Motorcyclists ride past banners for digital-payment service Freecharge and Paytm. (Photographer: Dhiraj Singh/Bloomberg)

Banning Rupees Didn’t Work. This Might

(Bloomberg Businessweek) -- Venkatesh Munivenkatappa runs his roadside stall in the Koramangala neighborhood of Bengaluru, formerly known as Bangalore, with help from a mobile phone loaded with digital payment apps. Customers can buy his colorful sandals and handcrafted shoes and belts using Google Pay, WhatsApp Pay, Paytm, PhonePe, and an app promoted by India’s central bank called Bharat Interface for Money, or BHIM.

“I never want to turn customers away, no matter which app they use,” Munivenkatappa says. The apps make him feel less vulnerable to theft, he adds, because he doesn’t have to keep a lot of cash on hand.

For India’s government, this is a much-needed sign of progress. It’s been trying to move the country of 1.3 billion people away from depending on cash, and its approach has often been heavy-handed.

Two years ago, Prime Minister Narendra Modi suddenly banned most bills of India’s paper currency overnight, triggering chaotic scenes as people lined up outside banks and ATMs to turn in old notes or get new ones. The government justified the move, known as demonetization, mainly as a way to crack down on corruption. The idea was to render stashes of ill-gotten cash worthless, while at the same time jolting people into using bank accounts and digital payments. In fact, almost all the old bills were returned, suggesting very little so-called black money was rooted out.

If Indians are becoming less dependent on physical money, it’s likely because of a separate—and far less flashy—initiative launched by the nation’s lenders and the Reserve Bank of India in April 2016, a few months before demonetization. The Unified Payments Interface (UPI) has provided a common platform for technology companies such as Google, Facebook, and Alibaba-backed Paytm to build online payment services. It links more than 100 major banks, allowing tech companies’ apps to connect to them and letting Indians transact with one another with a few clicks on their phone.

“UPI is the game changer,” says Vivek Belgavi, a Mumbai-based partner at consulting firm PwC India. “If it wasn’t for this real-time and seamless platform, demonetization would have struggled to push Indians to digital money.” One advantage of the system is its reach. In previous decades, banks made a limited, expensive effort to open brick-and-mortar branches in the country’s hinterland.

Now, Indians can use apps and electronic bank accounts to make utility payments, buy groceries, and book bus, train, and airplane tickets. “These payment apps make it much easier for me to quickly send money back to my family members,” says Ashok Kumar Yadav, a domestic worker in New Delhi. His family lives hundreds of kilometers away in the eastern state of Bihar. He doesn’t have to take time off from work to trudge to a bank during limited hours.

India has become a testing ground for new approaches to payment. In Europe and the U.S., mobile payment in stores often depends on technology such as near-field communications that require relatively costly smartphone chips. In India, where many people have inexpensive phones, Google has introduced Audio QR. The payer and payee open the Google Pay app, which works on any phone equipped with a speaker and microphone. At the click of a button, the phone emits sound waves inaudible to human ears that authenticate the transaction.

Credit Suisse Group AG forecasts the value of payments processed in India will rise to $1 trillion by 2023, up from $200 billion currently. The steep projected rise shows how big a gap there is to fill: About 190 million Indians are still unbanked, and about half of those who have accounts don’t use them, according to the World Bank.

Unlike China, where mobile payment is driven by two homegrown giants, Ant Financial Services Group and Tencent Holdings Ltd., the business in India is wildly competitive. It includes global players such as Google,, and Facebook’s WhatsApp unit, along with Indian payment startups. They’ve all piggybacked on the speedy proliferation of mobile phones and the falling price of data usage. The result is a sometimes bewildering array of payment options and digital wallets, luring users with sweeteners such as cashbacks and discounts to buy loyalty.

The different digital platforms don’t necessarily talk to one another, but UPI allows a user of any one of them to quickly connect a digital wallet to all her bank accounts. “It’s as simple as it can get,” says Amit Kumar, partner and managing director at Boston Consulting Group.

“More Indians have adopted UPI-based digital payments in two years than the total net banking accounts created in India over the last two decades,” says Sameer Nigam, chief executive officer of Bengaluru-based PhonePe, a subsidiary of online retailer Flipkart Online Services, which was recently acquired by Walmart Inc. PhonePe has more than 100 million users.

Not everyone is a winner. UPI has allowed many Indians to skip getting credit cards, leapfrogging traditional payment networks such as Visa and Mastercard. Transactions on the UPI platform in June were already close to 46 percent of those done at the point of sale using credit or debit cards, the latest comparable data show.

For all that’s changed, India’s economy is still highly dependent on cash: The value of rupees in circulation is back to where it was before demonetization. But more and more Indians are now able to see electronic money as an everyday alternative. —With Ronojoy Mazumdar

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