While the government’s decision to scrap Rs500 and Rs1,000 bank notes has been met with resistance from some quarters and been called too abrupt, Infosys co-founder Nandan Nilekani backed it, saying it was needed to speed up the move to a cashless economy. “There is no question that this is a very bold move—and it’s a defining point in India moving to cashless,” Nilekani said over the phone on Wednesday.
One of the foremost advocates of a cashless economy, former Unique Identification Authority of India chairman Nilekani argued that India is better equipped to handle this transition than other nations and has the necessary infrastructure to enable digital payments to gather pace. Nilekani, one of the brains behind the Unified Payments Interface (UPI), spoke in an interview about the near-term challenges of going cashless and how it needs to be tackled. Edited excerpts:
The reaction to scrapping the bank notes has drawn criticism in some quarters and been called too abrupt. What do you make of this transition?
For the move towards a cashless economy, this is a huge boost. The launch of UPI is (timed) just right and I’m sure they must have looked at the fact that UPI is coming. This will accelerate the cashless movement—people using phones to do P2P (peer-to-peer) payments using UPI or making merchant payments, all that will receive a tremendous boost. The other thing is that people will need to figure things out over the next few weeks because the dislocation that will happen when people will not have their notes and the retailer will not accept notes, they will realize that cash was thought of as such a friction-free thing. Now, they will suddenly find that it’s a nuisance. I think this will push people towards digital transactions. All in all, it’s a great signal for taking India cashless and I think the infrastructure that we have built over the last seven years—Aadhaar, IndiaStack and UPI in particular—will get a tremendous boost.
Close to 50% of India is still unbanked. Do you think the digital revolution is happening quickly enough?
I think the bank account movement is happening. Just on Jan Dhan Yojna, they opened 240 million bank accounts and if you look at the Aadhaar Payment Bridge, they have 350 million bank accounts linked to Aadhaar numbers, which means 350 million unique people who are basically adults and have a bank account, have their Aadhaar numbers linked. And now with the payments banks coming, more and more accounts will be opened—already people are getting wallets. So, I think it will just accelerate.
What are some of the things that need to happen to lead to more rapid adoption of digital transactions?
I think the cashless revolution is happening for three reasons—on the government side, there is the desire to make India cashless to eliminate black money, have a digital trail of transactions and so on. A lot of this is related to that part. And then from the consumer side, I think there is the desire to make payments, buy things online quickly, etc. So, from the people side, there is a desire to go cashless.
And now, with the infrastructure that we have created, we have the technology—so demand is there, the government push is there and the technology is there. So, all the things put together should lead to rapid adoption... I think the experience of cash management that everybody is going to encounter in the next few weeks, that will make them realize the power of a digital approach.
The Jan Dhan Yojana was about opening bank accounts. Aadhaar was about giving them the identity. Then Aadhaar-linked bank accounts became the basis for DBT (Direct Benefit Transfer). Today India has done more than a billion transactions on the DBT platform using Aadhaar. So, already people are getting their pensions and scholarships in their bank accounts, so everyone is getting a bank account. Then IMPS plays a huge role in the migrant movement and sending money and so on. Of course, the icing on the cake is UPI which is dramatically going to change the P2P transactions as well as merchant payments. And I think the real power of UPI is not just online merchants -- that’s only a small part of the business. Most merchant transactions are offline -- once offline merchants start using UPI, then you really see it taking off.
Customers want digital because it’s convenient to them -- government wants digital because they want to bring a transparency and technology platform, we have the world’s best infrastructure for digital payments. So, everything is coming together….We already saw IMPS (immediate payment service) go from zero to 29,000 crores a month in five years. So, there’s no reason why the UPI and its adoption won’t go there too.
What are some of the near-term challenges of moving towards a cashless economy?
Clearly, everything needs to stabilize. Then, you need people with a feature phone to participate in some way. They may not be able to get the full range of features, but they must be able to at least make or receive payments using UPI. And then connectivity, and companies will have to stick it to the offline retail outlets -- so, all this will be required over the next 6-12 months.
While UPI is a cornerstone of the fin-tech revolution in India, it has also faced criticism from some quarters -- for instance, the likes of Amazon have argued that UPI is too closely controlled and regulated by the banks and should be more inclusive, especially with merchants. How does that need to be addressed?
Everybody has to follow the rules—India has a Payment and Settlement Act, which is the basis for payments and within that Act, the RBI permits different people to participate in the payments system, and those could be regulated entities such as banks or whatever. That’s the rule, that’s the system -- you can’t do whatever you want. Payment is a very important thing, it’s part of the financial infrastructure of the country and the way it’s designed now is perfectly alright.
Somebody who wants to access payments, can do that through the banks. And the banks are tying up with others—for instance, Yes Bank has tied up with PhonePe, Axis Bank has tied up with FreeCharge and so on. Those kinds of tie-ups will bring about innovation and the robustness of the financial system is also there. You saw what happened with the global financial crisis in the US—it was excessive innovation, without proper regulation. And that led to the whole global economy collapsing. We have to do this carefully and I think the RBI has done an excellent job in calibrating innovation.