Tag: UPI

Explaining UPI

I just paid my cook his salary for November. Given the cash crunch, I paid him through a bank transfer, using IMPS. Earlier today, my wife had asked him for his account details (last month I’d paid him on his wife’s account).

An hour back he sent me his account details (including account number and IFSC) via WhatsApp. I had to wait till I got home and got access to my laptop (Citibank app doesn’t let you add payees on mobile banking).

I get home, log in to Citibank Online. Add payee, which includes typing his bank account number twice. Get SMS asking me to confirm payee addition. I authorise payee. And after all this I am able to finally do the transfer – and I expect him to have got his money already.

For a long time I was wondering what the big deal with UPI was, given that IMPS is already fast enough. Having finally tried UPI earlier this week (it’s finally coming to iOS, but only available on ICICI now. And the implementation so far sucks, since you need to pull out your debit card for two factor authentication – defeating the point of UPI. I’m told it’s better on Android), I realise how much easier and safer the transaction would’ve been.

Firstly, the cook needn’t have sent me his account number. All I would need was his virtual payment address. I would then open my UPI app (in my case, iMobile) and click on “send money”. And then I’d add his virtual ID there, following which his name would appear. Two or three more clicks, and entering my PIN code, the transfer would be done.

No bank account number. Not even a mobile number or an email ID. Just a random string of characters would allow me to transfer money to him! And later I could give him my UPI ID, and next month onwards he could simply send me a request via UPI for his salary. And two clicks later it would be done!

Mint has reported that there are massive delays in merchants installing point of sale devices in response to the cash ban. Banks should instead seek to acquire merchants to accept money via UPI. It’s simple, it’s quick and it protects privacy.

In fact, if the bank sales staff now have bandwidth, it can be argued that all the planets have aligned for UPI to take off for merchant payments – people have less cash, point of sale devices are not available, and both merchants and shoppers have shown openness to cashless payments, and there is a push from the government.

If only the banks can bite…

Using my cook as an ATM

This happened ten days before high value notes were withdrawn, and suggests nothing about my cook’s political opinions or views. 

On 30th October 2016, I paid my cook his salary for October. As it was the usual practice, I paid him in cash. He asked me if I could do an online transfer instead.

It was the first day of Diwali, and he needed to send money to his wife in Bihar. And it being Diwali, all banks were closed, and there was no way he could send money to her. So he asked me if I could do that. And if I were anyway transferring money to his wife’s account, could I send her a bit more, he asked – he would compensate me for the extra amount in cash.

And so like that I used my cook as an ATM. He gave me his wife’s account details (it was such an obscure branch that I’d to google it to find the IFSC code – wasn’t in citibank’s lookup list). I added her as a “payee” and immediately IMPSd the amount to her. And my cook gave me the extra funds I’d transferred in cash.

Later on, I told him to install his bank’s app on his newly acquired fancy phone (with a Reliance Jio sim). I’m not sure he’s done that but considering how resourceful he is, it wouldn’t be long before he does that. And more of the Bihari cooks network in Bangalore do likewise.

Nandan Nilekani, in his championing of the UPI, likes to talk about how “anybody can be an ATM” with the new technology. This was an exemplary example of that.

The only fly in the ointment was that I didn’t need cash that day – after all I’d been to the ATM earlier that morning just so that I could get cash to pay my cook – so I ended up with a lot of cash that I didn’t need. Thankfully I was able to spend it productively before the ceased to be legal tender.

Following the withdrawal of high currency notes, I told my cook I would pay his subsequent salaries by bank transfer. He gladly agreed.

Payment systems

I had lunch today at a rather fancy Japanese restaurant here in Barcelona (I’ve forgotten if I wrote that blog post last year on how you get fantastic East Asian food of all kinds here). I didn’t pay a fancy price – this concept called “Menu del dia” (menu of the day), one of the very few good things instituted by General Francisco Franco meant that you can get cheap weekday lunches at most restaurants in Spain.

The above (Katsudon and beer), along with some noodle soup and two sushis and a cup of coffee, set me back by €13, which isn’t too bad by Barcelona standards (most weekday lunch platters at restaurants cost ~€10).

While eating I noticed that other patrons at the restaurant were walking up to the bar to pay the owner directly, rather than asking for the bill at the table.

So once I was done with eating and drinking, I went up to the bar to pay. The owner had seen me coming and had prepared my bill, which he presented to me. As I reached into my pocket, he got out the card swiping machine.

It might have been a shock to him when I presented a €20 bill instead, and he had to scramble to produce the change from somewhere inside the kitchen (the other patrons before me had all paid by card).

While this is one data point, it’s interesting how the economy here has moved to a situation where the default method of payment is through credit/debit card, rather than by cash (though my favourite bakery refuses to accept card for payments less than €5). The ease of card payments (most debit cards nowadays come enabled with NFC, though a fair number of merchants still insert the card to read the chip) combined with ubiquity of cards has meant that card usage has started trumping cash.

It will be interesting to see how the payments ecosystem will develop in India, which is still largely a cash economy. My belief (and hope) is that India will leapfrog credit/debit cards (as it has leapfrogged landline telephones and big box retail, moving directly to mobile phones and e-commerce) and take up electronic payments in a big way.

IMPS (immediate payment service) is already a fantastic protocol for bank-to-bank transfers, and the costs are extremely low. In April, the Unified Payment Interface (UPI) will be rolled out, which makes transfers to hitherto unknown people even easier! If our banks do a good job of implementation, there is a good chance it might get adopted widely (long back I’d made a case for the RBI to subsidise such payments).

Cash on delivery

One of the big problems in the Indian e-commerce industry is that a lot of business happens through the “Cash on delivery” model, where the customer pays for the goods upon receiving it rather than at the time of ordering. According to sources, nearly three fourth of e-commerce in India is paid for using this model.

The problem with Cash On Delivery (COD) is that it leads to higher product returns and non-deliveries, since the recipient is not pre-committed to accepting it. While e-commerce vendors might try methods such as blacklisting customers in order to cut their losses, there is no clear solution in sight. COD is also a massive source of fraud, especially given that currently e-commerce platforms are more likely to subsidise rather than take a cut of transactions on their platforms.

One of the reasons given for the development of the COD model is the low credit card penetration in India (compared to other markets), and Indians’ unease with transmitting money online. Research (which I can’t be bothered to find and link to right now) shows that the Indian e-commerce industry actually took off once CoD was introduced.

Given that India is developing some new and innovative payment systems (the Immediate Payment System (IMPS) is one. There is a Unified Payments Interface (UPI) which is even better which is coming up), it will be interesting to see how the e-commerce industry in India shapes up from a payment standpoint.

There are two factors that drive CoD – one is the ease of payment transaction – you just hand over the cash to the courier when the goods are delivered. This is not seamless, of course, since it could involve problems involving change, and handling of large amounts of hard currency which makes it unsafe.

The other factor is trust – Indians don’t seem to trust vendors enough to pay for their goods before they receive them. While not prepaying gives the option to change mind at a later date, this can lead to significant friction in the system resulting in costs that are likely to get added to the customer (this doesn’t happen right now since platforms are still in heavy subsidy mode).

By paying for goods on delivery, the customer hedges against fraud by the vendor, and the transaction is smoother from the customer’s perspective.

While the industry claims that CoD is primarily due to lack of credit card penetration, my hypothesis is that it is more due to the trust factor. So far there has been no method (apart from possibly surveys which are internal to e-commerce platforms and which will never get disclosed) to understand which of the two it is.

With the development of new and innovative payment platforms, and the ability for a large number of people in India to transact online (willingness is another matter), this hypothesis can be tested. Once people have access to mobile apps that let them make instant and secure inter-bank payments (we are already on our way there), the low credit card penetration is unlikely to be a constraint against pre-payment for goods. If my hypothesis is true, the proportion of CoD will not fall despite the growth of these new payment methods.

There are flies in the ointment of course – platforms, driven by losses, are investing in moving customers away from CoD, so the data might not be very clear. Also, over time, people may develop more trust in e-commerce companies and start pre-paying, which will not tell us anything about their confidence levels right now.

We are in for interesting times!

PS: Like telecommunications (where most of India skipped the landline) and retail (where India skipped the “walmart step”), the payments industry in India is also likely to “leapfrog”, with a large part of the country set to bypass credit cards altogether.