A few years ago, the lively markets of India’s smaller cities were bustling with people engaging in buying and selling activities, primarily using paper money. Today, it's increasingly common to see transactions being made with mobile phones, QR codes, and e-wallets.
This shift signifies that millions of farmers and consumers, operating within both the formal economy and the vast informal sector, are now able to accept payments, settle invoices, and transfer funds anywhere in the country. All these operations require just a few taps on their screens.
The outbreak of the pandemic significantly catapulted the adoption of contactless digital payments for small-scale transactions across India. According to a report published last year by India’s Ministry of Information Technology, there's potential to unlock $1 trillion USD in value from the digital economy by 2025, with half of this opportunity stemming from new digital ecosystems.
With a rank as the second fastest digitizing economy among 17 leading economies globally, just trailing behind Indonesia, India has seen a substantial boost in digital payment use. A major role is primarily attributed to the influential India Stack project, which was fundamental in enhancing financial inclusion.
Driving Financial Inclusion in Rural Areas
From its inception, India Stack has evolved into a crucial component of the Indian economy, representing an ambitious endeavour to create a unified software platform that propels the entire population into the digital era. This platform facilitates easy access to financial services and complex government services through simple mediums like text messages or WhatsApp.
In more technical terms, India Stack comprises a set of APIs that enable governments, businesses, startups, and developers to leverage a unique digital infrastructure. This infrastructure aims to address India's persistent challenges through services that are presence-less, paperless, and cashless. The system encompasses four layers, offering diverse services including Aadhaar (India’s universal biometric identification system), e-KYC (a paperless method for verifying identities through Aadhaar), and the widely adopted Unified Payment Interface (UPI).
The government has credited India Stack with significantly advancing financial inclusion, enabling access to financial services for the previously unbanked and underbanked populations. A report by Omidyar Network highlights how the digital infrastructure facilitated by India Stack has democratized financial services, reaching millions across India and heralding a new era in banking and financial services.
Furthermore, India Stack plays a vital role in promoting financial literacy among rural populations. It offers educational videos and other resources on financial literacy, helping users to understand how to effectively utilize these services and make informed decisions.
“Before” vs “Now”
The contrast in the banking service accessibility between “before” and “now” is stark. In the early 2000s, opening a bank account at a public sector bank required at least three visits—first to obtain the application form, second to gather two witnesses, and finally, to submit a separate application for a debit card issuance.
The entire process, from application to receiving the debit card, could take approximately a month, a duration significantly lesser than the process required for loan approvals. For loan approvals, bank employees were obligated to conduct physical verifications at clients' premises to mitigate fraud risks.
In a country as expansive as India, finding a bank nearby, especially in rural areas, was often challenging. Consequently, individuals would spend up to six months persuading bank managers to visit and approve loans. Nowadays, the physical distance from a bank is inconsequential because banking services are readily accessible through mobile devices. Thanks to eKYC and Aadhaar, bank officers no longer need to visit customers' homes for address validation.
India Stack has empowered “Bharat” - the segment of India's population without access to traditional banking and credit schemes, as well as other rural users, by facilitating payments and money transfers without the necessity of visiting a bank. It provides key access to credit and insurance services, allowing rural residents to obtain loans and insurance policies effortlessly.
The Crucial Role of Rural Fintechs
Rural fintech companies are leveraging India Stack to develop digital platforms that enable farmers, merchants, and citizens in rural areas to easily access financial products and services like loans, insurance, and investment opportunities. For instance, mobile apps utilize Aadhaar for immediate identity verification and loan disbursement to beneficiaries' accounts. UPI is another essential tool that ensures seamless and instant payment transactions for goods and services.
Dvara Money, a neobank catering to the underserved urban population with wealth management services, exemplifies the transformative impact of digital tools like e-KYC and UPI. These tools have significantly streamlined processes, reducing costs and saving time, thereby simplifying the financial journey for customers. Pramod Ghorpade, CEO of Dvara Money, emphasizes how leveraging India's sophisticated digital infrastructure has enabled comprehensive financial inclusion solutions for platform workers across the country.
Rural fintech firms are not only innovating with new products and services but are also exploring the potential of the government’s initiative on a digital health stack. This initiative aims to enable the creation of electronic health records and facilitate telemedicine services. Through this digital platform, rural fintech companies are working towards providing affordable and accessible healthcare services to rural citizens.
The Final Piece: The Account Aggregator
India Stack offers a plethora of services, and the forthcoming integration of the account aggregator (AA) system is a significant advancement. The AA framework, endorsed by the Reserve Bank of India, aims to consolidate disparate financial customer data onto a single platform, facilitating easier access and use by banks and fintech startups.
This framework simplifies data sharing across services, contingent on user consent, and affords financial service companies the ability to optimize product offerings based on accessible transactional and banking data of users. Several major banks and fintech startups are exploring the applications of the AA framework, promising a more integrated and efficient financial ecosystem.
Challenges & Opportunities
India Stack has been instrumental in constructing a more inclusive digital economy from the ground up, paving the way not only for open banking but for open finance as well, creating synergies across banking, wealth management, insurance, and more. The government has initiated partnerships with other countries, focusing on the global utilization of UPI, MOSIP, CoWIN, and the Digital Health Stack.
While the future appears promising, with authorities working to extend UPI payments for non-resident Indians (NRIs) in countries like Singapore, Australia, Canada, Hong Kong, Oman, Qatar, the US, Saudi Arabia, the UAE, and the UK, challenges persist. Regulatory uncertainties could potentially impede innovation, and there is room for improvement in leveraging platform work data for delivering financial services.
