India may take the lead in mobile payments by cracking the digital ID problem


A lot has changed since the Fintech Global Tour went to India in January 2015, when the action looked uninteresting. Days later we discovered Paytm and digging into that story we could see how India is leapfrogging the West in mobile payments. Later that year we looked at the Payment Bank Licenses, an innovation that regulators in other countries now study and adapt to their country. Today we look at how India is taking this to the next level with the Unified Payment Interface.

Digital Identity for the Unbanked

Less than 2% of the 1.2 billion population of India have a credit card (and nearly 20% have never been to a bank). and yet there are over 1 billion mobile phones in India. Leapfrogging the old way (credit cards and ATMs) is the only way. This is the core of our thesis of First The Rest then The West (that the innovation, which in the 20th century went from West to Rest of the World, has moved in the 21st century and now increasingly moves from the Rest Of World to the West).

The goal of mobile money – to make transferring and receiving money as easy as exchanging e-mail or text messages – is an essential user need in India (and a nice to have in the West).Imagine paying for that pizza delivery when you don’t have a credit card and the ATM is miles away. The pizza guy has a mobile phone. The solution is obvious. As long as you can crack the Digital ID problem.

Unified Payment Interface

Unified Payment Interface is a recently announced architecture and a set of standard APIs that was launched by National Payments Corporation of India. It is consistent with the Reserve Bank of India‘s vision of a digital society. India already had an Immediate Payment Service (IMPS) platform through which one could transfer money instantly by going online. Unified Payment Interface takes this a critical stage further by enabling easy debit capability on mobile phones.

Identity after Aadhaar

The key to mobile money is Digital ID. This is key to preventing fraudsters and other bad actors (money launderers, terrorists etc).

Unified Payment Interface is built on top of India’s massive biometrics-enabled national ID system, called Aadhaar (the Hindi word for foundation). This is a unique 12-digit number associated with a person’s eye, fingerprint or facial features and it has recently crossed the magic number of registering 1 billion people. This leapfrogs western artefacts such as drivers license and passport.

Entrepreneurs and Banks on a level playing field

The goal of regulators is to get better, faster, cheaper financial services to the people. They should not care whether it is a bank or a startup that does this as long as both play by the rules.

Unified Payment Interface is being created by India’s retail banks and backed by India’s central bank. This is essential because the Banks have to accept the Digital ID. Yet the biggest beneficiaries could be ventures such as Paytm, or Novopay which offers mobile banking at 44,000 neighborhood convenience stores (called kiranas in India). Unified Payment Interface is about C2M as much as it is about C2C (a distinction that is unreal in a country like India where most people are micro entrepreneurs aka sole traders or free agents).

Tech Smart Regulation

Unified Payment Interface is another example of Tech Smart Regulation (like PSD2) that goes beyond a bureaucratic mandate to make it happen through an architecture and a set of standard APIs.

It is not a coincidence that these big government initiatives have been partly brought to life through the smarts and hard work of Indian tech pioneers such as Nandan Nilekani and Vinod Khosla.

Different path to China

The action today in Fintech is in China. BAT (Baidu Alibaba Tencent) are making moves that make the American Internet Platforms (GAFA – Google Apple Facebook Amazon) look hesitant. Western firms flock to China to invest and do deals. The Bitcoin story today is largely a China story.

India is just the other country with over a billion people. Except that a) India’s demographics are better (younger) and b) India’s GDP growth rate has surpassed China (the data is questionable as it is in many countries these days).

Those two “unicorn countries” (with over a billion people) have taken a totally different path. China leaped to prosperity through manufacturing and is now making the transition to being a consumer centric economy (from being export driven). India grew more slowly in services and is already more of consumer centric economy. China can make stuff happen quickly because a single Party is in total control, but has no safety valve of popular discontent, while India has a famously messy and slow moving democracy. In technology, the changes are also stark. American Internet Platforms struggled to get established in China, leaving room for BAT (Baidu Alibaba, Tencent) to emerge but were welcomed with open arms in India (where the Google of India is Google, the Facebook of India is Facebook, etc).

By cracking the Digital ID problem, India may create a global winner in mobile payments.

E-commerce is payments with a pretty wrapper

Flipkart is a big e-commerce success story in India that figured out how to accept cash for deliveries. Naturally they got into the mobile payments game by buying PhonePe, which uses the Unified Payments Interface.

Uber is really a taxi service that figured out how to tokenize the credit card payment process. India has figured that out and is not making their entry easy (which Uber responds to in their trademark pugilistic fashion as we reported here).

Better than M-Pesa

Africa pioneered mobile payments with M-Pesa. While the West was obsessing about the theoretical possibilities of Bitcoin, M-Pesa was changing millions of people’s live in practice. The data from where it started in Kenya is amazing – about 50% of the population use it. This has crossed the chasm.

However, M-Pesa suffers from one fatal flaw that prevents global adoption. It is a closed system controlled by one company (Vodafone). India has so far taken an open approach to innovation and could do this in mobile payments.

Both China and India view Africa as a market opportunity. Yet Africa may create its own disruptive innovation (see here for our coverage of African Fintech).

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network.Bernard Lunn is a Fintech thought-leader.

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