Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How India Built The Digital Payments Rail
Transcript
- Lucas: Look at the sheer volume of money moving through India right now. In the last fiscal year alone, the country’s real-time payment system, UPI, processed more than one hundred and twenty trillion rupees worth of transactions. That is roughly one point five trillion dollars. To put that in perspective, that is more than the total GDP of Germany. Luna: And it’s happening on basic smartphones with no credit cards attached. Most of those users don’t even have traditional bank accounts in the way we think of them here. Lucas: Exactly. And that is the critical distinction. This isn’t just about people using apps like PhonePe or GPay to split dinner bills. It is a fundamental rewiring of how commerce works in a developing nation. We often talk about emerging markets trying to catch up on credit card penetration, but India skipped that entirely. They went straight from cash to instant digital settlement. Luna: But infrastructure is expensive. How did they build a system that handles billions of daily transactions without collapsing under the weight? Lucas: The secret wasn’t just technology; it was regulation. The National Payments Corporation of India, which is a not for profit entity owned by the Reserve Bank of India, mandated that all banks must be interoperable. If you use HDFC Bank, you can send money instantly to someone using SBI or ICICI. There are no walls between the institutions. They built a common API standard that every financial institution had to adopt. Luna: That sounds simple until you realize banks usually fight tooth and nail to keep their customers locked in. Lucas: Right, and that is why most attempts to copy this elsewhere have failed. In the United States, for example, banks still operate in silos. Zelle only works within specific banking networks. Venmo is a social layer on top of a fractured backend. India forced collaboration at the plumbing level. They made the underlying rail a public utility rather than a competitive moat for individual banks. Luna: So the banks lost some control, but gained massive adoption because the friction disappeared completely. Lucas: Precisely. And they didn’t just stop at consumers. They pushed merchants to accept UPI too. Initially, there were no fees for small merchants. The NPCI subsidized the QR codes and the acceptance devices. Once everyone was on the network, the liquidity effects kicked in. Cash became less useful because it was slower and riskier. Luna: I remember reading that rural kirana stores—those small neighborhood grocery shops—are now scanning QR codes for everything from vegetables to school fees. It’s not just urban centers anymore. Lucas: That is the beauty of it. A vendor in a village doesn’t need a credit card terminal. He needs a piece of paper with a QR code printed on it. It costs almost nothing to set up. That low barrier to entry is what allowed financial inclusion to scale so rapidly. You don’t need a credit history to start accepting digital payments if you already have a mobile number linked to a bank account. Luna: Which brings us to the KYC rules. How strict were the identity requirements? Because in many countries, that’s the biggest bottleneck for opening an accounts. Lucas: They created a tiered KYC system. For very small accounts, you only need a basic video verification and a selfie. No physical branch visit required. It was designed specifically for people who might be illiterate or live far from a bank branch. The Reserve Bank of India adjusted the limits based on the level of verification, allowing small transactions to flow freely while keeping larger sums safer. Luna: It feels like they prioritized speed and access over perfect security initially, which is a huge gamble. Lucas: It was a calculated risk, but the data shows it paid off. Fraud rates in UPI are actually lower than in card networks globally because every transaction is authenticated via the user’s mobile device, often with biometric checks or OTPs. The traceability is inherent. With cash, once it leaves your hand, it’s anonymous. With UPI, every single movement is logged on a centralized ledger. Luna: Does that centralization scare anyone? Or does the government use that data for something controversial? Lucas: That is the tension point. The government certainly has visibility into economic activity at a granular level. Tax collection has become much more efficient because the informal economy is being brought into the light. But the privacy safeguards are still evolving. The current framework restricts how data can be shared, but as the ecosystem grows, the pressure to monetize that data will increase. Luna: We saw a dip in the Indian ETF today, though. EWY dropped nearly one percent. Is the market worried about valuation or regulatory overreach? Lucas: Partially valuation, but also concern about how the benefits are distributed. The big winners here are the tech platforms and the banks that manage the flow. But smaller traditional lenders are getting squeezed. When everyone moves money instantly, the float disappears. Banks make less interest on deposits sitting idle. They are trying to find new revenue streams, which sometimes leads to aggressive lending practices. Luna: So the efficiency gains come with some credit risks downstream. Lucas: Exactly. And we are seeing consolidation among the fintech players. Companies like Paytm faced regulatory scrutiny recently for compliance issues. It shows that while the rail is robust, the companies running trains on it are still learning how to navigate the rules. The infrastructure is solid, but the business models are still maturing. Luna: What about international expansion? Can other countries really just clone this model? Lucas: They try, but they struggle with the coordination problem. In Brazil, Pix works similarly, but it took years of intense negotiation between the Central Bank and private sector stakeholders to get there. In Southeast Asia, fragmentation is higher. Each country has different currencies, different banking laws, and different political priorities. India had a unified legal framework and a strong central bank pushing for it. Without that top-down enforcement, interoperability remains theoretical. Luna: It seems like the hardest part isn’t writing the code, it’s getting fifty different banks to agree on the same standards. Lucas: You nailed it. Code is easy. Politics are hard. The NPCI acted as a neutral arbiter. They didn’t compete with the banks; they enabled them. That trust was essential. If the central authority had been seen as favoring one giant player, the whole system would have fractured. Instead, they treated it like a toll road—everyone pays a tiny fee, but everyone gets access. Luna: Let’s take a quick breath here. If walking through the economy with us has made something click regarding how these systems work, consider supporting the show directly. Lucas: Your support keeps Fexingo independent and ad-free. Visit buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Every bit helps us dig deeper into stories like this. Luna: Thanks for listening, and for helping us keep the signal clear. Lucas: Back to the global picture. Now that India has this massive domestic rail, where is the next frontier? Cross-border payments. Luna: This is huge. Sending money out of India currently takes days and costs a fortune in intermediary fees. UPI is starting to link with Singapore and France, allowing direct transfers. Lucas: Yes, and this is where it gets strategic. By exporting its payment rail, India is gaining soft power. It sets the technical standards for how remittances work in the Global South. If other countries adopt upi like systems, they are effectively plugging into India’s financial ecosystem. It reduces their dependence on SWIFT and Western correspondent banking networks. Luna: That’s a geopolitical shift disguised as a tech upgrade. Reducing dollar dependency in trade settlements starts with the payment method itself. Lucas: Exactly. It’s not just about convenience. It’s about sovereignty. When you control the rail, you control the data, the speed, and eventually, the currency flow. Other emerging markets are watching closely. Vietnam and Indonesia are exploring similar interoperable frameworks, but they are lagging behind India by several years. Luna: Do you think the US will ever force Open Banking rules to mimic this? The consumer demand is clearly there. Lucas: There is talk of it, but the political will is missing. American banks are incredibly powerful lobbies. They prefer the status quo because it protects their margins. Regulatory change in the US tends to be slow and fragmented by state lines. India’s success came from a national mandate. Until Washington sees a compelling reason to disrupt the incumbent banks, we’ll likely remain stuck with slower, more expensive payment options. Luna: So the gap isn’t technological anymore. It’s purely institutional. Lucas: That’s the takeaway. Anyone can write an app. Building a national-scale, trusted, interoperable public good requires a level of coordination that few governments possess. India got lucky with the timing, the leadership, and the digital ID infrastructure. It’s a rare case of policy and technology aligning perfectly. Luna: It makes you wonder what other 'simple' infrastructure projects are waiting for that kind of decisive action. Lucas: Or perhaps, what projects are failing simply because no one was willing to pay the political cost of making them happen. The lesson for investors isn’t just to buy the Indian banks, but to watch for any country that finally decides to treat finance as a public utility rather than a private fortress. Luna: A fair question to end on: if you could wiretap one emerging market’s infrastructure next, which one would it be? Lucas: Probably Nigeria. Their population density and mobile penetration are even higher than India’s was ten years ago. If they can solve the fragmentation between their various local banks, the explosion in transaction volume could be even faster. Luna: High risk, high reward. Just like the rail itself. Lucas: Always.