Digitization and Finance: How UPI and Digital Payments Are Transforming Money

The intersection of digitisation and finance has always been complex and challenging. Digitisation has the potential to fundamentally change how money functions—how value is created, stored, and recorded. India serves as a leading example of this transformation. Over the past decade, innovations such as UPI have revolutionised the way commerce and financial transactions are conducted.

At the same time, money remains more than a store of value; it acts as a social interface, connecting individuals, businesses, and governments. Each entity interacts with money differently, and changing the system can create resistance or friction. Digital finance, therefore, is not just a technological innovation—it must address the real-world problems of the people using it. This is why experiments in digital finance often produce uneven results.

1. Public Utilities vs Private Apps

The architecture of digital finance systems plays a key role in their success. UPI’s achievement lies not in the app itself but in its neutral public architecture, which allowed banks and other entities to interconnect seamlessly. Any robust payment system must solve three fundamental problems:

1. Accurate transaction information exchange
2. Verification that the payer authorised the payment
3. Secure and coordinated transfer of funds

UPI’s architecture ensures accessibility for everyone and prevents monopolistic control. The focus on building a platform rather than just an app allows for further innovation beyond simple payments.

Global Example – Brazil:

Brazil developed a payments platform called PIX, which evolved into an open finance system. This allowed financial data to be shared across institutions, enabling new use cases like pre-loan borrower assessment and direct in-app payment flows. By late 2024, 62 million Brazilians shared their data willingly. Brazil’s next step is DRUX, a tokenized platform enabling programmable money and innovative financial structures. Both India and Brazil treat these platforms as public utilities, leaving the private sector to innovate on top.

Contrast – United States:

In the U.S., private companies create infrastructure themselves. The Genius Act allows private issuance of stablecoins, enabling rapid innovation but often lacking collaboration. Without a universal clearing system, private stablecoins may not function effectively as currency.

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2. The End of Cash Anonymity

Digital payments generate a permanent record of every transaction, creating a privacy gap compared to cash. Privacy is a civil liberty, and while some data sharing is voluntary, financial systems often require it for credit scoring, fraud prevention, and regulatory compliance.

However, excessive data usage can harm individuals, for example, differential pricing based on purchasing habits. Protecting one’s own data is insufficient if others’ data can predict individual behaviour. Economists sometimes treat privacy as a public good, benefiting society but requiring individual sacrifices.

New digital systems can safeguard privacy by incorporating offline balances or cryptographic zero-knowledge proofs, reducing the risk of financial surveillance.

3. The Illusion of Stability

Stablecoins promise a simple value equivalence: 1 token = $1. In practice, this is not always guaranteed. For example, in 2023, Circle’s USDC reserves were trapped in Silicon Valley Bank during its collapse, temporarily dropping the token’s value to $0.87. Only government intervention restored stability.

Stablecoins resemble money market funds more than digital cash. While they function under normal conditions, stress events can disrupt settlement and cause systemic risks. The stablecoin market remains concentrated, with Tether and Circle controlling 85% of the $270 billion market. Although still in early stages, stablecoins are a significant innovation in financial infrastructure.

4. Programmable Money and Singularity

Programmable money allows governments and institutions to impose rules on transactions—such as restricting purchases or creating expiring currency to incentivise spending. Central banks focus on singularity, ensuring that every unit of currency has a consistent value. Programmable money introduces trade-offs but offers substantial benefits, including improved welfare targeting and behavioural incentives.

In the future, multiple forms of currency with distinct rules and values may coexist, replacing a singular, uniform rupee or dollar.

5. Algorithmic Credit

Digitisation transforms lending by reducing transaction costs and enabling real-time, data-driven assessments. Alternative data and machine learning can outperform traditional credit scoring systems.

Digital collateral further streamlines lending—for instance, an e-commerce platform could automatically deduct repayments from future revenue streams. This approach allows for faster, more efficient, and less risky borrowing, fundamentally changing the financial ecosystem.

What's The Final Conclusion

The integration of digitisation and finance is reshaping daily life and transforming the way money functions. Digital finance now extends beyond payments, encompassing programmable currency, privacy-preserving systems, and algorithmic lending. 

These innovations hold immense potential but also present new risks and challenges.

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