India does not boast corporate Internet giants like Amazon or Alibaba. Its nearly 1.4 billion people are more of a battle ground for Big Tech from the U.S. and China. Yet it too boasts a deep reservoir of engineering and entrepreneurial talent, much of it nurtured by experience in Silicon Valley, and it too has a fintech story that is poised to influence the world.
This is embodied in a combination of technological projects that collectively are known as the India Stack.
A “stack” comprises all the technologies required to operate an application: computer languages, architecture, libraries or lexicons, servers, user interfaces and experiences, and software – the apps themselves – and tools used by developers, such as APIs, which connect databases and software.
India’s government has led the creation of a tech stack for the entire country, from identity to payments to other services, that has made this country a fintech pioneer in its own way.
“There’s no other tech stack in the world that has a prefix with a country’s name,” says Sri Shivananda, PayPal’s CTO based in San Francisco, speaking at a recent virtual conference. “It’s a unique convergence of government, technology and regulatory frameworks.”
Beginnings: identity and payments
India’s fintech journey began in 2009 with the creation of two institutions under the premiership of Manmohan Singh. First was the National Payments Corporation of India, which took over the ATM networks to modernize retail payments and settlements. Second was the establishment of the Unique Identification Authority of India, spun out of the government’s economic planning commission, and the appointment of Nandan Nilekani as its chairman.
Nilekani was the co-founder of Infosys, the company that epitomized India’s first tech wave as a software services provider to multinational corporations (today is serves as its non-executive chairman). As chairman of UIDAI, he would oversee the creation of Aadhaar, the world’s biggest biometric identity database, and go on to become a key player in India’s second tech wave: its own digitalization.
No other tech stack in the world has a prefix with a country’s nameSri Shivananda, PayPal
The India Stack is, in essence, the combining of NPCI’s projects for digital payments and Aadhaar’s identity and authentication prowess via APIs. “Aadhaar enabled digital payments and eKYC,” Nilekani said speaking at the Global Fintech Fest in July, 2020, organized by NPIC. “It has been instrumental to opening new accounts and enabling mobile connectivity.” There is now 1.26 billion Indians registered on the database, according to PwC.
Together these led to the first applications, such as direct benefit transfers by the government into peoples’ bank accounts, and allowing people to make payments with just their biometric Aadhaar identifier – a huge accomplishment in a country with so many people who lack conventional documents or proof of identity.
Payments projects under NPCI have proliferated, with services covering road tolls and domestic remittances. The main project is UPI, United Payments Interface, which allows people to transfer money via their mobile phones instantly with only biometric inputs. It began with person-to-person transfers, like a vast Venmo or HSBC PayMe, and then extended to person-to-merchant transactions; now its new Autopay feature will allow for people to make recurring payments.
UPI is controversial: it is not just infrastructure, it is a product. The central bank uses it for its own e-wallet (called BHIM), while an estimated 50 companies leverage UPI’s app for their own wallets. UPI has brought fees down to zero. This has put enormous pressure on the roughly 45 standalone digital wallet providers in the market, including market leader Paytm.
Paytm and its early competitors enjoyed a huge boost during the Narendra Modi government’s 2016 demonetization campaign, a crude attempt to take cash out of the system; now it and other wallets are being forced to find other commercial opportunities because payments alone no longer makes money, not even at volume. Since 2016, though, the market has seen the entry of more wallets, not fewer, including those from the likes of Google Pay and Amazon Pay.
Payments may not make money on their own, but the COVID-19 pandemic is giving the industry a new impetus. This trend is worldwide but India has the infrastructure to make it happen faster: in June 2020, UPI processed 1.3 billion transactions. The government is now revamping the underlying tech to reach a goal of 1 billion UPI transactions a day.
From payments to lending
Nilekani says the next step is what Indians call an account aggregator system – and what other markets call open banking, although in India it is a universal architecture being built for all sectors, not just finance. “This is based on the premise that data should be available to people to use for their own good,” Nilekani said. “How can we empower people to use their own data to get better credit, healthcare, and education?”
This capability is being rolled out now, starting in Mumbai. Firms that are deemed account aggregators can manage and move data on behalf of consumers, upon their request.
In finance, the Reserve Bank of India (the central bank) is licensing who can become an account aggregator, which will lead to a new fintech ecosystem. Nilekani says the biggest application will be lending. In other words, this new feature is extending the India Stack from payments into credit, as well as personal finance, wealth management, and insurance.
How can we empower people to use their own data to get better credit?Nandan Nilekani, Infosys
“India has to do something about providing credit for its most deserving and smallest businesses and individuals,” Nilekani said. Micro enterprises are barred from credit because they are too costly for banks to service.
Digitization is bringing that cost down, making small-value, short-duration loans commercially feasible. “Now you can think of an end-to-end credit cycle that’s entirely digital,” Nilekani said, “from origination and underwriting to disbursement and repayment. That’s possible because of UPI, Aadhaar, and account aggregation.”
Data and standards
Digitized infrastructure is also making people and small businesses able to retrieve and use their data: by getting easy connections to tax records or transaction data on e-commerce marketplaces. “Street vendors can get access to loans if they use digital payments because it gives them a history,” Nilekani said. Over time, this data will help account aggregators compile more accurate data so they can better price their products. (This has also been made easier by 2017 tax reforms that began to unify India’s complex patchwork of state and local taxes.)
Street vendors can get access to loansNandan Nilkekani, Infosys
To make this open-banking regime work will require a standard language, similar to the way UPI created a protocol for payments. The NPCI is rolling out an Open Credit Enablement Network (OCEN) to connect lenders, marketplaces, and lenders.
“If OCEN is rolled out it will have a big impact and democratize credit,” Nilekani said. Lenders such as banks and fintechs are already keen to get involved; the challenge will be getting marketplaces – in the jargon, “loan service providers” – to adopt OCEN’s software.
Those that do, however, will be able to embed loans in their other services, not from their own balance sheet, but from participating banks. And with UPI Autopay, small businesses or individuals will be able to opt to pay off those loans in increments instead of via lump sums.
Nilekani says OCEN probably represents the apex of the India Stack in finance. Future priorities will be healthcare and education. But India still has a long way to go just to make the India Stack ubiquitous, even in payments, let alone in credit.
From foundations to use cases
Sometimes the glitzy headline numbers mask the reality that India is still mostly a cash economy: 90% of transactions still settle in cash, according to Amazon Pay, and still only about one-third of the population has a smartphone. Aadhaar has been opposed by some Indians as a civil-liberties and privacy threat, and cybersecurity looms as an ever-greater risk.
The growth rates are huge: according to PwC, in 2020 UPI will have processed 12.5 trillion transactions valued at Rs21 trillion ($281 billion). And it’s growing at a staggering rate: PwC estimates from 2017 to 2020, the compound annual growth rate of this product is 785% in volume and 570% in value. There are also 1.15 billion wireless subscribers and 718 million Internet subscribers.
However, business leaders say those headline numbers hide a more disappointing reality. The number of Indians active on the Internet is closer to 500 million. Estimates of actual users of digital payments vary, as there is no complete data, but it’s probably in the range of 130 million to 170 million, including UPI users plus those using standalone credit cards and e-wallets for online purchases. That’s about one-third of Internet users, which is still a low proportion considering the government’s efforts to go cashless.
This reflects the fact that the India Stack has been a government initiative from the start, a project pursued by both of its major political parties. The focus has been on building a digital infrastructure of financial inclusion, in which fintechs, banks and other private businesses can create their own products and opportunities. But those commercial use cases are still nascent; most people, even sophisticated urbanites, still trust banks and traditional rails more.
The government continues to drive improvements: big priorities now include tokenization for credit card transactions, video eKYC, and other security-related matters. New features like UPI Autopay and account aggregation will drive usage; banks, insurers and mutual fund companies will work with software companies to build new products across the spectrum of the market.
The next big challenge for the India Stack and Indian fintech will be taking it global – not just to export an Indian model for national pride, but to create an onramp for Indian companies to do business abroad. Many developing markets could find India’s model useful and relevant. Indeed, Nilekani said, so could the U.S. with its sizeable population of underbanked and chronically poor.
What that means in practice is not clear, although the Indian government has been in talks with tech-savvy places with lots of Indian workers, such as Singapore and the United Arab Emirates, about allowing Indian citizens to access UPI from abroad. The other use case would be to allow global tech companies that are piggybacking off the India Stack to take those services abroad.
“India is the first country to take a platform-first approach,” said PayPal’s Shivananda. “Once you get into payments, you can participate in a large ecosystem. As a global platform, PayPal can learn how to leverage this and add services on top.”
But for that to make sense to global tech players, the India Stack will need to be compatible with global payment networks, like those of a PayPal or a VISA or Mastercard. If India is able to export the India Stack, though, its smallest merchants could find their marketplace has also expanded globally. This is the opportunity and the challenge for the next mile of India’s fintech journey.