Unified Payment Interface (UPI) – India side story. Arguably a Unique Payment System ever attempted anywhere in the world.

What is UPI

It is an interbank payment system in India where money can be transferred from a bank account to any other account held with any bank in the network instantaneously. Round the clock every day of the year.  UPI facilitates both Credit Push as well as Debit Pull transactions. Never mind the Bankers’ gobbledygook.  It only means one can initiate a payment transaction and even receive a payment request on one’s mobile phone. Over 100 banks in India are expected to participate in UPI bringing in hundreds of millions of customers seamlessly into a common nationwide payment system.

How it Works

Banks can play three distinct roles in this payment system. At the heart is a role where a bank, acting as a Payment System Provider (PSP), offers a mobile application which can be downloaded and used by customers of any other participating banks. The basic but the most crucial is a role where every bank in the network has to allow its customers to link their accounts with any of the PSP banks’ mobile applications. This is called an Issuer role. Issuing bank will receive encrypted MPIN and accept debit request in the linked accounts. The third role is of a market maker where a bank acting as an Acquiring bank facilitates merchants to collect payments. A bank has to join the network as an Issuer. Roles of a bank as a PSP or an Acquirer are optional.    

Let’s assume a customer named Suresh who has an account with “MyBank”. But MyBank is only an Issuer. So Suresh downloads a mobile application provided by an ”OtherBank”. Once Suresh links his MyBank account on the OtherBank mobile app, he creates a handle for himself. If Suresh is lucky he can call his handle Suresh@OtherBank. Now using this handle Suresh@MyBank can send, receive and even collect money to & from AnyCustomer@AnyBank. Voila. Now you have hundreds of millions of customers making payments to each other. They can be customers sending money orders to other customers or making payments to merchants. They can even be merchants making or receiving payments to other merchants.

Pardon the Spiel

If you are not a banker and have still survived the first three paras then let me not further test  your patience.  I hope you will pardon the spiel. But I had to narrate the plot before I could begin to tell the story.

But we have Cards

A lot of people have brushed off UPI saying, there are already cards! Why on Earth do you need a UPI or whatever”?.  One needs to scratch the surface just a bit to look for an answer. It is easy but not obvious. Take a look at the cards in India.  The latest data from RBI shows that there are 24 million Credit Cards and 660 million Debit Cards for a population of 1.3 billion in India.  Of these, Credit Cards clock in 2.7 merchant payments per credit card per month and Debit Cards chip in with 1.8 merchant payments per debit card per year. This is not a proof reading error. But this data means a) there aren’t enough Credit Cards and b) not enough customers are making payments to the merchants using their Debit Cards. Contrast this with almost a billion mobile phones.

I have seen in almost all developed countries Mobile Payments equal payments made by the linked cards. So you have mobile phones where credit card information is stored to make payments using Near Frequency Communication (NFC) or a Quick Response (QR) code. But when you don’t have enough cards or enough people who use cards to pay, this ain’t no good in India.   

And we have Mobile Wallets too

Now I am going to stick my neck out and say Wallets is a different story altogether. They are hep, they are trendy, they are cool too. They are also a great way to promote brand for a Merchant. But there are too many of them. Spare a thought for the customer. What does she do if every high street store and every e commerce merchant offers a mobile Wallet each?  And Wallets tend to work in silos. Rare are the chances that a customer can use balance in the wallet issued by Merchant A to shop at the Merchant B.  Wallets don’t earn you interest on the balances either.

What guarantee, UPI will work?

Nope. I can’t offer one. But as they say, the proof of the pudding is in eating. The banks and their customers are about to start eating theirs, here in India. For starters it is safe. The unique ID or finger print of the mobile handset and the handle chosen by a customer together form a strong factor of authentication.  Besides, every transaction is authorised by the customer using an MPIN. This eliminates the apprehension of the customers in India of card data getting stolen or the card getting cloned. Second, customers can pay in real time with just a click and an MPIN whether they are paying to a friend a thousand miles away or shopping at a high street store. This is because UPI will allow them to make payments remotely from anywhere or even over the counter. Third, customers won’t need to take money out from their bank accounts to keep lying idle in multiple wallets. Fourth, all they need is a smart phone and a bank account. In a nutshell the ingredients are right and the recipe is perfect. Chances are so will be the Pudding.

UPI has been conceived by Nandan Nilekani, the IT Czar of India. The Proof of Concept was launched under auspices of the Reserve Bank of India. UPI will be operated by the National Payments Corporation of India (NPCI).  

(All the opinions in this article are personal)

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Blokchain – It’s time we got rid of the Meddling Middlemen

Blockchain has taken a while to unravel its mysteries and full potential despite bitcoins having captured imagination of the general public a while ago. There have been enough and more discussions about what a blockchain is. What is more interesting is what it does rather than what it is! Here is a recap for those who have so far managed to insulate themselves from the rattling noise this blockchain.

The oft repeated definition of the blockchain says it is a distributed ledger. And like a traditional ledger it allows to maintain records of opening balances, closing balances, debits and credits.  But unlike a traditional ledger which requires a single and “trusted third party” to make those entries, blockchain  provides for multiple stakeholders or “nodes” to validate a transaction. Thereby democratizing and making transparent the entire process of record keeping. There are four most important characteristics of a blockchain which have potential to make it the most transformational method of record keeping.  Let’s now see why the ledgers will never be the same again. 

First is the Consensus. Blockchain requires that a transaction or an event be accepted as a valid record only if all – or the majority - of  the participants in that transaction have confirmed legitimacy of that transaction. Mandating the consensus achieves two benefits. The validated transaction can’t be repudiated nor can a transaction be inserted later into the chain surreptitiously. Only a transaction so validated is allowed to be entered as a record into the ledger or the blockchain.

Second is the Irreversibility. A transaction can’t be reversed once it is accepted as a valid record. And this record remains in the blockchain for posterity. Whenever it is warranted that a transaction be reversed then the blockchain mandates creation of another transaction in the reverse order. Thus recording both the event and its “antievent”. All such transactions are then added into a block. Blockchain can define a rule to allow a block of transactions to be created either after lapse of fixed time or completion of a fixed number of transactions. Once such a block is formed then a hash value of this block is created and added to all subsequent transactions. This ensures that once created a block can’t be tampered with. All these blocks are then added to a chain making the records in the ledger irreversible.      

Third is the Provenance. This means a blockchain records not only the title but the entire history of the title as it passes hands over a period of time. Blockchain ensures that a person can’t transfer a title in an asset unless he owns it or transfer a value unless he has the balance more or equal to that value.  

Fourth and the most important is the Transparency. Depending upon the rules defined upfront, a blockchain makes available to the stakeholders of a transaction holding necessary rights, auditors or investigating agencies the history of recorded transactions.

Let’s see how a blockchain will simplify say property registration transactions. Blockchain will be useful for both sale of new as well as resale of pre owned properties. One can create a workflow involving a node each for Property Registrar’s office; local Municipalities; Advocates handling the sale and purchase of properties; Real estate consultants; Builders and Developers; Architects and Civil Engineers,  Building Contractors and even Income Tax Department etc.  Rights of each of these entities can also be predefined. The blokchain then will obtain consensus of all or predefined majority of the nodes before allowing a transaction to be added into the chain. It is apparent that each transaction of sale of property has met all the four qualifying criteria of the Blokchain : Consensus, Irreversibility, Provenance and Transparency.

It must be obvious by now to even a casual reader that these tenets make a blockchain a perfect way of handling a slew of transactions especially in matters of public interest. Blokchain will have several useful applications in payments, banking and any type of asset transfers. A few examples where a blockchain appears to be the most apt way of keeping records are, land / property registration, cross border remittances, handling of Letters of Credit, vehicle registrations, inventory and supply chain management so on and so forth. Using blockchains in carrying out such transactions will automatically eliminate need for a separate third party to maintain a ledger and as a corollary its ability to tamper with records. It is about time the meddling middlemen retired and gave power back to the people.       

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Humans are not Wildebeest - why stampedes don't work outside Serengeti

For the last millions of years the wildebeest have been migrating every year from Serengeti in the south to Masai Mara in the north in search of new grass.  Primarily it’s their genes that drive the wildebeest as well as hundreds of thousands of zebras, gazelles and assorted other herbivores to set on the round trip to Mara.  This annual ritual not only guarantees food to the herds but also safety in their sheer numbers. Straying out is a sure recipe for death for the outliers either by starving or becoming one for the carnivores.  So it makes immense sense to a Wildebeest to join the stampede.

More often we humans  don’t exhibit traits any different from  the Wildebeest  in our natural instinct to follow the herd.  Farmers of a particular topography tend to grow the same crop year after year. Students flock to the most popular course in the campus and entrepreneurs set up the businesses which attract most subsidies and investments. And you bet sure it pays. In the short run that is. For the fact that the basic economics principle of the Demand and the Supply dictates that in the long run the glut  result in falling demand and thereby diminish the incentives to the entire herd.

Why would a stampede guarantee uninterrupted survival to a species for  millions of years but diminishing returns to the other?  What makes humans so different that the natural law of the animal kingdom fails to protect the most advanced species on the planet?  How come a mere economic principle defies the fundamental law of the nature?  

This seeming paradox has a simple answer. Humans are greedy.  It is not a case here to debate whether greed is good – as Gordon Gekko declares in the movie Wall Street  - or evil but simply to investigate if it indeed plays any role in stampedes actually being unprofitable in the long run to us Homo Sapiens.

And for that investigation we will have to take a detour. A rather long detour through some two and a half million years of evolution of the Mankind.  I am not an anthropologist. Neither am I a sociologist. I would still like to venture into this unfamiliar territory to ferret out an answer that is not just plausible but convincing and logical. History has witnessed a very skewed evolution of humans over the past two and a half million years.

Let's take a look at the archaeological and the historical progress of mankind. 

Archaeological / Historical Period*	Year from	Year to	Time elapsed              (in yrs)	Percent (%)	If the last 2.5 mn years were just one day                      (in seconds)
Stone Age	2,500,000 BC	3300 BC	2,496,700	99.8680	86,286
Metal Age	3300 BC	600 BC	2700	0.1080	93
Historical Age	600 BC	1400 CE	2000	0.0800	69
Renaissance	1400 CE	1800 CE	400	0.0160	14
Industrial Age	1800 CE	1975 CE	175	0.0070	6
Digital Age	1975 CE	Present	41	0.0016	1

(* the Archaeological / Historical ages represented here may not be accurate or precise but are mentioned only to elucidate the argument being put forth in this article. Similarly mention of  Digital Age and its beginning in 1975 is arbitrary )

The above table is self explanatory and it will be obvious to the reader that if we were to imagine that the total time it took for us humans to evolve from being just apes (or whatever else we were) to 2016 were one day then the mankind has rapidly progressed from the Metal Age to the present only over the last 184 seconds or just about 3 minutes. What is more amazing is the fact that the real explosive evolution to the modern times has happened only in the past 7 seconds since beginning of the Industrial Age.      

How come a species meanders for 99.86% of its evolution at a languid pace and suddenly shakes off its stupor and rolls at a break neck speed in a fraction of that period. I can’t think of a better explanation than the greed of humans. Greed to possess more meat, more cattle, more gold, more land, more comforts. Somehow there must have been a dramatic genetic mutation that made Man use metals, bronze and later iron, to augment his abilities and the rest is history.  Somewhere along that greed must have evolved into an urge to possess finer, non material aspects such as curiosity, knowledge, creativity and of course in modern times energy.  The greed has helped us rush from the Metal Ages to the period of Renaissance to the Industrial Age and to the current Digital Age.   It  has also shrunk the time humans are taking to propel themselves into more advanced forms of civilizations one after the other.    

As every coin has a flip side, sure does the greed too.  The human evolution is not as smooth as the above table would make us believe.  And more relevant to our discussion, it hasn’t been without hiccups either. Greed has its faults and it certainly extracts its price. Mindless greed has caused  flops at the best of the times and disasters at the worst.

Charles Mackay in his classic book ‘Extraordinary Popular Delusions and the Madness of Crowds’ has  chronicled several follies committed by the peoples of Europe in  17^th and 18^th centuries. These were  the result of the hysterical societies which seemed gripped by mass hypnosis. They simply seem to have suspended reason and joined the bandwagon because everybody else was doing so.  So the 17^th century saw Europe engulfed in Tulip Mania which at one point shot the prices of Tulip bulbs to hundreds of thousands of pounds at the current value. Needless to say that the market for the Tulip bulbs eventually crashed sending  several into bankruptcy. But we don’t need to go that far back to discover the perils of such hysterical bandwagons. Dot com bust around turn of the century and Subprime debacle of the last decade are proof enough that human greed has no expiry date. This also explains otherwise confounding phenomenon of  entrepreneurs  herding around wallets, hyper local, on demand businesses  in India in spite of obvious downturn of fortunes due to overcrowding. 

So while wildebeest will continue their stampede into the future forever, our species will have to keep inventing newer ways to satisfy its greed. 

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Internet Banking? Mobile Banking? Sorry, please say it again, do you mean Digital Banking?

Long ago there was a time when people could access the internet only through their bulky personal computers. You may say ‘long ago’ sounds a bit dramatic because it must have been barely 10 year ago that the PC was the only means for all of us to access the net. But like Ice Age, Stone Age and Iron Age we are living in a Digital Age. And the time in this Digital Age is calculated by the Moor’s Law. Way back in 1965, Gordon Moor had predicted that the computing power will double every two years. So by the standards of Moor’s Law, the primary means of accessing the net through PCs is a relic of 5 digital generations ago. That is long ago indeed.       

I never cease to be amused when people – bankers for god’s sake – use the terms Internet and Mobile Banking. Somehow what is unsaid or implied is that the former is accessed through desktops, the good old Personal Computers or laptops if you will. On the other hand the latter suggests carrying out banking using a mobile app or over SMS or even in some developing countries over USSD.  

But what happens when you do your banking transaction using a tablet, a pad or a smart phone? You simply type mybank.com on your mobile browser and start transacting. So is it now internet banking or mobile banking? As a fact of the matter there are even two separate regulatory guidelines for Internet and Mobile Banking in India.

Staggering 80% of the total internet users in India access the net using mobile phones. Though there is no reliable data available, it will be safe to assume equal proportion of the customers must be carrying out their banking transactions using their mobile phones. More over with the advance technology available today, most of the websites anyway detect if a browser making request for a webpage is coming from a ‘desktop’ or a mobile phone or a tablet and render a page suitable for the screen size of the device making such request.

With the launch of Unified Payment Interface (UPI) in India most of the e commerce transactions will – in reality – be m commerce transactions as a customer will be required to authorize the payment using an MPIN after receiving a payment request on the mobile phone. So as and when  UPI becomes the preferred mode of payment, the end point of all e commerce transactions will actually be a mobile phone  irrespective of whether the goods were purchased on a merchant’s website, in the mobile application or at a shop.   

As for security of an online banking transaction carried out through a particular device say a desktop or a mobile phone there is no more or less vulnerability due to using one or the other.

I don’t want to speculate here whether PCs will be extinct or not but one does not need to be a visionary to realize that most of the incremental access of the net will be through mobile phones or handheld devices. And as a corollary most of the incremental “internet Banking” transactions will be done using mobile phones.

So Banks, Customers and even Regulators need to start using a more generic term Digital Banking for all online transactions regardless of which device is used for carrying out such transactions. There is also a need for a unified Digital Banking regulation in India instead of the banks having to refer to two  separate guidelines.  

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