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Payments 4G (aka UPI) The Best is Yet to Come!

Last week was a landmark week for all Indians and by sheer coincidence; the country witnessed the launch of two generational shifts. The one that has everyone excited is Jio, a pure, data-only high-speed mobile network.

The other that perhaps will have equal transformational impact is its peer in the world of digital payments, the Unified Payment Interface (UPI). As soon as I had my first experience with UPI, I realized that its impact has barely been appreciated by most, including me.

Why Payments 4G?

Similar to data networks in telecom, which were built on top of the existing voice/SMS infrastructure, most innovations in Payments are layered on Card platform, a solution conceived in the 70’s. Almost all large-scale payment systems today run on the rails of card-based systems, operated globally by Visa, MasterCard, AmericanExpress and adapted in other regions by companies like UnionPay in China and RuPay in India. While innovators like PayPal, Venmo and Paytm in India have attempted to create close-loop systems, some with more success than others, the interface to the external ecosystem was still mostly card-based.

With UPI, the payment rails have been rethought and built from scratch, a de-novo system that was conceived in the year 2015 and implemented within 12 months. From the ground up the system is built with the idea of SmartPhones and Mobile Internet and like all things in Digital India, ZERO Vendor Lock-in.

A few key capabilities in the UPI architecture are fundamental game changers:

1)   Real-time, inter-bank authorization and settlement from one bank account to another: It sure is fascinating to see a live transaction with someone who receives a notification and can do a balance refresh to see their balance updated instantaneously using ANY application!

2)   SMTP for Payments: Just as you can use any email client (e.g. Outlook, Gmail to access any email account), UPI has decoupled the payment instrument (application) and store of funds (bank account). During the first week of its launch, two of my colleagues showed me a demo of transferring money between each other’s accounts with the same bank and neither of them was using that bank’s mobile application.

3)   Support for all types of payments: It can be anything from one-time, recurring, pull, push, pre-authorized, on-us, off-us, etc. The flexibility in the platform that is exposed to the banking ecosystem as an API is immense.

4)   A concept of Virtual Payment Address (a la email) that enables privacy and security and in effect as much of anonymity with auditability and traceability.

India has largely been a cash economy. For digital payments to takeoff, it is important to be able to bring as many of the real attributes of cash as possible, notably in Real-Time, with 100% value and allowing anonymity between payer and payee. Additionally, digital transactions have the benefit of auditability and traceability, both of which are important in the case of dispute resolution.

For once we have a payment system that is built on a whole new rails and I believe its impact will be nothing short of revolutionary. Coupled with the Smart-Phone and Mobile Internet penetration and an aggressive business model, there are five areas that will be impacted significantly.

1.    P2P – P2P is set for lift-off!

a.   Until now P2P payments in India have been largely done in a batch manner using NEFT or RTGS platforms and even with the launch of IMPS (the underlying foundation of UPI), few had used the slightly clunky interface. With virtual addresses, it becomes easy to send money to someone or send a collect request too. This means Social Payments, Bill Splitting, Gifting and other such use cases will come to the fore.

b.   Additionally two fundamental changes are likely to happen

i.    Informal sector merchants will be happy to accept payments into their bank accounts because they are real-time and zero charge – which can be a great way to get them into the system. Of course once they recognize the value of being in the formal sector, they may have to pay a fee – or alternately a bank may leverage the data for services like loans etc. and keep the payment transactions free.

ii.    Everyone automatically becomes an ATM machine , which in essence can be a catalyst for digital transactions. A large part of the population keeps cash because they may not have access to an ATM, but knowing that an ATM is always around the corner will give people the confidence to keep their money digital. One company has built an app to do just this and could be an exciting one to watch.

2.    Acceptance – from Rates to ROI/Impact will drive decisions

In the enterprise and mid-market sectors, the previous generation of payments innovation, notably SmartPhone-based Mobile POS solutions that have enabled businesses like insurance companies, e-commerce companies, utilities, police departments, and several others to enable digital payments – although on the same rails as the card system. These initial forays have proven the improvement in agent efficiency and productivity, often an increase of up to 10%.

With UPI, the stage is set for SmartPhone/POS to go mainstream and for payments to be integrated into business workflows. Businesses will hence make buying decisions not based on Merchant Discount Rates but more by choice of applications, availability of SDK’s, breadth of payment offerings and by trying to quantify ROI and productivity gains. We expect such sales processes to no longer be driven by banks but done more in partnership with Application or Flexible Payment platform providers.

3. Consumers – Win with rich choice of front-end applications

Until now, consumers could only transact with a card issued by their bank (credit/debit/prepaid) or the mobile banking app of their bank. With the 4-party model of UPI, consumers can use any UPI-certified app to transact via their SmartPhone. This is a breakthrough in that consumers will be spoilt for choice and can pick the best app. While the initial restriction is that a bank must develop such apps, there are some examples of banks allowing third parties to build differentiated experiences. Over time it is clear that there will be an abundant supply of apps and consumers can use any app they like. While this might seem like banks are giving up control but in reality banks that develop a partner-ecosystem can benefit the most by getting visibility into transactions with customers who may not even be banking with them. It’s surely a shift from the banks’ perspective but a big opportunity nonetheless.

4. Convergence – Online & Offline

Historically in Card-based systems, there was a lot of importance given to Card Present vs. Card Not Present . However as we move to a “Phone-present” world, there is fundamentally no difference between a face-to-face transaction and a remote transaction. We are already seeing use-cases like Uber where the service is delivered in a face-to-face manner but the payments are processed in an online manner. We expect more and more of this to happen and business wise the system should start treating all payments the same. I expect to see one simple business model for payments in the near-term.

5. New Metrics – Mining the digital exhaust

Business Metrics will change – from Stores to Flows!

The most fundamental thing that will change with UPI is the business metrics. In the past for banks, CASA (Current Account Savings Account) count and balances were always the primary metrics that were tracked, along with Merchant Discount Rates and transaction fees. However in the UPI-enabled world and the four-party architecture, it is clear that the most important isn’t just to be the store of funds, but to be in the flow of the transaction. As such banks will need to start tracking the use of mobile apps by them or partners, use of such apps by existing customers and customers of competitors as well as the use of competing apps by their customers. With switching costs now becoming close to zero, banks that encourage the creation of an ecosystem and giving the maximum choice to their customers are likely to emerge as winners. Mining the digital exhaust will be key for banks to make the most of UPI.

While exciting, it’s still early days in India. UPI has barely gone live in the past one-week, and already we’re seeing some dramatic impact it is having on the system. The next few months and years promise to be truly exciting for the Indian consumer, retail or corporate, as well as the banking sector which stands to gain a great deal from this innovative approach to payments. Indeed the real-time architecture of UPI will truly make it the envy of many a payment regulator and industry expert around the world.

Watch this space, the best is yet to come – but one thing is for sure – UPI will usher in a disruptive step-function in the growth of digital payments in India. There is no precedent from developed economies – India is blazing a new trail and writing the new chapter in the world of Real-Time Payments!

PS: All images are courtesy iSPIRT

Guest Post by Sanjay Swamy, Entrepreneur & Early-Stage VC! IndiaStack Evangelist. Reblogged from here

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UPI – The Revolution in Payment Industry

Japan introduced ‘Zengin’, a real-time money transfer mechanism in 1973. Thirty Seven years later, NPCI (National Payments Corporation of India) introduced IMPS (Immediate Payment Service) in 2010 as the first real-time 24*7 money transfer mechanism in the country.

In-between PayPal launched money transfer by just knowing a person’s email ID in 1999 and now in 2016, India is about to make UPI (Unified Payment Interface) live in few weeks. It will enable real-time transfer of money 24*7 just by knowing a person’s virtual address.

These two comparisons above need to be looked at with different lenses, one from the laying of groundwork and the other ease of usage. It took some time but NPCI setup IMPS which has performed very well with IMPS transactions growing at a staggering pace, over 100% every year. In May 2016 alone, USD 3.4 Billion were transferred on it.

However, these transactions have not really been very easy to carry out for Indian consumers. Whether with account numbers and IFSC codes or with MMID, the friction has curtailed the full potential of this behemoth on rise. This is where UPI comes in, abstracting the payments on top of existing robust IMPS to the degree that Indian consumers can now carry out transactions in few taps with just a virtual address. It is India’s PayPal moment for consumer payments bringing it to that parity in terms of end user convenience that will only lead to further digitisation of cash in the country.

This moment is also an inflexion point for us. Bill Gates recently said that “India will lead the world in digital financial inclusion”.

Few key things have led to this point.

The Indian consumer has adopted smartphones and internet very well. In 2015, the internet user-base in India recorded an impressive 40% growth over the past year and the smartphone shipments in India is estimated to grow by 29% in 2016. Stepping few years back, it has been a remarkable journey starting with paying for a train ticket on IRCTC website to small mobile recharges to e-commerce payments, Indian consumer got a taste of online payments and got comfortable with it and now slowly like it panned out in West, the demarcation of high touch and low touch products is diminishing with users now purchasing anything online.

Consumer trends aside, policy-making and the work of bodies such as RBI, NPCI, iSPIRT (Indian Software Product Industry Round Table), IAMAI and many more has helped in information collection, dissemination and laying of frameworks to provide a solid ground to build up Indian mobile payments story.

Apart from peer to peer payments, IMPS can now carry out PULL based transactions as well so that a user can now make merchant payments seamlessly with just an MPIN in a ‘Single Touch, 2 Factor Authentication’ method where a user’s device ID is being treated as the first factor of authentication.

Like any new system, it will take some time to set up and grow. The merchants will have to come on-board quickly to accept payments with UPI and users will need to be educated. For merchants, it will have a low TDR (Transaction Discount Rate), comparable to low Debit Card rates and higher conversion in transactions as multiple intermediaries and hops for an online payment to take place successfully will get out of the way. For the paying customer, it will allow payments in one tap and money will get debited directly from their bank account.

In past, we have seen many financial systems and methods take years before going mainstream but we believe that UPI will get adopted at a faster pace than what we have seen in the past. A lot of macro-trends and unique Indian payments landscape in which masses skipped credit cards altogether and many had a mobile smartphone as their first internet device indicates that things will play out differently here.

That brings us to the question that amidst all of these changes in the ecosystem with all of the above playing their crucial part, what role do we, the startups have? Answer is that as young entrepreneurs, it is our obligation to take this story forward.

Just like Uber used GPS, Google Maps and different facets of established or emerging pieces of technology, we have to use UPI to provide Indian consumers with great experience and delightful products.

In doing so, we will have to educate Indian consumers about what UPI is – what a virtual address is, how safe and secure it is, how they can have a virtual address issued by a bank when they don’t even have a bank account with the bank application (Payment Service Provider) issuing that virtual address and more.

The experience of on-boarding them onto UPI will have to be very simple and delightful.

The old ‘Goldilocks effect’ will have to be brought in where a user should not get too wary of the new yet understand that the whole payments paradigm has changed for good.

We at Mypoolin have spent a great amount of time acquiring tacit knowledge in how consumer payments are made and users behave in various social contexts and settings when it comes to payments. We are of the strong view that UPI brings the great convenience required for payments to be made smoothly and we will build great value on top of it for Indian consumers. We have begun playing our role by education our existing users and more with a UPI specific website and other channels about UPI which has helped us gauge market response to it and get valuable feedback that we can share with the ecosystem at large for the benefit of the market.

The applications of UPI are in many different use-cases and it is upon us startups to recognise it and take it to market.

We can’t blame it on anyone – the system or the current economic downturn to not do our job – UPI is one of the many enablers to follow that will help us build great technology products to make India a ‘Product Nation’

The true mettle of Indian founders to build great products will be tested and it will change the mindset as well to build India specific New from the scratch and set a trend the country needs for future entrepreneurs to follow.

This is our pivotal moment and we must not let it slip away.

Guest post By Ankit Singh, Co-Founder, Mypoolin

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India Stack takes the Digital India campaign to a whole new level

India is the third largest smartphone and mobile internet user market in the world with over 200 million internet users in 2013. The figures are expected to touch a staggering 500 million users by 2017, including 314 million mobile internet users according to a report by IAMAI and KPMG. Clearly, mobile phones are the ‘computing device of choice’ for the country. To keep up the momentum, the Government of India is keen on developing the digital infrastructure of the country under the Digital India program.

Digital India is a revolutionary program that will empower the masses and leapfrog India into the next generation of government services. Fortunately, the lower level of investment in earlier generation technology means India has skipped the legacy era and waited for the right technology to arrive at its doorstep. To kick-start and empower the Digital India program in a very democratized form and involve the great innovation talent of the nation, the Government of India has launched an open API policy. An open API, often referred to as a public API, is a publicly available Application Programming Interface (API) that provides programmers with programmatic access to a propriety software application. This set of open API is known as the India Stack and these would enable the ease in integration of mobile applications with the data securely stored and provided by the government to authenticated Apps.

India Stack is a complete set of API for developers and includes the Aadhaar for Authentication (Aadhaar already covers over 940 million people and will quickly cover the population of the entire nation), e-KYC documents (safe deposit locker for issue, storage and use of documents), e-Sign (digital signature acceptable under the laws), unified payment interface (for financial transactions) and privacy-protected data sharing within the stack of API. Together, the India Stack enables Apps that could open up many opportunities in financial services, healthcare and education sectors of the Indian economy. What this essentially means is that developers and tech startups can now build software and create businesses around the readily available infrastructure offered through India Stack, thus opening a huge potential to tap into the booming smartphone market in the country. Since the consumer market in India is very large, such startups could also hope for institutional funding and gain from the early mover advantage.

Through the digitized elements like e-KYC, e-Sign, digitized Aadhaar information and digital locker, the entire ecosystem has now become a presence less, paperless and cashless based system. A Digital Locker enables users to have all their legal documents in a digitized format that is stored online and can be accessed from any part of the country. The e-Sign makes it simple for people to sign deals, contracts and legal documents through their phones and the Unified Payment Interface lets people make payments with ease through their smartphones from anywhere.

India Stack makes a user base of over a billion people readily available through its API. This means that startups and tech companies can build over this to be able to integrate various functions for their businesses or for larger enterprises. Every bank or telecom operator scans through tons of paperwork every day to be able to verify customers and generate KYC documents. Now imagine the impact if this entire process could be digitized by building an application which would integrate India Stack and the user base of over a billion Indians!

With the technology, documentation and sample code available, entrepreneurs and startups can get started with innovating, prototyping as well as building India Stack enabled applications. The commercial applications are endless with multiple opportunities, as the large user base opened up by India Stack is nascent, solution-hungry and largely untouched by technology. Now even a local vegetable trader can take an intra-day loan almost instantly through his mobile phone and pay it back the very same or next day without even physically visiting the bank or wasting any time (time is money when earnings are proportional to time spent)! With their e-KYC documents and digital signatures, a loan can be processed almost instantly and the money transferred through the Unified Payment Interface. Long queues at banks, telecom offices and all other government and non-governmental processes should be the thing of the past, through proper integration of India Stack.

The nation is looking for “a transition from technology-poor to innovation-rich society” and entrepreneurs have a good role to play. The problems (read opportunities) in financial services, healthcare and education are all so large that only the right technology can cost-effectively solve them. Solving these scale problems would mean great business sense too.

iSPIRT, the non-profit software product industry think tank powered by industry veterans, has been actively involved in the development of India Stack and is helping entrepreneurs make the best use of business opportunities provided by India Stack, while building their startups. iSPIRT believes that India Stack creates a whole new generation of business opportunities around the mobile phone and early movers would have tremendous market advantages.

On a recent visit to India, Bill Gates commented on India Stack saying, “India is on the cusp of leapfrogging!” And it truly is; considering it is the only country in the world offering such an open and secure API, India is certainly looking at taking the Digital India campaign to a whole new level.

The future is here and now is the time to act.