The curious case of UPI

June 2024

Pivoting on its strengths, digital India marches on.

The people’s verdict is out and yet again the National Democratic Alliance (NDA) led by the Bhartiya Janata Party (BJP) is invited by the head of the republic of India to form the government for a 3rd consecutive term resulting from the absolute majority of the alliance in the 2024 parliamentary elections in the world’s largest democracy. The iron-man behind such an unequivocal victory, BJP-chief Prime Minister Mr. Narendra Modi, who is often accredited with uplifting millions of ordinary Indians out of abject poverty has in the past 2 terms of his governance focused on the country’s strength- the Tech sector, thus redefining the path to progress hitherto taken by any emerging economy. Japan in the 80s, Korea in the 90s, China in the last 2 decades have all prioritized manufacturing as a tested and confirmed recipe for gaining economic might. In the backdrop of the present day Chinese manufacturing prowess, Mr. Modi and his team decided on an alternative campaign to attract foreign investment into ‘Digital India’, nurturing the country’s tech talent pool to create the economic differentiation.

The case of UPI

In the absence of a quick, reliable and efficient way of flow of capital, the flow of goods and services in a country remains equally slow, lacking quality and efficiency, slowing down GDP growth, is the simple theory the administration adopted in developing the United Payments Interface (UPI), an Application Programming Interface (API)-first based domestic Instant Payment settlement scheme developed and regulated by the National Payments Corporation of India (NPCI), an arm of the country’s central monetary authority, the Reserve Bank of India (RBI). The highly reliable infrastructure of this real-time cash settlement system has overnight replaced all archaic instruments such as cheques, something even the United States has not able to do away with, despite the launch of FedNow (ACH-check settlement cycle is still 3 working days in most use cases) over a year ago. And if the success of UPI is accredited solely to the NDA administration, one must be reminded that the building block of UPI is the formidable Unique Identification Authority of India (UIDAI)’s Aadhar scheme, a gargantuan biometric database of the country’s 1.3 billion human capital, that was envisioned and implemented by the current-opposing-then-ruling Indian National Developmental Inclusive Alliance (INDIA) alliance led by the Indian National Congress (INC) party. The UPI infrastructure relies on Aadhar’s real-time user authentication (aka KYC) for authorizing financial institutions and merchants to issue credit or facilitate trade. With such swift flow of cash throughout the domestic market, UPI and Aadhar remain the indisputable reason for India’s enviable socio-economic progress. This is not to say that other digital measures of e-governance like electoral services (voter helpline), passport and consular services (passport seva), transport services (parivahan sewa) etc. are to be belittled. The digitally savvy administrators seem committed to building the cashless society of transparency and fairness.

So, what’s the catch?

The positive economic outlook is never always exclusively so. The very case of UPI is treading perilous waters. UPI issues licenses to the private sector on condition that customers may never be charged for using payment services- a noble and popular directive from a government mandated regulatory body. The license holders, Amazon Pay India, Google Pay PhonePe Paytm, to name a few, generate revenue in other ways like e-commerce online shopping, sale of auxiliary charged services like sale of credit products etc. The model works well until the license holders struggle with grey areas of the regulatory framework and the regulator doesn’t do its part of issuing clear guidelines and directives along with penalties for possible breaches. Just as anywhere else, fraud is very much real in the UPI construct. Amazon India’s Cash on Delivery mode of payment method allows its delivery staff to collect cash using their personal QR codes as contingency during network or system issues, something that is sacrilege in the world of Digital Security. Cases of fraud are brewing and yet the regulator doesn’t seem to issue any directive or alternative to quell such an unsafe practice by a behemoth of a license holder. Another inherent flaw is the Aadhar’s total reliance on mobile numbers to deliver one-time-passwords (OTP). Anyone who is aware of Fido alliance’s latest passkey authentication technique knows that passwords and OTPs are not complete phishing-proof. A sovereign nation that delivers citizen services through the fraud-prone OTP way relies on the country’s telecom regulator, the Telecom Regulatory Authority of India (TRAI) in this case, to keep telecom services highly reliable and secure. Perhaps that’s the reason why internet operators deliver free-WIFI services in all airports across the country only upon delivery of an OTP to a domestic number that has been issued only after an Aadhar verification (the option of delivering OTPs to international number exists non-functionally) leaving international travelers discriminated from availing free-WIFI services. Being on the digital (and possibly AI going forward) forefront is certainly the country’s strength and the administrators have pivoted on it for some time now. To unleash the full power of digital capabilities relies on being able to think through all use cases, especially the ones susceptible to fraud.