By Saurabh Tripathic
Today, almost all domestic service providers – carpenters, vegetable vendors, math teachers and others – quickly request payment through their mobile number. A few years ago it would have been cash. A more determined digital enthusiast would ask for their account details and set them up as a beneficiary with her own bank account. Nowadays, one does not even need to use their banking app to complete the task. Rather, all your bank accounts can be seen on one of the payment apps (payment service provider or PSP) and you can choose which account you want to pay from. Five years ago, no one would have expected such a rapid and profound transformation.
Today, the transformation of retail payments in India has become a global case study of ‘Open Banking’. The natural question is whether the full range of banking services – such as lending, investments, mortgages and others – will go down this road, and if so, when. The answers are “yes” and “sooner than we think”. In general, the heavy lifting is done to create the underlying wiring. It’s a matter of how quickly the players and customers adopt the new ways.
Many argue that this “opening of the banking system” has not happened on a large scale, neither in the West nor in China, despite the idea being around for a while. So why will it happen faster in India? Well, Indian banking will lead the West in this change. There are four preconditions behind this lead and the lead will increase in the future.
First, India’s approach to public digital stacking. India’s political establishment, across party lines, has accepted the idea of ”public digital goods” meaning minimum basic digital infrastructure is provided either directly by the government (Aadhaar provided by UIDAI) or by non-profit organizations that are supported by the government (UPI supported by National Payment Corporation of India) Based on this fundamental digital infrastructure, private competition thrives. The UPI protocol, which underpins the success of digital payments, is operated by NPCI as a non-profit institution with no monopolistic “winner takes all” profit ambitions, unlike the digital giants of the West. Similar infrastructure elements or conduits to connect banks and non-bank lenders for lending and other day-to-day banking services are ready. No other major jurisdiction – the US, Europe or China – has embraced the idea of a basic public digital infrastructure. Their infrastructure is either held hostage by private players (West) or being built by the state (China).
Second, India’s banking sector has tasted success and is poised to embrace bigger changes. It is important to note that the use of UPI is not mandatory for banks and yet almost all banks have embraced it. This is because the large under-penetrated market in India allows such digital disruptions to facilitate market expansion; so the banks benefit even if they have to relinquish control. Having a small share in a much larger market is better than holding onto a large share in a very small market. This happened with digital payments, as it moved from a privileged “card-carrying” people to the masses. In lending, the under-penetration and latent need among the masses is even greater.
Third, the Indian banking market structure is conducive to embracing change. India’s banking is dominated by state-owned banks working on hybrid priorities, with market development as important as shareholder returns. RBI’s reluctance to allow large industrial houses into banking implies that the banking sector lacks a strong political ties to lobbying against changes that threaten its commercial interests in the near term. Even today, while most bankers lament the loss of control as payments have shifted to PSP platforms from banks’ own platforms, there is a common underlying belief that this trend is good for everyone in the long run – despite the adjustment pains on the short-term .
Fourth, India has a strong banking regulator in RBI, which has slowly and steadily embraced the idea of digital and innovation. Regulators must be conservative by their mandate. The idea that services can be available on a large number of fintech platforms while risks are managed in the background by few banks under close supervision is appropriate for the regulator, who wants to promote innovation while managing risk at the same time. The success of digital payments encourages regulators to achieve the goals of financial inclusion and deepening without sacrificing systemic risk. Now that this compromise has been broken, a WhatsApp moment in lending is fully in line with legal incentives.
Big changes happen when the stars align. For credit disruptions in India, we see a perfect alignment of different stakeholders. The Indian consumer can look forward to the convenience of ubiquitous and easy borrowing, as it does with payments today.
The author is Chairman, FICCI Fintech Committee and Senior Partner, BCG