entitlements like NREGA, handicapped, old-age pension, student scholarship, etc., of any central or state government bodies. This is a big step toward reducing corruption and ensuring intended money reaches the intended beneficiary.
This is a new card payment system launched by the National Payments Corporation of India (NPCI), offering a domestic, multilateral system which will allow all Indian banks and financial institutions in India to participate in electronic payments. As it is a cheaper alternative to the more expensive Mastercard and Visa card networks, it is expected to be a hit with merchants, especially the smaller and medium-sized merchants.
Banking customers who do not have a smartphone or are challenged with the usage of a smartphone can avail this service by dialing *99# on their mobile phone and transact through an interactive menu displayed on the mobile screen.
BBPS (Bharat Bill Payment System) will function as a tiered structure for operating the bill payment system in the country under a single brand. National Payments Corporation of India (NPCI) will function as the authorized body, which will be responsible for setting business standards, rules and procedures for technical and business requirements for all the participants.
These are just some of the products and services coming from the India Stack that will propel India toward a less cash-dependent and a more transparent economy. Many of them have already been rolled out, and are being phased out. As the technology platform provided by India Stack is an open-data initiative and is supported by an open API policy, it paves the way for many enterprises, entrepreneurs and government bodies to collaborate for building cashless services on top of Aadhaar, Jan Dhan and mobile. This is a huge development for India and is set to change the way the country conducts its financial transactions. More critically, it will change the way India’s yet untapped bottom of the pyramid will conduct its financial transactions as the adoption barriers reduce. We all are and will be consumers of this cashless layer – be it as merchants, business owners, beneficiaries of welfare schemes.
While the technology platform provides a vast canvas, there are other components too that are critical to making mobile payments and cashless India reach critical mass and to accelerate financial inclusion. Let’s take a look at some of the revolutionary changes taking place in the banking system in India in the next blog post.