How India Stack is driving Digital Financial Inclusion in rural India
A few years ago, India’s vibrant little cities markets were filled with people buying and selling goods with paper money. Today, they are just as likely to use mobile phones, QR codes and e-wallets.
It means that nowadays millions of farms and customers, in the formal and vast informal economy, can accept payments, settle invoices, and transfer funds anywhere in the country with just a few screen taps.
The pandemic outbreak has abruptly accelerated the use of contactless digital payments for small transactions in India. In its report last year, India’s IT ministry had envisaged unlocking 1 trillion USD of value from the digital economy by 2025, with half of the opportunity originating in new digital ecosystems.
India is the second-fastest digitizing economy amongst 17 leading economies of the world, only behind Indonesia. In this framework, the famous India Stack project has boosted the use of digital payments, boosting financial inclusion too.
Driving Financial Inclusion in Rural Areas
From its humble beginnings, India Stack has now become an indispensable part of the Indian economy. India Stack refers to the ambitious project of creating a unified software platform to bring India's population into the digital age. Imagine getting access to financial services, and complex government services with a text message or on WhatsApp, this is India Stack.
More specifically, India Stack is a set of APIs that allows governments, businesses, startups, and developers to utilize a unique digital Infrastructure to solve India’s hard problems towards presence-less, paperless, and cashless service delivery. The system has four layers that offer multiple services including Aadhaar (India’s universal biometric identification system); e-KYC (electronic Know Your Customer, a paperless method of verifying identity using Aadhaar), and the well-known Unified Payment Interface (UPI).
The government said the India Stack has helped in increasing financial inclusion in India by making financial services accessible to the unbanked and under banked population. According to a report by Omidyar Network, it created a digital infrastructure that enabled financial services to millions in India. And now it is ready to usher in a new era in banking and financial services.
India Stack is also helping to promote financial literacy amongst rural users. It provides access to educational videos and other materials on financial literacy, which helps users understand how to use the services and make informed decisions.
“Before” vs “Now”
How has India Stack helped bring banking services to everyone’s doorsteps? The difference between “before” and “now” is terrific. Back in the early 2000s, people had to go to the bank at least thrice just to open a bank account at a public sector bank. The first time to get the application form, second, to come up with two witnesses and finally, to file a separate application for the debit card issuance.
The entire process, from application to getting the debit card, took almost a month, but this was nothing compared to the process of asking for loans. To approve the loan, bank employees were supposed to visit potential clients' places for physical verification. Just in order to avoid frauds.
In such a big country as India or China, it is usual to have no bank close to private houses, especially in rural areas. So people plead with the bank manager for a good six months to convince him to take a visit and approve the loan. Today, it does not matter how far is the physical location of the bank, banking services are just a tap away on one’s mobile. Thanks to the eKYC and Aadhaar, bank officers never have to visit a customer’s home to validate the address.
India Stack has helped the ‘Bharat’, which does not have access to banks and credit schemes, and other rural users make payments and transfer money without going to a bank. It is the key to providing access to credit and insurance services, enabling rural users to avail of loans and insurance policies without going to a bank.
The Crucial Role of Rural Fintechs
Using India Stack, rural fintech companies are creating digital platforms allowing farmers, merchants, and citizens in rural areas to access financial products and services, including loans, insurance, and investment products easily. For example, mobile apps use Aadhaar to verify the identity of rural borrowers and disburse loans immediately to beneficiary accounts. UPI is another important tool to facilitate seamless and instant payments for goods and services.
Dvara Money, a neobank offering wealth management to the urban underserved, has been able to redefine financial services for platform workers through Banking as a Service (BaaS). Its CEO, Pramod Ghorpade, says, “Innovative tools such as e-KYC and UPI have streamlined processes, reducing both cost and time, and further simplifying the financial journey of our customers. By leveraging the sophisticated digital rails that India has to offer, we have managed to provide comprehensive financial inclusion solutions for platform workers across the country.”
Thus, rural fintech firms have been working on new products and services leveraging the digital stack. For instance, the government is working on a digital health stack to enable the creation of electronic health records and facilitate telemedicine services. Rural fintech companies are exploring ways to use his digital platform to provide affordable and accessible healthcare services to rural citizens.
The Final Piece is the Account Aggregator
As underlined below, India Stack provides different services and the next move is account aggregator (AA). As the government looks to provide more support to India’s fintech industry, private players such as banks and fintech startups are now adopting Reserve Bank of India’s account aggregator framework, which seeks to bring disparate financial customer data onto a single platform.
The AA framework helps in creating a single window for financial and banking data. Moreover, lending, wealth management, and robo-advisory startups can use the data to create customized products. As of now, banks such as Axis Bank, Bajaj Finserv, ICICI Bank, IDFC FIRST Bank, HDFC Bank, Indusind Bank, Kotak Mahindra Bank, and State Bank of India (SBI) and fintech startups are exploring use-cases of AA. The AA framework makes data sharing easier across services, but only after gaining consent from users. According to RBI, the AA framework will help financial services companies to easily get transactional and banking data of users to optimize product offerings for their customers.
Challenges & Opportunities
India Stack has succeeded in building a more inclusive digital economy from the bottom up. 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. The government has inked agreements with other countries to use India Stack, with most of the attention on UPI, MOSIP, CoWIN, and Digital Health Stack.
According to local media, authorities are working to allow UPI payments for NRIs in Singapore, Australia, Canada, Hong Kong, Oman, Qatar, the US, Saudi Arabia, the UAE, and the UK. The road ahead looks promising, however, while the enabling environment is strong, challenges remain. For example, the regulatory uncertainty could hinder innovation and the use of platform work data for the delivery of financial services can be improved.