India's digital payments revolution

Cash-less, digital payments have been a norm in the West for most peer-to-peer, and person-to-merchant transactions for a long time now. But until just a few years ago, this seemed like a distant dream in India. With a population of over 1.3 Billion people, and with a sizeable population living on just a few dollars a day, it seemed like digital payments weren’t a great fit for the majority, and would be relegated to the very top of the economic bracket and only for merchants that had a sizable turnover.

In what is no less than a miracle, Prime Minister Narendra Modi’s administration has changed all of that in the past few years. Today, India’s digital payments volume is around US $3 Trillion, and is projected to reach US $10 Trillion by 2026 [1]. By 2026, 2 out of every 3 transactions is projected to be digital. You’ll see the ubiquity of cashless transactions on any street in India. From small-time vendors selling flowers in pushcarts to large retailers like India’s D-Mart (A Wal-Mart’ish retail chain), everyone uses digital payments. QR payment codes are everywhere, and people from every strata including those who aren’t fully literate feel very comfortable using digital payments. In fact, it’s preferred as not only easy but also the more secure option to conduct transactions.

How did this happen?

Such large changes are usually more a result of strong political will than technological innovation. Moving to digital payments not only makes things easier and secure for people, it regularizes tax collection (value-added taxes, sales taxes, etc.), gives people an incentive to go get a bank account (people under a particular income bracket usually were fully on cash and didn’t have bank accounts). Streamlining and tracking the exchange of monies was always a problem in India, and the government had a strong incentive to address this problem.

There were two pre-requisites before the technology could be effective:

1. The drive to get everyone in India a centralized ID (akin to the US’s SSN), called Aadhaar and PAN (for tax purposes) had started many years ago. Next, getting the unbanked population bank accounts so transactions had a place to land. This happened through the Pradhan Mantri Jan Dhan Yojana, that provided default savings accounts for everyone without any minimum balance requirements. This program resulted in a whopping 250 Million (yes, you read that right) new bank accounts (a Guinness record) resulting in 80% of India’s population having bank accounts - the same percentage of people who own mobile phones.
2. Once this was done, all that remained was to build the technology and get people to adopt. Private companies were all too eager to get into this market, given the size of it, so this part was relatively easy.

The technology that powers this

Underneath it all is the mobile-only API called the Uniform Payments Interface or UPI that was built by a (regulated) government body called the National Payments Corporation of India. Third party apps like Google Pay, Amazon Pay, Samsung Pay, etc. would need to build on top of this interface, and the government also provided a home-grown app called the Bharat Interface for Money, or BHIM (another clever play on words, on the strong and muscular protagonist called Bheem in the Mahābhārata)

UPI scaled up from a few million transactions to billions of transactions very quickly, and overtook American Express within its first year of use. UPI is expected to overtake Visa and Mastercard by 2023 in the number of transactions. Scalability limits were imposed on newer services like WhatsApp Pay, but they have recently been lifted, thereby enabling almost 530 Million registered WhatsApp users in India to do digital payments through UPI!

This technological feat was not easy to achieve, so full marks to the National Payments Corporation of India.

India’s digital payments are more resilient

Regardless of your take on the Russia-Ukraine situation, we saw that private companies like Google were able to - almost on a whim - shut down services like payments, etc. in Russia all of a sudden. This was more than just an annoyance for people, as I am sure it dented Russia’s economy quite a bit given the heavy reliance on these services.

India’s UPI interface is resilient in comparison. Though most people seem to use Google Pay, PhonePe (a clever play on words, where “phone pe” in Hindi means “on the phone”), etc., these services build on the UPI interface with the indigenously developed BHIM app providing catch-all coverage for people who can’t or don’t want to use these other third party payment services.

In summary, India is leapfrogging the digital revolution at an unimaginable pace, thereby creating value for people and opportunity for private enterprise. It’s so great to see such a sea change in India in the span of just a few years.