This article has been written by Sagar Rane pursuing the Diploma in US Technology law and paralegal studies from LawSikho. This article has been edited by Prashant Baviskar (Associate, Lawsikho) and Smriti Katiyar (Associate, Lawsikho).
Table of Contents
Introduction
Indian Stack is a set of API’s that allows government, business and start-ups and developers to use a unique digital infrastructure to conduct India’s business presenceless, paperless and cashless delivery service. Many software developers approved of this concept and they came together to develop, evolve and evangelise these API’s and systems.
Indian stack is a software project aimed at creating a unifying software platform that would enable the Indian population to use digital software in their mobile phones and other electronic devices. The Indian government has pushed this creation of Tech stack, thereby enabling different services to be utilized by the Indian people at the a click of button without the hassle of documentation, paper money and wet signature. These developments have paved the way for India to become a fintech pioneer.
Success story of Indian stack
Indian has ventured into adding this digital platform to its economy, which has been growing at a very fast pace since 2009. They have achieved this by creating three different layers.
a.Biometric Identity database,
b.Simplified payment addressing
c.Digital Payment Interoperability.
Let us understand this by using a example of fictional person called “Ram”
- Biometric Identity Database: Ram is a garment worker who ventures from Madhya Pradesh to Mumbai in order to start his own garment business. As Ram is a garment worker he does not have his own permanent address and Bank usually needs multiple ID documents to open an account. In 2009 the Indian government linked the Biometric identity of a person to a unique account number. This enabled people like Ram to have their own Unique identity number. By using this biometric number (Aadhar Card) & his own Physical biometric Ram is able to open a Bank account as the unique identity allows the banks to conduct an instant KYC check.
- Simplified payment addressing: Thereafter that identification number, phone number and Bank account number is linked to a simplified payment address called UPI eg: ram@bankaddress. This address can be shared by Ram with his employee so that he can receive his salary digitally from Mobile applications or Web Apps specifically made for these purposes.
- Digital payment Interoperability: Now Ram can send money from his phone to his mother in Madhya Pradesh (M.P) instantly, because she also has an account linked to Biometric Identity Database. Ram’s mother can withdraw the funds from Madhya Pradesh itself by using her ID number and fingerprint.
Recently Digital Locker was also added to the entire process separately. Here people can upload digital copies of personal documents such as their Passport book, Bank passbook, academic records, driving license, or birth certificate.
Another system added to Digital locker is the feature of E-Consent which would allow Ram to share certain documents with financial institutions so that he can avail loan facility fast and with ease.
When all Indian citizens are able to utilise these facilities then a huge Digital Data infrastructure will be formed with very strict security protocols at key required points to ensure safety of their database. Thus, this has allowed the formation of connected networks between businesses, the government, and millions of people and the financial system. m.
Institution pioneering the project
Two institutions were formed under the leadership of Manmohan Singh.
- National Payment Corporation of India (which took over the ATM network to modernize retail payments and settlements)
- Unique Identification Authority of India (by the then planning commission and the appointment of co-founder of Infosys, Nandan Nilekani as its chairman)
As all Indians know, Infosys epitomized India’s first tech wave giving software service to multinational corporations in India as well as throughout the globe.
Mr.Nandan Nilekani looked after the creation of Aadhar, the world’s biggest biometric identity database and that enabled India’s second tech wave ie., its own digitalization.
Indian Stack is a combination of NPCI’s projects for digital payments and Aadhar’s Identity and authentication prowess via API’s Aadhar enabled digital payments and eKYC.
UPI (United payments Interface) which was part of the project which enabled transfer of money via mobile phones instantly with only biometric inputs. It began with P-2-P (Person to Person) transfer and then was extended to person to merchant transaction, and now it o has an Autopay feature which enables it to make premeditated recurring payments. The Central Bank uses the UPI project for its own e-wallet called BHIM and more companies have adopted the feature of ewallet which is born from UPI’s. They charge no fees for transfer of funds from wallet to person or merchant or for storage into e-wallet. In 2006 more e-wallets came into the market such as Google Pay and Amazon pay. Covid 19 pandemic also encouraged people to make paperless/contactless transactions using the e-wallet and UPI facility due to fear of infection through paper money.
E-Signature
E-signature is an attempt to try and form a Digital signature of an API. It allows any Aadhar holder to digitally sign any sheet of paper under the information technology act legally with no paperwork, dongle etc. Just an authentication procedure required. India is constantly evangelizing with regulators to adapt the Esign API. The technical aspect of it also includes Consent Architecture taking into account the data protection which allows an individual to take control over the date trail/footprint, protect it, securely store it and share it with the individual’s consent.
Credit transaction /OCEN
With the success of APIs and UPIs India is now focusing on making available credit facilities for the most deserving and smallest businesses and individuals. The banks did not venture into giving credit facilities to these small businesses and individuals as it is not feasible for them to cater to such service at a Micro level. The NPCI has rolled out an Open Credit Enablement Network (OCEN) to connect lenders & marketplaces. OCEAN probably represents the supreme of the Indian Stack in finance. Thereafter future vision would be in Healthcare and Education. Unfortunately, the reality is that India is still mostly a cash economy. 90% of the transactions are still settled in cash as stated by data released by Amazon pay and only 1/3rd of the population has a smartphone. Many court cases and opposition by various sects of people claiming Aadhar to be a threat to civil liberty, privacy and cyber security looms as an ever-increasing risk. According to PwC, in 2002 UPI processed 12.5 trillion transactions valued at Rs.21 trillion ($281 billion). And it is growing at a staggering rate. PwC had estimated that 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.
Transformation from cash economy to digitalisation
The number of Indians active on the internet is around 500 million. Estimates of digital payments vary as there is no complete data, but it is 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 is about one-third of internet users, which is still a low proportion considering the government’s efforts to go cashless. It is expected that government initiatives might prove to be successful as they are focused on building a digital infrastructure of financial inclusion, in which fintech, banks and other private businesses can create their own products and opportunities. Most people, even sophisticated urbanites, still trust banks and traditional rails hence the commercial use is still nascent. The government continues to drive improvements, big priorities matters. New features like UPI Autopay and account aggregation will drive usage, banks, and insurers. Mutual funds companies will work with software companies to build new products across the spectrum of the market.
Going global
The next big challenge for Indian stack and Indian fintech will be taking it globally- Not just to export an Indian model for national pride, but to create freeway for Indian companies to do business abroad. Many developing markets could find India’s model useful and relevant. The Indian government is in talks with technologically advanced areas with a large number 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 thus taking with itself other entrepreneurs as well. Once you get into payments applications, one can participate in a large ecosystem with many facilities. 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 Visa or Mastercard. If India is able to export the India stack to its smallest merchants, their marketplace would expand globally. This is the opportunity and the challenge for the next mile of India’s fintech journey.
Conclusion
No single aspect of the India Stack is entirely unique. However, its comprehensive planning has succeeded in building a more inclusive digital economy from the bottom up. The Indian experience offers several lessons:
- A foundational approach providing a range of public infrastructure and policies can allow for significant synergies across different parts of the digital economy. A digital ID system promotes widespread inclusion by giving everyone a foothold in the digital economy. Common approaches to APIs can set up an ecosystem for data and payment flows that is open to participation by many providers, leading to innovation and choice for the consumer. Data fiduciaries will potentially operationalize greater user control over individual data, setting the stage for the transition from open banking to an open-data economy that spans many sectors.
- Interoperability is a useful tool for fostering competition in digital financial services. The India Stack ecosystem is vast, allowing existing financial intermediaries, as well as big tech firms and new fintech companies, to compete. But it is also mindful of the need for stability to underpin public trust, subjecting these diverse participants to regulation. Could the costs of complying with regulation be a barrier to entry for smaller firms? It is still early days, and while big techs process the bulk of transactions on UPI (Frost and others 2021), smaller fintech companies are gaining ground. Moreover, existing intermediaries and some fintechs account for the bulk of the source and the end points of funds transferred. The market continues to develop rapidly and, in the end, it is a question of striking the right balance between efficiency and stability.
- A level playing field for data flows is necessary to ensure fair competition. There are concerns that big tech companies will be able to obtain financial data from banks and fintech providers but will not have to share their own non-traditional data, such as location, web browsing, or social media history. This remains outside the data-sharing regime but can still inform financial decisions such as credit assessments. Non-traditional data will be crucial as the India Stack eventually expands into processing insurance and even health data, which are beyond the scope of most of the world’s existing open banking frameworks.
Approaches such as the India Stack can support not just open banking but open finance as well, with synergies across banking, wealth management, insurance, and other products across the world.
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