Economist, in its May 13th issue, wrote: “As India emerges from the pandemic, however, a new pattern of growth is visible. It is unlike anything you have seen before. India has rolled out a national “tech stack”: a set of state-sponsored digital services that link ordinary Indians with an electronic identity, payments and tax systems, and bank accounts” (1). India Stack is the name for a configuration of Application Programme Interphases (APIs), software, data sets, AI models etc., that aim to unlock the identity, data, and payments on a large scale.
India possesses an engineering and entrepreneurial talent mostly educated at home, but some nurtured in Silicon Valley. Prodded constantly by the Government of India (GoI), they have contributed to building a fintech revolution embodied in an array of technology projects collectively known as the India Stack.
What is a Technology Stack?
The India Stack was born in 2009 when Prime Minister Manmohan Singh set up the National Payments Corporation of India (NPCI) to modernize ATM payment. Then, the establishment of the Unique Identification Project, conceived and led by Nandan Nilekani, gave it the spine. IndiaStack consists of 4 technology layers, with each layer providing technology-based solutions to meet specific goals.
The first layer enables individuals to consensually provide genuine identities to anyone at any time and place. Earlier, identity used to be location-based, with no foolproof way of validating identities, leading to potential misuse. The Aadhar project, launched in 2009, provides a unique 12 digit identification number to the citizens. This individual ID linked to biometric information enables people to provide identity proof without physical documentation. A printed Aadhaar can be carried as ID proof. More than a billion people — almost 90 per cent of India’s population — got a digital ID in less than a decade. A good fraction linked their ID to their bank account (2).
E-sign and Digital Locker — Redefining Documentation
The second layer facilitates storage and retrieval of data and documentation digitally through Aadhaar eKYC, E-Sign and Digital Locker. The Aadhaar eKYC enables access to identity information through the Aadhaar identification system for verification. E-sign and Digital Locker allow documents to be easily exchanged, stored and retrieved digitally as and when required, without printing them out (3). e-authentication guidelines govern E-sign. Digital Locker is the GoI repository for documents.
A company can use e-Sign to digitally sign job offers and vendor contracts and store them in the Digital Locker for retrieval when needed. Such applications can be used across transportation, health care, banking and other sectors to improve efficiency and cost-effectiveness.
UPI for Cashless Financial Transactions
The third layer enables cashless financial transactions. With Unified Payment Interface or UPI, one bank account holder can send and receive money from another using smartphones (3). Instead of account-related banking information, it uses a virtual payment address (VPA) like an email ID that users can create for themselves, like IFSC codes, etc. Many bank accounts can be attached to a single VPA.
UPI transactions use the BHIM or other UPI-enabled apps, like banking and wallet apps (4). UPI, thus, removes the need for payment infrastructure like POS hardware bringing interoperability to payments. In 2021, more than 3,800 crore UPI transactions amounting to Rs 73 lakh crore were conducted (4). Since 2004, India’s fast-growing fintech firms and multinationals like Google Pay and Amazon Pay have launched digital wallets and mobile money making it cheap and simple to store and transfer money digitally — even for those without a bank account (5). Anyone could receive payments for goods or services without a bank account. UPI has brought fees down to zero, which has compelled digital wallet providers in the market to seek other commercial opportunities because payments are no longer profitable. After Pradhan Mantri Jan Dhan Yojana enabled bank accounts to all households in India, millions of people had opened accounts under this program, rising to almost 384 million by 2019. Government benefits are paid directly into these accounts.
Interoperability is the essential feature of the system: transaction extends to all actors in the financial system. To participate in this, fintech firms have to be licensed or partner with a bank. Bringing all participants under the regulator promotes financial inclusion while safeguarding stability.
Data is critical in the digital economy, and the ability to access and control data is a determinant of economic growth, equity, and stability. Data managers, or “fiduciaries,” responsible for managing personal data, can offer the trust that synergizes various layers of India Stack. For example, individuals’ identities can be authenticated and confirmed to third parties. Fiduciaries can also authenticate digital documents like statements of financial assets, liabilities, and cash flow using the API. It can also help people in the informal sector access financial services who have a problem getting proof of their creditworthiness.
Easing Financial Data Flow
The fourth layer of the India Stack comprises aggregators that mediate the flow of financial data between individuals and financial firms. This layer enables people to securely allow the data flow between data providers like banks, hospitals and telcos and banks, credit card providers etc., to those who need the data. For example, a person can allow his bank to share required documentation with the card provider to verify his creditworthiness for a credit card application.
Open Banking and Cheap Credit
The next step is an account aggregator system for banking, credit, healthcare, and education. The Reserve Bank of India licenses accounts aggregators, leading to a new financial ecosystem. Again, lending will be the biggest gainer, taking India’s Stack into credit and personal finance, wealth management, and insurance.
Digitization brings the cost down, making small-value, short-duration loans commercially viable. However, a language similar to UPI, which created a payment protocol, will be needed to make this open-banking regime work. This is the Open Credit Enablement Network (OCEN) to connect lenders, marketplaces, and lenders, launched in July 2020. OCEN is the high point of India’s Stack in finance, with future priorities shifting to healthcare and education.
Digital infrastructure enables people to retrieve and use their data: like tax records or transaction data on e-commerce marketplaces. For example, “Street vendors can get access to loans if they use digital payments because it gives them a history” (6).
Disintermediation provides selective financial services to customers by unbundling them from the hundreds of other services that banks offer. Thousands of fintech startups have sought to select specific aspects of the banks’ package and turn them into viable businesses. This means recording all the relevant details of a patient-service provider interaction with a simple bar code scan in health care. These details will include the identity of the prescribing professional, the name and location of the dispensary, the date and time, dosage etc. (7). This data will reside in the cloud and link to other information systems. Thus healthcare becomes portable, enabling people to access healthcare services anywhere without carrying medical records. For example, the travel industry can use Aadhaar eKYC for passenger verification. Tickets bought using UPI can be stored on Digital Locker and retrieved at travel time. There are massive application opportunities, and both private and public agencies can leverage the stack to optimize and digitize processes.
The vision of India Stack is not limited to India; it is relevant to many developing economies. The Indian government is exploring allowing Indian citizens to access UPI from abroad in countries with a significant presence of Indian workers, such as Singapore and the United Arab Emirates. Global tech companies deploying India Stack may be allowed to take those services abroad by making them compatible with international payment networks, like PayPal or VISA. Exporting India Stack will make the markets of small merchants go global.