Home / Opinion / UPI: Moving towards a cashless future

Banking in India is truly witnessing what Nandan Nilekani calls the “WhatsApp moment". WhatsApp, started in 2009, disrupted the messaging business of telecom companies. Nilekani argued in 2015 that the banking business in India will also be disrupted as payments will move to mobile and lending to algorithms. The entity with better technology will attract more deposits and disrupt the banking business.

A number of things are happening simultaneously, which could potentially change the way banking and finance work in this country. With the launch of the unified payment interface (UPI) by the National Payments Corporation of India last week, India has passed a significant milestone.

UPI has made digital transaction for individuals as easy as sending text messages. In addition to peer-to-merchant, UPI allows seamless peer-to-peer transactions. This will bring enormous efficiency in the system and help India become a truly cashless economy. Imagine a situation where a farmer sells his produce in the mandi and gets paid in his account. He immediately gets a confirmation on his mobile phone and uses the same to pay his daughter’s school fee even before leaving the mandi.

According to a recent report by the Boston Consulting Group (BCG) and Google, total payments through digital instruments in India could increase by about a factor of 10 by 2020. Also, by 2023, the proportion of non-cash transactions is estimated to overtake cash. These projections may sound somewhat unreal to many at the moment, but technology has surprised us in the past, and Indians have shown the ability to adapt, especially when it comes to mobile phones. The BCG-Google study notes that the number of mobile wallet users has surpassed the number of mobile banking users and is now three times the number of credit card users.

But the payments business is only one part of the change. The Reserve Bank of India has also issued licences for new payments and small finance banks. These new-age banks will compete for business with existing banks and it is likely that entities with better technology and interface will gain disproportionately, possibly resulting in consolidation in the banking and wallet business. Things are likely to become more difficult for banks, especially in the public sector, which have lagged in adopting technology. With Aadhaar authentication and use of better technology, the cost of customer acquisition and service would also fall. This would allow people to seamlessly migrate to better platforms.

More and more people joining the digital payments and banking platform will open up a number of possibilities. For instance, small business owners find it difficult to get credit from formal sources. Now, with more cashless transactions, they will have a banking track record which will improve their chances of getting a loan. In fact, with changing technology and regulatory environment, this may also get automated. It is possible, in the not-too-distant future, that people will be able to apply for loans through their mobile phones. Since banks have all the relevant details, perhaps the application would be processed and loan granted in real time.

To be sure, it is difficult to point to how disruption will actually unfold in the banking space. But one thing is clear, India will rapidly reduce the need for carrying cash. Apart from developments in the banking and payments space, other factors will also contribute to this change. For instance, the Narendra Modi government is continuously working towards reducing the influence of cash in the economy. Last week, it decided to set up a committee that will suggest ways to overhaul the digital payments framework. It has also taken a number of steps to encourage digital transactions.

Irrespective of what happens to existing banks, one of the biggest benefits of moving to a cashless system will be availability of a transaction trail which will make tax evasion difficult. This would increase tax collection and possibly reduce tax rates in the future, which will further boost compliance. Implementation of the goods and services tax will also plug leakages and incentivize digital transactions.

The way India deals with money is changing and the pace of change will only accelerate from here on. It will be interesting to find out whether rapid digitization of money will also change the Indian mindset towards risk and investment. Again, this could change the face of finance in India.

Can India become a truly cashless economy? Tell us at views@livemint.com

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