The India Stack Story - Paving the way for financial inclusion

Not so long ago, currency notes formed an integral part of India’s financial system. Whether it was for buying and selling of goods or for keeping a certain amount aside as emergency funds at home, cash was what the people of India heavily relied on. Fast forward to today and payments through smartphones are gradually becoming the norm. Millions of people in the formal and vast informal economy are now accepting payments, settling invoices, and transferring funds across the country with just a few screen taps. As with most things tech, covid-19 accelerated the adoption of contactless digital payments as people went from one lockdown to another. Now from paying the milk delivery man to making high-end purchases on e-commerce sites, the Indian consumer is increasingly getting comfortable making online payments.

And a lot of credit for this payment revolution in India can be attributed to the India Stack!

The India Stack website defines it as “the moniker for a set of open APIs and digital public goods that aim to unlock the economic primitives of identity, data, and payments at population scale. Although the name of this project bears the word India, the vision of India Stack is not limited to one country; it can be applied to any nation, be it a developed one or an emerging one. Having said that, this project was conceptualized and first implemented in India, where its rapid adoption by billions of individuals and businesses has helped promote financial and social inclusion and positioned the country for the Internet Age.”

The first step in the creation of the stack began in 2010 with the launch of a biometric digital ID system called Aadhaar. The government initiated a campaign encouraging people to have their photographs, fingerprints, and other biometric details are taken at enrollment centers across the country. Each person received a unique 12-digit identification number that could be used to access a range of services. 

The second layer of India Stack involved introducing a new layer to the retail payment system, known as the Unified Payments Interface (UPI) so that banks could exchange messages and payment orders with non-bank firms. As with the Aadhaar digital ID, a crucial feature of the system was its interoperability: users could transact with all actors in the financial system, public and private, large or small.

A third “paperless layer” of the stack allows for the verification of digital documents that can replace traditional paper equivalents, increasing efficiency, and integrity. More importantly, the fourth and final layer of the India Stack (which is not yet fully operational) is formed of aggregators (data fiduciaries) that intermediate the flow of financial data between individuals and financial firms.

While no single aspect of the India Stack is entirely unique, the key differences of the Indian approach are: 

1. Uniform identification for all citizens

For the first time, through Aadhaar, India gave formal identification credentials to all citizens and ushered millions of them, irrespective of social standing, into the digital economy. A staggering 1.3 billion Aadhaar cards have been issued since 2016. 

India’s central bank, seeing the potential in Aadhaar, developed an electronic procedure so that commercial banks could verify a new customer’s identity instantly through the Aadhaar database. These biometric checks reliably verify the identity of the holder, thus reducing the likelihood of false identities and fraudulent claims. An ambitious financial development policy (Pradhan Mantri Jan Dhan Yojana) was launched in 2014 to provide a bank account to all households in India. In just one year, 166 million people had opened accounts as part of the program. The number had risen to almost 384 million by 2019. The gender gap in bank account ownership has narrowed, and so has the gap between those with secondary education and those without it. 

Now that most people in India have bank accounts, the government has been able to make large-scale direct benefit transfers quickly and efficiently. For example, the government’s COVID-19 relief program, which used the India Stack to pay out $44 billion to women and small farmers. For decades, India’s efforts to deliver government services have been plagued by a host of problems from slow-moving bureaucracy to frauds and scams. The India Stack presents a solution that represents a powerful return on investment. As of March 2020, India had saved an estimated $20 billion by having a more secure system that eliminates fake and duplicate beneficiaries.

The second layer of India Stack involving Unified Payments Interface (UPI) has made it cheap and simple to store and transfer money digitally—even for those without a bank account. With the new system in place, from the roadside pani puri seller to the small neighborhood trader, one can receive payments for goods or services through a digital wallet, even without a bank account. They can transfer funds instantly to someone else—a struggling relative in a remote village, say—so long as the recipient too has a digital wallet. Transfers like these would take days or even weeks and would likely involve depositing cash at a distant bank branch and paying hefty transfer fees.

​​To participate in the UPI, fintech firms are required to partner with a bank or obtain their own special license. This keeps all participants under the watchful eye of the regulator allowing the central bank to promote financial inclusion while safeguarding stability. 

As per the latest NPCI BHIM UPI Stats (November 2021), there are 274 banks live on UPI and the volume of payments done is 4,186 million.

5. Access to financial services for people in the informal sector 

Once the fourth layer of the stack is ready, Account Aggregators (data fiduciaries) can authenticate to third parties an individual's identity, based on their digital ID. Fiduciaries can also use the stack’s API to certify the veracity of digital documents. These documents might include statements of financial assets, liabilities, and cash flow—a powerful basis for establishing trust in the digital economy and a way for people to leverage the data their activities generate. It can also support access to financial services for people in the informal sector who can produce few records proving their creditworthiness.

While initially earmarked to be piloted in the financial services industry, the grander vision is to enable consent-based data sharing across a number of important sectors like healthcare and e-commerce where ordinary citizens will have the ability to leverage their own data to avail of relevant products and services like loans, telemedicine, portfolio advisory, and several other use cases that are waiting to be developed.

The various products built using the India Stack are also empowering Indian citizens in multiple ways :

DigiLocker is a public utility provided to Aadhaar holders by the Government of India through which they can access their digitally signed, legally valid electronic documents. Currently, there are more than 4.6 billion documents issued directly into Digilocker by authorities. These documents range from driver’s licenses to educational diplomas, to insurance policies. In total, there are currently 1460 institutions signed up as document issuers on Digilocker, 233 are integrated with DigiLocker as requesters who can verify user documents with consent. 

This product facilitates digital document exchange with the consent of the citizen ensuring faster service delivery- Government Benefits, Employment, Financial Inclusion, Education, Health, and reduced cases of fraud.

Another product built on top of Aadhaar, eSign, allows any Aadhaar holder to produce legally valid digital signatures on any document, at any time, using any device. Consent for this signature is obtained through a one-time password sent to the signer’s Aadhaar-linked mobile number. Presently, eSign is used to streamline workflows for multiple fields including financial services, legal services, healthcare, and more.

The large-scale digital growth India has experienced as a result of the India Stack, combined with the platform’s designation as an open-access “public good,” has incentivized several startups across various sectors to use IndiaStack APIs to build their products.

While startups like AuthBridge, AadhaarAPI, FRS Labs, BioEnable, and Evolute focus primarily on Aadhaar and e-KYC, others like DirectVerify, Checkwala, and CertiSafe also offer DigiLocker, thereby providing document verification and digitizing features along with employee background verification.

With RBI’s KYC requirement being fulfilled by Aadhaar, all prominent FinTech companies like Paytm, PhonePe, Razorpay, and Chillr are using eKYC to easily onboard customers, creating disruption in the way Indian customers access financial services and products.

3. Digital lending

Startups like Capital Float, RangDe, EzCred, Indifi, and CreditVidya are utilizing Aadhaar Auth and eKYC to authenticate the borrowers and then offer them quickly dispensable loans. Startups like MicroGraam, FlexLoans, NiraFinance, and Quikkloan additionally utilize UPI and simplify P2P lending. 

Startups like Digio, FinaHub, ezeDox, TrueCopy, Leegality, and Docswallet, which offer online document management and DigiLocker facilities, are using primarily Aadhaar, e-KYC, and e-Sign authentication.

Upcoming sectors such as investment distribution, financial product comparison, insurance distribution, credit scoring, fraud detection, cyber security, etc. Prominent players include Policybazaar, Bankbazaar, and TrustID.in, Wishfin, Perfios, Acko, Indus, and Rubique. Most businesses utilize Aadhaar and e-KYC integration. Some, such as Reserver, Jama, Gramcover, and Banknomics additionally make use of e-Sign and UPI.

The development of the India Stack has implemented open banking principles through interoperability and data sharing in the financial sector. By bringing in a diverse range of banks and non-banks together under a common infrastructure, this architecture has potentially facilitated financial inclusion, as evidenced by the increase in high volume-low value payment transactions. The potential of the infrastructure provided by the India Stack could extend far beyond finance. As a broader data policy framework, the confluence of the four layers forms the basis for a competitive and inclusive digital economy, in which individuals exercise meaningful control over their data. 

Never in the history of Indian infrastructure projects have we seen such a successful working partnership among civil society, government ministries, bureaucrats, payment companies, regulators, banks, non-banking financial-services companies, and fintech organizations, with largely no political interference. These are exciting times in the Indian digital infrastructure space. 

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