India set to go cashless - thanks to UPI, Aadhar

By Lionel Alva

An astounding 233 million Indians do not have any type of access to a bank. It is a fairly bleak situation. Furthermore, a significant number of accounts have a balance of zero, according to PricewaterhouseCoopers (PwC). Despite having the world’s second biggest population, there are only 23 million credit cards in the country, according to the Reserve Bank of India (RBI).

“Only 3 percent of the payments are done with cards. There is a need to address privacy concerns and increase awareness as well as education to increase the penetration of digital banking,” says Karthik Sathuragiri, Director-Emerging Business, Akamai Technologies. He was talking at the Digital Money 2016, a conference that concluded recently in Mumbai.

This scenario is in stark contrast to a developed country like Sweden that has a nearly cashless society. According to Sweden’s central bank the Riksbank, cash transactions made up barely 2 percent of the value of all payments made in Sweden last year. What has led to a cashless society in Sweden? There is the trust and confidence that the general populace has on their country’s banking system. Coupled with high internet penetration there is also the perception that being cashless lowers crime rate. So strong is the system that around 900 of Sweden’s 1,600 bank branches no longer keep cash on hand or take cash deposits – and many, especially in rural areas, no longer have ATMs. Circulation of Swedish krona has fallen from around 106 bn in 2009 to 80bn last year.

What made it work for Sweden?

• General perception that going cashless leads to lesser crimes and high level of infrastructure and internet penetration has made physical cash redundant in Sweden
• Sweden’s head start in the field began in the 1960s, when banks persuaded employers and workers to use digital bank transfers for wages as a matter of course, with credit and debit cards receiving a boost in the 1990s when Sweden’s banks started charging for cheques.
• Cards are now the main form of payment: according to Visa, Swedes use them more than three times as often as the average European, making an average of 207 payments per card in 2015.
• Mobile phone apps have also taken off in spectacular fashion. Swish, a hugely popular app developed jointly with the major banks including Nordea, Handelsbanken, SEB, Danske Bank and Swedbank, uses phone numbers to allow anyone with a smartphone to transfer money from one bank account to another in real time.
• According to Sweden’s central bank, cash transactions made up barely 2% of the value of all payments made in Sweden in 2015
• The transactions made by cash are expected to drop further to 0.5 percent in 2020.
• In shops, cash is at present used for barely 20 percent of transactions, half the number five years ago, and way below the global average of 75 percent.
• 900 of Sweden’s 1,600 bank branches no longer keep cash on hand or take cash deposits – and many, especially in rural areas, no longer have ATMs.

Bhavik Vasa, Chief Growth Officer, ItzCash, asserts, “When we talk about digital payments or digital money, we are working towards creating an effective replacement for physical money. Everything is going digital. Commerce is going digital and if our money remains physical then our economy is not going to grow at that pace of change. So, we are all working towards the same objective of digital currency so that we can have a larger part of India participate in the digital revolution. “

UPI to meet the inclusion challenge

Ostensibly, the challenge is inclusion, as a large part of the population does not have access to banking services. On its part, The Reserve Bank of India too stressed upon the fact that as the Banking industry moves towards bringing about more innovative products and solutions there has to be an emphasis on bringing in newer customers rather than addressing the existing customers.

V George Anthony, Managing Director, UAE Exchange, avers, “While there are several new promising technologies in the banking sector, there is a lack of adoption. The reasons are many. Lack of education, awareness and people in general lack confidence in online payment systems being some. The end customer needs to be offered sufficient value. The change is going to take time.”

Recognizing the importance of digital banking, under the Digital India scheme, the government has initiated the Unified Payment Interface (UPI) platform. This is a system designed to make online transactions as accessible as email or text messages. If successful, banking and financial services shall be brought to a large part of the population that hitherto did not have access to banking services, especially, the poor. The UPI is being backed by India’s central bank, RBI.

Furthermore, India’s biometrics-enabled national ID system, Aadhaar, where the endeavor is to assign every citizen a unique 12 digit number associated with the individual has met with resounding success. Recently, Aadhar crossed the one-billion-registration-mark and is expected to be the foundation of the UPI.

Vasa adds, “Our largest competition is cash. It is not really one player against another in the industry. It is not one bank against another. I think that the entire ecosystem has recognized that it is going to be a collaborative and converging effort. Any market for growth has to find an inflection point where all the pieces of the puzzle and ecosystem come together.”

The UPI endeavors to replicate the success of a digital payment model introduced in Kenya; Safaricom’s M-PESA system has met with tremendous success as nearly half of Kenya’s populations uses it to make digital transactions. India’s system too has a similar outline with payments flowing between bank, mobile and other networks.

Sagar Saxena, Head, Business Development, Razorpay, reckons, “There are new aggregators coming up, as well as new technologies. Recently, we have seen that there are movements in our bill payment system, or even UPI, the idea or essence is that once you do the registration or once you are in the ecosystem then it should be very easy to transact. Razorpay is also dealing with these technologies.”

Finally, it must be noted that banking as well as non banking players must collaborate with regulators and the government to bring about innovative banking solutions and schemes to bridge the divide. It would herald a new age of seamless and secure transactions and bring about a banking renaissance. The silver lining is that there is a huge market for the banking sector to explore.

What is UPI?

• UPI is a payment system that allows money transfer between any two bank accounts by using a smartphone.
• UPI allows a customer to pay directly from a bank account to different merchants, both online and offline, without the hassle of typing credit card details, IFSC code, or net banking/wallet passwords.
• UPI can be used to make Merchant payments, remittances, bill payments among others.
• The UPI app of 19 banks in India will be available on the Google Play Store of Android phones for customers to download soon.
• UPI provides better security as customers only share a virtual address and provide no other sensitive information.

What is Aadhar?

Aadhar card is a 12-digit unique identity number issued by the Unique Identification Authority of India (UIDAI), a central government agency of India to each resident on the basis of a biometric scan. It is considered the world’s largest national identification number project. Aadhar card is a number that serves as a proof of identity and address, anywhere in India. Any individual, irrespective of age and gender, who is a resident in India and satisfies the verification process laid down by the UIDAI, can enroll for Aadhaar. The enrollment is free of cost and needs to be done once voluntarily. While it is not mandatory, a number of citizen services are getting linked to it to make it indispensable.