Rebooting India: Realizing a Billion Aspirations (9 page)

Electronic payments will also help to plug the leaks in government disbursement systems that drain precious resources away from the intended recipients. Once money is transferred directly into a beneficiary’s bank account, the entire process becomes transparent. Payments can be easily traced and collected, and corruption will automatically drop, so people will no longer have to pay to collect what is rightfully theirs. The estimated savings from such a model are enough to boost the country’s welfare spending by 25 per cent, or increase the per capita income of every poor household in India by 15–20 per cent.

In his book
The End of Money
, the journalist David Wolman narrates a story about the unexpected consequences of switching to an electronic payments system.
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In 2010, local police in the Afghan province of Wardak started receiving their monthly salary electronically. When they checked their bank balances on their cellphones, they were stunned to find that their salaries had jumped 30 per cent overnight. This was not an accounting error or a sudden outburst of generosity on the part of the Afghan authorities—the extra 30 per cent was the amount that, unbeknownst to the policemen, corrupt senior officials in the system had been skimming from their cash payments.

For an electronic payments system to work, two major requirements are the ability to identify a beneficiary correctly, and a way to ensure that the money is reaching only the intended recipient. This is where Aadhaar enters the picture. Once the Aadhaar number is added to the database of all social welfare recipients, the government can now accurately identify these individuals. On the other side, linking a person’s bank account with their Aadhaar number makes it possible to reliably verify the identity of the account holder. Aadhaar now serves as a link between the government and the people, making it easy both for the authorities to transfer payments to the correct individual’s bank account, as well as for people to easily withdraw money using Aadhaar to authenticate their identity.

Many of these ideas have found a home in the recently launched Pradhan Mantri Jan Dhan Yojana (PMJDY), which will ensure that every household gets access to a bank account, a debit card, and up to Rs 5000 overdraft facility from the bank. Eventually, bank accounts under the PMJDY will become the repository of all government payments. As of August 2015, over 170 million bank accounts have been opened under this scheme.
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India is the fourth largest user of cash in the world. What makes cash-based transactions such an attractive prospect for most Indians? For one, there are no extra transaction costs involved when you pay with cash, costs that often make it financially unviable for smaller merchants to switch to electronic payments. While the local supermarket may have enough transaction volume to simply accept these fees as the cost of doing business, the owner of a corner stall selling bananas, shampoo sachets and cigarettes by the stick certainly doesn’t have any incentive to allow customers to pay by card. A cash transaction is immediate, as simple as a banknote moving from one hand to another. You don’t have to worry about a computer system crashing and losing your transaction. A thousand rupees loaded into Ola’s digital wallet allows
you to only buy taxi rides; the same thousand rupees as a banknote in your pocket can buy you anything under the sun. On the flip side, it’s also easier to launder money and evade paying taxes if you’re using cash, since those transactions are much harder to trace.

Part of the reason is also the fact that online payment systems in India still have very low rates of penetration. Large e-commerce companies have developed the workaround solution of cash on delivery (COD), much as mobile telephone companies came up with the idea of offering prepaid connections to customers whose lack of credit history disqualified them from buying the standard post-paid mobile connection.

Financial inclusion is one very good reason to shift from a cash-based system to one that operates on electronic payments, but there are other compelling reasons as well. Cash is a very expensive habit for the nation to cultivate. The cost of printing, managing and moving money around the country is as huge. In the period 2010–2011, the RBI spent nearly Rs 24 billion on printing money, and an additional Rs 455 million on distributing that money nationwide. Cash has other problems too—it can be lost or stolen, and a wet, torn or otherwise damaged banknote is not accepted by most businesses, making it valueless. Despite what we may have seen in the movies, it’s not easy to transport large amounts of cash, or move cash over large distances. When rampant hyperinflation in Zimbabwe caused an astronomical increase in the price of daily staples (a loaf of bread cost over 100,000 Zimbabwean dollars), hapless citizens had to haul money around in sacks and suitcases to pay for their groceries.
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So long as money circulates outside the formal financial system in the form of cash, the monetary policy of the government has no real effect on economic activity. Electronic payments, on the other hand, can greatly reduce friction in the economy, since transactions are simpler, faster and easier to trace. If the government were to make the switch to electronic payments, the savings in one year alone would be enough to pay for the entire cost of setting up the system.

The global retail sector has embraced the convenience and transparency of electronic payments. In Sweden, you can buy a magazine
from a homeless vendor, or make a donation in a church, and pay with your credit card.
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PayPal, was an early pioneer in online payments, and services like Square, Paytm, MobiKwik, Apple Pay and Ezetap (founded by our former UIDAI colleague Sanjay Swamy) offer a multitude of electronic payment options to the consumer, whether it’s turning your phone into a mobile terminal that can process credit card payments, or letting you pay by simply tapping your phone against a point-of-sale terminal in a store. Smartphones like Apple’s iPhone 6 now come equipped with fingerprint readers so that adding your fingerprint data to every online transaction increases the security and reliability of such payment systems. Taking things further, we have systems like Bitcoin that operate on ‘digital currency’—not issued or controlled by any government—where users can transfer money completely free of regulatory oversight.

Lest one think that all of these innovations are confined to developed nations, consider M-Pesa, a mobile payment system operational in Kenya and Tanzania that’s run by Safaricom and Vodacom, subsidiaries of the telecom giant Vodafone. M-Pesa has its roots in the airtime-swapping system that mobile phone users in some African countries spontaneously came up with; they started transferring mobile talktime minutes as a proxy for money transfers. Today, while only 7 million Kenyans have bank accounts, 18 million use M-Pesa; it processes a staggering US$ 1.6 billion in transactions every month. Data released by the Central Bank of Kenya shows a 10.6 per cent increase in formal financial inclusion for the time period 2009–13; it is not unreasonable to suppose that a significant fraction of that percentage has been driven by M-Pesa.
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Dilip Asbe, now chief operating officer of the National Payments Corporation of India (NPCI), is possessed of a no-nonsense, ‘get it done’ attitude leavened with the bluff, hearty humour typical of his home city, Mumbai. As part of Viral’s work on financial inclusion, he was scheduled to meet with Asbe. The meeting never happened, and
Viral assumed he had been given the kind of polite brush-off common in government circles. The real reason behind the cancellation? A motorcycle had run over Asbe’s leg, leaving him limping for months. Viral recalls laughingly, ‘Dilip helped to build Aadhaar-based payment systems with a limp and a smile!’

It was these and many other strong partnerships forged between the UIDAI and other organizations that helped to realize the vision of Aadhaar as the cornerstone of a new, technology-centric government payments system. One of the earliest organizations to come on board was the RBI, which had been active in promoting financial inclusion, including the use of handheld biometric devices to conduct secure banking transactions. The RBI had also pioneered the concept of ‘business correspondents’, external agents who were authorized by banks to offer certain services, such as cash withdrawals, in places where the bank did not have a branch.
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Usha Thorat, former deputy governor of the RBI, tells us, ‘When it was announced by the government that the UIDAI project was being launched, I felt it was like a dream coming true—providing the answer to the biggest challenge we faced for furthering universal inclusion. A unique identification based on biometrics was just what was required. I remember I was so excited I sent a message to Nandan saying that if we could link Aadhaar to financial inclusion it would be a winner.’

A key early meeting to chalk out the role of Aadhaar in electronic payments was held in December 2009; the attendees included representatives from the UIDAI, RBI, NPCI, all major banks and other related organizations. The final proposal integrated the RBI’s business correspondent model with Aadhaar-based identity verification. We envisioned a system in which business correspondents would be equipped with a microATM device. Rather than a debit card or a PIN, a person would only need their Aadhaar number, their eyes and their fingers to identify themselves and carry out transactions instantaneously. This system was also designed to be interoperable—a customer of any bank could walk up to any business correspondent and withdraw money, in the same way that a Bank of India customer, for instance, can withdraw money from an Axis Bank ATM.

The details of Aadhaar-based financial inclusion were captured in a document entitled ‘From Exclusion to Inclusion with Micropayments’ released by the UIDAI. This document served as a blueprint and guide for the implementation of Aadhaar-based payments over the next few years. Today, over 15,000 microATMs are deployed by various banks and India Post, and should the government have the will, this number can rise to 1 million installations going forward.

The NPCI, formally incorporated only a year before the Aadhaar programme was launched, played a major role in the development of Aadhaar-based payment systems for the retail sector. A.P. Hota, the CEO of NPCI, along with its board members, was closely involved in these efforts; in addition to Viral, A.P. Singh and Rajesh Bansal from the UIDAI were part of the project as well. As Dilip Asbe put it, the goal of this partnership was to ‘build payment systems for both Bharat and India’. The concept of using Aadhaar as a ‘financial address’ to deliver payments accurately—exactly the way a postal address ensures that you get letters meant for you—was further developed, culminating in the creation of the Aadhaar Payments Bridge (APB) and the Aadhaar Enabled Payment Systems (AEPS), for handling government and retail payments respectively. We discuss these systems in greater detail in subsequent chapters. The success of these systems can be gauged by the fact that in the month of January 2015 alone, the NPCI processed nearly 50 million government payments through the APB system, for a total value of over Rs 20 billion.

How can we bring banking facilities to the 600,000 villages in India that have mostly had none? Imagine a network of 1 million microATMs, operated by business correspondents—the local postmaster, the owner of the village grocery store—functioning exactly like the mobile top-up points that have mushroomed all over the country. Those 600,000 villages fall under roughly 250,000 gram panchayats. So if we assign three microATM-equipped business correspondents to every gram panchayat and the remainder to urban areas, we
would in effect have brought a bank to every doorstep in the country.

How would such a system work on the ground? The accompanying diagram outlines the process. The business correspondent is equipped with a microATM that also incorporates a biometric scanner, capable of reading fingerprints and performing iris scans. When a person wishes to withdraw money from their account, they go to the correspondent, who captures the customer’s Aadhaar number, biometric information and the payment details, and sends it to the appropriate bank. Once the customer’s identity is successfully verified, their account is debited, the correspondent’s account is credited, and the cash is handed over to the customer. The entire transaction is completed within a matter of minutes; the whole process is simple, efficient and cheap, and seems like child’s play compared to the hapless Ram’s travails to collect his wages.

How did integrating Aadhaar into the business correspondent model make it better than what was already out there? Existing solutions required that an individual’s fingerprints and banking data be stored on a smart card; creating and delivering these cards was an expensive process for banks. The data stored on the smart card was not available anywhere else, which meant that the person could not operate their account from a physical bank branch, could not use an ATM, and could not do business with a correspondent from any bank other than their own, unwittingly creating a monopoly in the market. This monopoly was worsened by the fact that employees of for-profit companies—for example, mobile service providers—were not allowed to function as business correspondents.