Lessons from India’s fintech revolution
Unlike consumers in the West, many Indian consumers have leapt straight to mobile banking and wallets without any experience with card payments or e-banking.
Twenty years ago, four Reserve Bank of India (RBI) officers went on a study tour to Sweden to experience of the Swedish payments system first-hand. They were impressed with what they saw at the Bankgirocentralen or BGC AB. BGC AB was set up by the leading banks of that country and had become a one-stop clearing house for retail payments and related services. The officers felt that a similar model that combined private initiative with public-spirited innovation might work for India.
This idea found expression in RBI’s 2005 vision document on payments. RBI should work jointly with the Indian Banks’ Association (IBA) to set up a retail payments platform, the vision document said. Despite resistance from some bankers, the idea gained ground. With leading banks as shareholders and then RBI governor YV Reddy’s blessings, the National Payments Corporation of India (NPCI) was set up in December 2008. The rest, as they say, is history.
After beginning operations in 2009, NPCI standardised the protocols for inter-bank fund transfers. In 2010, it launched the Immediate Payment System (IMPS), an instant retail payment service with round-the-clock availability. Prior to IMPS, transfers of funds across bank accounts (through the NEFT and RTGS systems) was processed in batches and at fixed operating hours. Digital banking was limited to high-value transactions.
IMPS provided a mobile-based interoperable fund transfer service, with instant payment confirmation to both the remitter and the beneficiary. It set the stage for the launch of the Unified Payments Interface (UPI) six years later (UPI transactions are settled through IMPS). UPI enabled fund transfers without having to share one’s bank details or one’s mobile number with the beneficiary. The UPI ID (or virtual payment address) was enough. Small-ticket digital payments saw a massive boom after UPI was launched. New payment firms contributed to the growth with unique innovations such as the “sound box” that tells your local grocer in her own language how much you just transferred to her account.
The NPCI success story offers three key lessons.
The first relates to openness. The idea of a not-for-profit payments platform owned by leading banks came from Sweden. Although NPCI has been touted as an indigenous success story, the inspiration is foreign. RBI and NPCI teams deserve full credit for adapting the Swedish model to Indian conditions, and for adding new innovations on top of it. But it is the willingness of RBI’s officers to learn from others that helped them launch a path-breaking initiative.
This suggests that Indian officials should keep an open mind in search of policy ideas. They need to adopt the ethos of a vishwa vidyarthi (global student). The makers of modern India, from Rabindranath Tagore to BR Ambedkar, engaged with the wider world and gained from it. Their examples remain relevant even in a world with tighter borders and narrower minds. Just as it is unwise to blindly accept a policy idea with foreign origins, it is unwise to reject a policy idea simply because it has foreign origins.
The second lesson relates to leapfrogging. In his 1962 book, Economic Backwardness in Historical Perspective, the economist Alexander Gerschenkron argued that latecomers to the Industrial Revolution (such as Germany or France) had not followed the same steps towards industrialisation as early pioneers. Instead, they leapfrogged their way to industrialisation by skipping some steps, and by avoiding the mistakes of the early industrialisers such as England and the United States. Their relative backwardness did not disadvantage the latecomers.
In the same vein, most consumers in India (and other developing countries) have skipped a step in their financial journey. Unlike consumers in the West, who adopted mobile banking after having used e-banking and card payments (using computers), many Indian consumers have leapt straight to mobile banking and digital wallets without any experience with card payments or e-banking.
The third lesson pertains to the appropriate role of the regulator in market development. Regulators are often blamed for stifling innovation, and often justifiably so. But regulators have sometimes played a stellar role in steering innovation as well. For instance, the transformation of India’s financial markets in the 1990s happened only because of a jugalbandi between the Securities and Exchanges Board of India (Sebi) and the National Stock Exchange (NSE). With Sebi’s blessings, NSE introduced electronic settlement of shares in the country, helping bring down frauds. The introduction of screen-based trading defanged entrenched broker-cartels that had held Indian markets ransom for long years.
However, this model of regulatory patronage in which the regulator acts as the guardian angel of a corporate entity has its limits. The Sebi-NSE saga itself demonstrates that. While NSE was a hub of innovation in the early years, the implicit backing of the regulator eventually led to complacency. Even as innovations dried up, NSE’s senior officers began treating it as their personal fiefdom. Financial scandals followed.
Had Sebi withdrawn its regulatory patronage earlier, both NSE and Indian financial markets would have been better served. There’s a lesson there for RBI.
Pramit Bhattacharya is a Chennai-based writer. The views expressed are personal