These days, almost all household service providers - carpenters, vegetable vendors, math tutors, and others - are quick to ask for payment via their mobile numbers. Few years ago, it would have been cash. A more determined digital-enthusiast would asked for their account details and set them up as a payee with her own bank account. Today, one doesn’t even have to use one’s bank app to finish the task. On the contrary, all of your bank accounts can be seen on one of the payments app (payment service provider, or PSP), and one can choose which account to pay from. Five years ago, no one had expected such quick and pervasive transformation, Trend reports citing Financial Express.
Today India’s retail payments transformation has become a global case study of “Open Banking”. The natural question is whether the full range of banking services - like lending, investments, mortgages, and others - will go down this path, and if so, when. The answers are “yes” and “sooner than we think”. By and large, the heavy lifting to create the underlying wiring is done. It is a matter of how soon the players and customers adopt the new ways.
Many argue that this “opening of banking” has not happened at scale, neither in the West and nor in China despite the idea being there for a while. So, why will it happen faster in India? Well, Indian banking will be leading the West on this change. There are four enabling conditions behind this lead, and the lead will widen in the future.
First, India’s approach to public digital stack. India’s political establishment, across party lines, has accepted the idea of “public digital goods”, which means that a minimum foundational digital infrastructure is provided either directly by the government (Aadhaar provided by UIDAI) or by non-profit organisations backed by the government (UPI supported by National Payment Corporation of India) Based on this foundational digital infrastructure, private competition thrives. The UPI protocol, which is behind the success of digital payments, is run 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 pipes to connect banks and non-bank lenders to each other for lending and other daily banking services are ready. No other large jurisdiction - the US, Europe, or China - has embraced the idea of basic public digital infrastructure. Their infrastructure is either hostage to private players (West) or in the process of being built by state (China).
Second, the Indian banking industry has tasted success and is ready to embrace bigger change. It is important to note that being on UPI is not mandatory for banks and yet almost all have embraced it. This is because the large under-penetrated market in India allows for such digital disruptions to facilitate market expansion; so, the banks benefit even if they have to cede control. Having a small share in a much larger market is better than sticking to a large share of very small market. This happened with digital payments, as it moved away from a few privileged “card-carrying” people to the masses. In lending, under-penetration, and the latent need among the masses, is even higher.
Third, India’s banking market structure is conducive to embracing change. India’s banking has been dominated by state-owned banks who work on hybrid priorities, where market development is as important as shareholder returns. RBI’s reluctance to let large industrial houses into banking implies the banking industry has no strong political connection to lobby against change that threatens its short-term commercial interests. Even today, while most bankers lament the loss of control as payments have shifted to PSP platforms from banks’ own platforms, there is a general underlying belief that this trend is good for everyone in the long run - the adjustment pains in the short term notwithstanding.
Fourth, India has a strong banking regulator in RBI, which has slowly and steadily embraced the idea of digital and innovation. Regulators have to be conservative by their mandate. The idea that services can be available on a large number of fintech platforms while risks are managed by few banks in the background under strict supervision suits the regulator, which wants to promote innovation while controlling the risks. Success of digital payments emboldens the regulator that it can achieve the goals of financial inclusion and deepening without compromising on systemic risks. With this compromise being broken, a WhatsApp moment in lending is fully aligned with regulatory incentives.
Big changes happen when the stars are aligned. For disruption in lending in India, we see a perfect alignment of various stake holders. The Indian consumer can look forward to the ease of pervasive and convenient borrowing as she does in payments today.