Can India’s UPI Payment Model be Replicated in US and Europe? Tech Diplomacy Could Make it Happen

Bitcoin’s value tumbled final month following the information that regulators in China would ban home banks from dealing in cryptocurrencies. Chinese banks is not going to course of funds made in cryptocurrencies or permit financial institution clients to carry bitcoin of their accounts. It additionally stopped Chinese banks from changing bitcoin into yuan or every other kind of foreign money. India, too, has been mulling over the ban on cryptocurrencies’ operations within the nation and it was introduced {that a} invoice could be handed in Parliament to outlaw cryptocurrencies within the nation, apart from the digital rupee one that’s backed by the Indian authorities, just like what China is making an attempt with the digital yuan. China’s newest transfer is one other iteration of its crackdown on cryptocurrencies. In 2017, it outlawed the operation of Initial Coin Offerings (ICOs), the cryptocurrency analog for an Initial Public Offering (IPO) for shares.

Digital currencies and cryptocurrencies are a thorny situation for nations and regulators. After all, if cryptocurrencies are allowed to proliferate and be used as an alternative to a nation’s foreign money, it could actually probably infringe on the sovereignty of the nation as central banks lose management over manufacturing and provide of coinage. In response, China, India together with a number of nations’ central banks have floated concepts for a Central Bank Digital Currency (CBDC), a digital illustration of a nation’s foreign money backed by blockchain expertise. Whether that is by design or accident, Beijing has been influencing insurance policies of different nations on the subject of cryptocurrencies, and, consequently, how cross-border funds work. China and Chinese firms’ selections on digital funds firms may be seen as a type of tech diplomacy.

CBDCs are a brand new and untested concept and although it holds lots of promise for various nations, its implementation and precise use instances are but to be absolutely developed. China has begun piloting its CBDC, however within the bigger geopolitical panorama, it represents a menace to the United States greenback because the world’s dominant foreign money. If the utilization of the digital yuan will increase with nations, it might undermine Washington DC’s efforts to uphold worldwide sanctions by prohibiting transactions utilizing the US greenback. Currently, the United States wields an unlimited affect on the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging system, which is utilized by banks and monetary establishments to ship cash switch directions. The digital yuan, utilizing blockchain expertise, can bypass these restrictions.

Against this backdrop, there is a chance for India to wield some affect over tech diplomacy with digital funds.

Chandni Chowk to China

Though China is now a strategic rival to India, New Delhi and Mumbai are tempted to comply with of their footsteps by enacting an identical ban on cryptocurrencies. However, the 2020 Galwan clashes have disturbed India-China relations. Chinese capital and expertise concepts have influenced India’s home funds ecosystem. The most notable is Paytm, the place Ant Financial has a 30 per cent stake within the firm. Paytm together with different digital wallets within the nation helped popularise the thought of QR code funds within the nation. Paytm CEO, Vijay Shekhar Sharma, mentioned that the corporate was impressed by how Jack Ma’s Alipay used QR code funds to dominate funds within the nation.

Following the incursion within the Galwan valley, Chinese diplomatic and financial relations with India have turned frosty. The Indian tech startup ecosystem, which had relied on Chinese capital for his or her development growth, immediately needed to change gears and distance themselves from China. The most notable instance was when restaurant aggregator and meals supply service Zomato wasn’t in a position to elevate US $100 million from Ant Financial in 2020, following a change in overseas direct funding (FDI) guidelines. In April 2020, India put curbs on FDI from nations that share a land border with it, a transfer that has angered China. India tightened FDI rules to “prevent opportunistic takeovers or acquisitions of Indian companies during COVID-19 pandemic.”

The seeds of this may very well be seen earlier within the funds house as properly. In 2018, the Committee on Foreign Investment within the United States (CFIUS) scuttled a US $1.eight billion merger between Ant Financial and worldwide remittance firm MoneyGram citing nationwide safety issues. At the time, India’s Paytm was alleged to play a strategic function if the deal had gone by way of and would have helped Ant Financial broaden its footprint throughout Southeast Asia and India to about 630 million customers—450 million of Alipay’s customers and 180 million customers from Paytm.

Paytm’s fortunes since have turned for the more serious with the introduction of the Unified Payments Interface (UPI), a home interbank account-to-account funds structure that enables funds switch by way of digital aliases with out price. This killed a key characteristic of Paytm’s cell pockets use case the place folks might switch cash from wallet-to-wallet with out price. Soon, different contenders like Walmart-owned PhonePe and Google Pay overtook Paytm’s place by way of customers and variety of transactions. Though, it should be identified that the UPI has seen nice success and the general variety of transactions now stand in extra of two.5 billion monthly, primarily pushed by the rivalry between PhonePe, Google Pay and Paytm.

The Indian Opportunity

The National Payments Corporation of India (NPCI), which owns the UPI structure, is a singular entity within the Indian expertise panorama. It is a not-for-profit organisation which has a monopoly over the retail funds providers within the nation. In addition to the UPI, it additionally runs a invoice funds structure, handles the toll fee programs, operates an ATM community, a cheque clearing home, and one other real-time funds system referred to as IMPS.

The NPCI just isn’t a authorities entity however is promoted by members of the Indian Banks Association, the banking foyer organisation and has the blessings of the banking regulator, the Reserve Bank of India (RBI) and the finance ministry. In some sense, the NPCI acts as a quasi-regulator for retail funds within the nation the place member banks should adjust to its guidelines and rules or face punitive motion. However, the success of the UPI in India has prompted the NPCI to arrange an organization referred to as NPCI International Payments Limited (NIPL) with the only goal of exporting the UPI structure.

The NPCI’s transfer may be seen as a type of exercising tender energy. Indeed, seeing the success of Google Pay in India utilizing the UPI structure, the corporate wrote to the United States Federal Reserve supporting an identical interbank real-time funds structure referred to as FedNow within the nation. FedNow at present has 5 regional California banks and three credit score unions testing out the service. In Europe, BNP Paribas is main comparable account-to-account fund switch experiments.

Potentially, India, by way of NIPL, could lead on this type of tech diplomacy for establishing an interoperable funds community for numerous areas. Germany has had some misgivings concerning the SWIFT community and has referred to as for an finish of US dominance over worldwide funds and adopting its personal worldwide funds channel for the European Union.

The NPCI might not discover it straightforward to construct a rival community of banks and monetary establishments to SWIFT. To start with, SWIFT has greater than 11,000 members throughout the globe. In distinction, the UPI structure has a mixture of 220 banks of varied sizes and technical capabilities.

The UPI’s structure may not be finest suited to different geographies’ wants and should not slot in with their enterprise and political landscapes. The US Federal Reserve is dealing with criticism from banks for working a competing funds system with personal firms whereas performing as their regulator, a battle of curiosity that RBI is comfy with working the Real-Time Gross Settlement programs. This is critical as a result of although the UPI says that it processes transactions immediately, the quantities are settled with completely different banks at a later time. Further, banks within the United States are detest to surrender their charges on inter-bank transactions.

The structure of the UPI additionally locations lots of emphasis on interoperability of funds. This is a characteristic that banks in different geographies may not be comfy with. Essentially, the UPI unbundles funds from the financial institution and the checking account. It permits interoperability by utilizing open banking APIs to permit financial institution A to entry account data from financial institution B and provoke a fee. This was finished in India to convey extra competitiveness in India’s financial institution funds panorama the place clients might decide financial institution functions with higher consumer expertise to entry funds from their account. Essentially, with this mannequin, a rival financial institution can get funds information of current account holders and supply different providers.

None of this might be potential with out patronage from the federal government and the regulator. In truth, within the aftermath of the 2016 demonetisation train when outdated notes had been being exchanged, UPI functions had been extensively promoted by Prime Minister Narendra Modi in India to allow cashless transactions.

It could be extraordinarily troublesome to copy the political and enterprise will for the establishing of UPI in several geographies. But in the end, diplomacy boils all the way down to the adoption of latest concepts with out arousing hostility. For instance, although Jack Ma’s Ant Financial’s fortunes have taken an enormous setback following Chinese regulators’ crackdown on his web conglomerate, the thought of utilizing QR codes for funds has been co-opted by the UPI in India. Similarly, the thought of account-to-account real-time transactions is gaining floor within the United States and Europe. Herein, lies the chance for India.

This article was first published on ORF.

Disclaimer:Shashidhar Ok.J. is Associate Fellow at ORF’s Mumbai centre. Views expressed are private.

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