The Art of a Good Unicorn | What UPI internationalisation means for startup founders

Indian startups may be able to explore markets abroad without potential burden of complex payment infrastructure, but information security is a big necessity

February 2024 saw close to 125 crore UPI transactions worth a total of ₹18 crore. A year ago, the Reserve Bank of India announced that UPI would be integrated with Singapore's PayNow, which may have meant more accessible remittances between India and Singapore. Other countries, like Sri Lanka, France and the UAE are said to have jumped on the UPI bandwagon as well. For startup founders, this opens a whole lot of opportunities because they'd no longer be confined by geographical boundaries and may even envision global expansion with newfound ease. If there's an ability to transact using UPI in foreign countries, it could eliminate the reliance on traditional banking systems or credit cards.

"UPI transactions need to be secure, which means cybersecurity and risk management systems have to be robust."(Mint file)

We spoke to Arjun Goswami, director of public policy, Cyril Amarchand Mangaldas, about what it would take to go global with UPI. Edited excerpts:

How can other countries adapt to and build the UPI infrastructure? Can a technology like UPI pave the way for a truly borderless world economy? And what would the internationalisation of UPI really look like?

 

If there's an Indian traveller who has gone to a foreign country where UPI has been accepted, they would be able to pay a merchant there using UPI. They wouldn't have to bother with a credit card that has to be enabled for foreign use or other methods. Conversely, when a foreign traveller comes to India, they can use an app on their system to pay in India. So, this makes the payment systems for ordinary people seamless.

Detractors, however, say that this could also open a Pandora's box of increased digital surveillance, where one's actions in foreign countries could be more closely monitored, leading to the next wave of surveillance capitalism.

UPI doesn't operate on its own and if it did, it can't be effective that way. It's part of what's being called the India Stack of the country's digital public infrastructure. There are at least four layers to it: UPI-enabled payments are used to move money across; a consent layer, where there has to be some data protection architecture; a paperless layer, which includes an e-KYC or a DigiLocker system; and the presence-less layer, which has a digital identity. And all of this works if the consent layer works. UPI transactions need to be secure, which means cybersecurity and risk management systems have to be robust. This is because personal data is involved in the form of financial information.

Would this interoperability need policy changes in India?

 

From an international perspective, if there are cross-border UPI transactions, the question that arises is how UPI would work if foreign countries don't have something like Aadhar or a similar system. That’s required, otherwise identities could be stolen. And if there were a system, like Aadhaar, developed internationally, an institutional framework would be needed, which is not an easy process. So, there needs to be a robust legal and institutional framework around these things. The fact that the government is trying to promote not just the internationalisation of UPI, but, to some extent, a cross-border option of the Aadhaar system is the correct thing to do, but there could be some challenges.

From a domestic perspective, people are used to having UPI for free. The applications that are using UPI at the moment don't have merchant discount rate fees. Given exponential growth, this becomes quite difficult. That's why, for several years, industry bodies for these payment applications have been pressing for some change, when it comes to Merchant Discount Rate. Sure, entities are trying to make money through commissions, charging fees for brands, monetising data, like spending patterns, and more; that may help a bit, but over the medium term, it's not going to be enough. And despite a staggering growth of Internet usage in India, there still seem to be digital literacy problems.

And are these some creases to iron out when it comes to UPI?

 

At the moment, there's a monopoly, when it comes to the UPI being run by the public sector through the National Payments Corporation of India (NPCI). But, if there’s competition with private networks running systems, like UPI, merchants could, then, have a choice. Previously, there was an attempt by the RBI to start new umbrella entities that were private retail payment systems. Some consortiums tried for it, but none of them came through. The fact that there's no rival means that the improvements in cybersecurity, which could happen, are not happening at the desired level.

Does the death of UPI internationalisation spell the death of physical cash?

 

I think the notion that cash would completely disappear out of the system may be fanciful. The benefits of digital payments, in terms of ease, do exist, but I don't think in the immediate term, cash would disappear; no one should be ideologically driven about this. It should be a pragmatic process, where the advantages of digital payments expansion happen through a conscious effort on financial inclusion.

So, Indian startups may be able to explore markets abroad without the potential burden of complex payment infrastructure. And that could foster a climate ripe for experimentation and growth. Could it be that with this internationalisation, the global marketplace is beckoning?

 

I think digital payment system operators have a responsibility to spread awareness in Tier-5, Tier-6 cities and rural India. Whatever we do in the payments space should not make us beholden to a couple of operators. The principles of antitrust and fair competition must continue to operate, for that is the lifeblood of a competitive economy.

Shrija Agrawal is a business journalist who has covered startups and private capital markets before it was considered cool in India.

The views expressed are personal