UPI and “banking revolution”: A violent coup or just a disorderly transition?

19th Apr 2016
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George Orwell – “In a time of universal deceit, telling the truth is a revolutionary act.”

The cold, hard truth about India’s banking system is that it’s a gigantic mess with bad loans of several public sector banks ballooning above their market capitalisation. So, when RBI Governor Raghuram Rajan says, “A banking revolution is upon us” while launching the Unified Payments Interface (UPI), skepticism is bound to creep in.

A revolution needs to put in place an alternative institutional framework that will solve present day problems and provide a peek into the future. In the absence of actionable direction, a revolution could turn out to be a violent journey from the peak of inflated expectations in a hype cycle to the trough of disillusionment.

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That said, UPI when fully operational across the Indian banking sector should be a win-win proposition – not only for banks and customers, but also for the overall economy. It will also create a level-playing field for the Indian banks struggling to catch up with the emerging, easy-to-use, and seamless technologies of mobile wallets.

Predicting the future of technology is a tricky business because no predictive model is remotely capable of factoring in human ingenuity. But change is usually a struggle – for businesses it’s about additional expenses, for users it’s adaptability – irrespective of the drawbacks of legacy systems and infrastructures. Only 10 banks have partnered for UPI as of now; “others will join soon”.

Except for the fact that now receivers will be able to initiate a transaction and that the universal app could be used by consumers irrespective of accountholders or not, the UPI on paper is a rehashed version of the already existing Immediate Payment Service (IMPS) platform, an instant inter-bank electronic fund transfer services.

There are two critical reasons why IMPS didn’t take off: Firstly, it’s not user friendly (one has to remember a seven digit Mobile Money Identifier number) – that’s probably why India’s “mobile savvy population” isn’t quite “bank savvy”; Secondly, it lacks interoperability (which essentially means limited to the participating banks only). Thus, the success of UPI also hinges on these two critical factors.

In addition, with “other income” (transaction fees have a significant share) coming to the rescue of Indian banks reeling under bad assets loan and lackluster credit growth, it’s hard to fathom that the banks will jump on to the UPI bandwagon and allow their fee income to be negatively affected. The fee coming from a transaction through UPI gets split between the bank in which the person holds an account and the bank whose application is being used to make the transaction.

If convenience and financial inclusion are key, why limit the app to mobile devices only? Note that there are 306 million mobile Internet users in India; smartphone users count just 200 million. Also, what’s the logic behind keeping the mobile wallets out of the UPI ambit? Why interoperability is still denied to the Wallets? Twenty-first century “banks” need 21st century regulations and systems.

UPI is reportedly likely to level the playing field for banks struggling to cope with the onslaught of non-traditional banking services on their transaction-related businesses. When policies are framed or systems are put in place to favor the traditional incumbents, they smack of the License Raj of the 90s, and not a revolution that cries out loud for simple and easy-to-understand rules and processes.

There is a need to understand that the playing field wasn’t level anymore for a reason. The Indian traditional banks, especially the public sector ones, have long turned into an obese cat – satiated and wanting to be left alone. It’s hard to believe that they turn into purring beast waiting to pounce on an opportunity.

Thus, the epitaphs of mobile wallet companies flying across the mainstream and niche media outlets seem a bit too premature. Last but not least, everyone is the startup world is in awe of the unicorns. I’m in awe of the cockroaches. Unicorns are after all a mythical beast. Cockroaches have a history of surviving nuclear disasters! The innovative Indian mobile wallet startups will surely bank on their ingenuity to stay relevant!

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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