In India today, digital finance is connecting individuals, government and businesses in dramatically simplified ways. A person who just five years ago would have struggled with documentation, delays and denials when trying to open a bank account can now open one easily and instantly. Not only that, she can now link her account information to a virtual payments address to send or receive wages, remittances or government payments.
This interconnected set of systems, collectively called “India Stack,” simplifies complex processes such as identifying account owners and routing payments. Three basic layers make the stack work: a biometric identity database, virtual payments addressing, and digital payments interoperability. To learn more about these layers, see this short video:
Taken individually, these layers are not unique to India and can be found in different forms elsewhere. What is special about India Stack is that these pieces of infrastructure are connected to each other to improve the user experience. For instance, a resident can link her ID number to her bank account and consolidate these under a virtual payments address, which looks similar to an email address. To receive money from the government, an employer or a family member, she only needs to remember and provide this address.
There are many other attractive features of the India Stack, and other countries might do well to build parts or all of the new system for their own residents. The Indian experience suggests several lessons.
The biometric identity database was the foundational layer in India, but other countries could begin with other layers first. The Indian journey is linked to the biometric identity database, which was established in 2009 and has now surpassed more than 1 billion registrations. This system may be difficult for other countries to replicate, but it is not a precondition for building the other layers. Countries without biometric ID systems may find it hard to replicate the ease of account opening now achieved in India; however, these countries could start by enabling residents to conduct transactions across different digital value accounts with simple, email-like payments addresses. By allowing customers to expose only this address while transacting, they can make it easier for people, government and businesses to send and receive money.
It is not necessary to start with a “grand design”: the stack can be built layer by layer and connected over time. The components of India Stack began to be built in 2009, quite separately at first, and there was not a grand plan at that time. While the government’s Unique Identification Authority of India (UIDAI) was gaining traction from 2009 to 2014, a consortium of banks formed the National Payments Corporation of India (NPCI) and in parallel started to create new layers of interoperability. UIDAI and NPCI only began to discuss ways to link their infrastructure later on, and the term “India Stack” did not emerge until much later.
Specialized public utilities can play a key role in building the layers. UIDAI and NPCI are both nonprofits that do not seek to maximize revenues, though each does earn modest fees for their services. Both have a strong public utility mindset and are focused on building something for society at large. While the Indian government established UIDAI as a statutory authority, the NPCI is a cooperatively owned utility with banks (primarily publicly owned banks) on its board. NPCI was formed in close association with India’s central bank. This public utility character has made it easier for UIDAI and NPCI to collaborate and build something relatively open and market-wide, rather than thinking narrowly about their own revenues or market share.
India Stack is not mandated. There is a healthy debate today about whether getting a unique ID number is de facto required by the government. Most, but not all, Indian residents have an ID number today. The India Stack, however, is not a mandatory system for businesses, people or government. People can still open accounts with traditional documentation, and banks and businesses can still process payments through other means. Interoperable arrangements are not required of banks, though many do feel compelled to participate for business and other reasons, given India’s unique history and size. If India Stack or a similar infrastructure play is to succeed, however, it will need to do so based on providing a more persuasive service for its users.
Should other countries build their own version of India Stack? India Stack is not a panacea for financial inclusion. There are healthy debates about what protections should be built into India’s ID system, and digital finance requires much more than a stack to succeed for the masses (a point CGAP’s CEO, Greta Bull, raised in a recent blog). The stack reduces the complexity of many identification and payment processes, but it does not solve the challenge of mass distribution and agent locations for the majority of consumers. That is a challenge other systems will have to solve in order to complement India Stack.
Nevertheless, India Stack has made possible some impressive advances in financial inclusion. When NPCI launched a smartphone app for cross-bank payments, 20 million people downloaded it in less than three months, and more than 10 percent actively used the app. Much more will be learned as India Stack gets tested and we see how far and wide its use can go. As that happens, it will also be interesting to see what influence India’s new financial infrastructure might have on other countries.
There's an additional primary benefit that you've omitted mentioning. To quote Nandan Nilekani, India is poised to go "from data-poor to data-rich", as millions of customers started transacting electronically and leaving digital foootprints. This offers lenders incredible opportunities to use data to lower lending risks, and use the existing NPCI rails to rapidly and cheaply disburse micro loans - ultimately improving access and reducing costs for borrowers.
In addition to laying excellent infrastructure, there is more to be done in creating the right institutional incentives to truly transform digital finance - beyond the mere movement of money.
Rightly said. There is huge potential for micro loans in India, which is largely an unorganized sector today. Hope India Stack will provide a WeChat or an Alipay moment to Indians very soon.
Interesting post. To enable true Indiastack (or similar organisations) realise their true potential, a broad based advisory board representing varied stakeholder interests is crucial. Involving consumers and grassroot representatives since inception aids in understanding local concerns, build customised solutions and ensure scale-up.
Stack model of development has its own advantages and disadvantages. Since this post would be looked at people across the world trying to build these stacks to solve financial inclusion problems among others that would intend to benefit mankind, Let me put down my 2 paisa as an observer of India Stack.
Driven by APIs -- IndiaStack is a centralized stack, driven by APIs. This makes it easier for wide range of platform participants to develop using the platform. It also makes easier to manage changes to upgrades to platform seamless as participants are mandated to follow the latest and greatest designs of the platform ensuring easier updates over legislative / process changes. Aadhaar enrollment system, as part of the stack is one example where these process changes were pushed to downstream operators seamlessly over time.
Participatory nature in development of systems -- I wrote about why IndiaStack must be follow free and open source software development to be inclusive (http://blog.srik.me/2016/11/18/india-stack-must-free-open/
). Sadly, this is not being done, although to be fair, we are seeing IndiaStack opening up for consultations, most recently held a digilocker v2 consultation.
Inheriting Regulatory license raj -- While the IndiaStack might be looked as one form of "opening up" of digital economy and deregulation, it is at the same time, inheriting the infamous regulatory license raj of India. UPI (http://www.medianama.com/2016/10/223-upi-is-a-toll-road/), other NIUs (like GSTN) along with legislative, regulatory bodies ensure that platform participants pass a certain threshold and carry same set of values when it comes to use / development of platform, hence will be counter productive to goals of inclusion in long term. Democratization of access to "digital public good" infrastructure to allow participation of free and open source software would go a long way in fixing this issue.
Economics of platform economy -- Platforms are only as successful as platform participants, for whom consumers and platform economy participants are key. As there is uncertainty about benefits of platform between various players, stakeholders and economics isn't worked out, agreed upon by each actor, its a key challenge for sustainable development. It remains to be seen if the IndiaStack model of digital economy is sustainable.
Fixing accountability -- Even though the popular perception is that digital brings accountability inherently, sadly reality isnt the same. Be it the aadhaar replay attacks (Defenders responded that it was done by "developer of contract agency to service provider to bank which partnered with UIDAI", clearly not wanting anyone else along the chain to be held accountable), or the UPI BoM fraud, fixing accountability is not clearly sorted out, atleast yet. Drawing these lines may be hard and time consuming, but failure to do so, would collapse the platform.
Design choice of centralization -- The common pattern with IndiaStack is a conscious design choice of centralization which fundamentally cuts across privacy to participants, among fears of surveillance, lack of open debate between platform creators, government and citizens compounded with legal handicaps of not having a privacy, data protection law shows the ugly side of IndiaStack, to say the least. For governments, looking at Stack, must also gauge the problems associated with centralization of power if they choice a centralized design like IndiaStack.
Great video and article! However, I would like to point out that the characterisation of India Stack in the video is not entirely accurate. The way its developers see it, India Stack is comprise of four layers, with the biometric ID number serving as the foundation for all four layers. These four layers are called presenceless, paperless, cashless, and consent.
Thank you for your comment!
I like this India Stack, and have a few questions
1. what is the process to get this to another country?
2. Are other countries installing this model and solutions?
3. What % of the poor are really using it for payments?
4. Is all G2P running through the stack
5. How long took the convincing process for Politicians to agree on this model?
Hello Cornelis - thank you for your appreciation and questions. Please email me with the questions and I will be happy to respond. Thanks, Anand
While this is a great initiative (common good) it will take time for other countries to implement reason being that it would need a huge investment and so they will probably want to watch and see how it goes in India first before any country can attempt.