A version of this article appeared in the Spring 2022 issue of strategy+business.
Every morning, Anjali Vazare, a woman in a remote hamlet in Maharashtra, India, opens her shop to customers. But this isn’t a typical small-village shop—it’s a one-woman business on the cutting edge of India’s digital transformation. Armed with a cell phone and a signature scanner, Vazare helps the people of the village check their bank account balances, withdraw cash, pay utility bills, download government land records, and transact on e-commerce sites. Most of Vazare’s customers are poor and uneducated. Just a decade ago, they had no identification papers and were unable to access the formal banking system. But today, they are making instant, seamless, secured financial transactions.
It’s not just India’s rural entrepreneurs who have changed the way they transact. India has created a national identification and digital payments infrastructure that has revolutionized the way businesses both big and small interact with their customers and suppliers. Known as the India Stack, this infrastructure has given formal identification credentials to all citizens and ushered millions of them, rich and poor, into the digital economy, in the process becoming as important to progress as road, bridges, and ports.
The India Stack has two major components: a unique identifier for each citizen (called Aadhaar) and a digital payments infrastructure, built by the National Payments Corporation of India (NPCI). A staggering 1.29 billion Aadhaar cards have been issued since 2016. And for the month of September 2021, the NPCI reported 3.6 billion transactions, amounting to US$88 billion, using United Payments Interface (UPI), the NPCI’s flagship payments app for transferring money between bank accounts. The average size of a UPI transaction is just $26, indicating its widespread usage for day-to-day business. UPI transactions increased at a 785% compound annual growth rate between 2017 and 2020, according to a PwC report.
India has made further strides toward inclusive growth. Because of the launch of the government’s Jan Dhan Yojana financial inclusion program in 2014, 80% of Indian adults now have bank accounts, up from 35% in 2011. The gender gap in bank account ownership has narrowed, and so has the gap between those with secondary education and those without it. The gap between rich and poor has also gotten smaller. All of these gaps are now smaller in India than global averages.
Now that most people in India have bank accounts, the government has been able to make large-scale direct benefit transfers quickly and efficiently. Take, for example, the government’s COVID-19 relief program, which used the India Stack to pay out $44 billion to women and small farmers. For decades, India’s efforts to deliver government services have been plagued by a host of problems not unique to India, from slow-moving bureaucracy to the abuse of welfare programs. The India Stack presents a solution that represents a powerful return on investment. As of March 2020, India had saved an estimated $20 billion by having a more secure system that eliminates fake and duplicate beneficiaries.
How the India Stack is incentivizing innovation
The large-scale digital growth India has experienced as a result of the India Stack, combined with the platform’s designation as an open-access “public good,” has incentivized local and international companies to retool their own approach to financial transactions.
As part of its COVID-19 relief program, the Indian government used the India Stack to pay out US$44 billion to women and small farmers.
Apart from UPI, the India Stack includes the NPCI’s open-access, interoperable platforms for utility bill payments, travel ticket and pass purchases, toll payments, and health vouchers. Driven by customer-acquisition and -retention goals, more than 230 Indian banks (including the behemoth State Bank of India) have quickly adopted these offerings, realizing they can more effectively market their traditional products and services via the payments experience. In July 2020, banks also welcomed a new autopay feature launched by the NPCI that allows them to take bigger-ticket purchases, such as insurance premiums, and split them into installment payments. Banks are hoping to use this offering to grow their retail lending business.
Traditionally, those in need of small loans have found it difficult to qualify due to complicated documentation requirements and a lack of transaction history. A consent-based digital locker (DigiLocker), launched in 2015, allows anyone with an Aadhaar card to store documentation and allow access to it. Combined with transaction data from mobile wallets, this allows lenders to quickly review credit history and sanction loans. A key feature of the DigiLocker is that the data ownership and sharing rights reside with the individual who uploads documents, not with the public or private organizations that access it.
Funded by domestic and global investors, many Indian startups, such as Paytm (a major player in UPI, digital wallets, and credit and debit cards) and BharatPe also have found huge success. PayNearby, the app that Vazare uses in her remote hamlet, has 850,000 retailers participating, with more than a million transactions each day, and an annual payment volume of $73 billion. Setu, a software startup whose founders were part of the India Stack team, offers a set of plug-and-play application programming interfaces for financial products and a sandbox where developers can test their applications.
The ripples of the India Stack’s success are already spreading around the globe. Several customer-facing global companies are tapping the India Stack to enter the country’s market, with a wide range of internet and mobile phone offerings now integrated into the India Stack platforms. Walmart, through its acquisition of Indian e-commerce giant Flipkart, now owns PhonePe, which is currently the market leader in UPI transactions. PhonePe has more than 300 million registered users, and an annualized total payment volume of $390 billion as of May 2021. Other major global players include Google Pay, WhatsApp, and Amazon Pay. Alphabet CEO Sundar Pichai plans to apply what the company has learned from Google Pay’s experience in India to global markets. Google has also written to the US Federal Reserve, advising it that the India payments model should be adopted for FedNow, the instant payments system in the US.
The NPCI has set up a fully owned subsidiary, NPCI International Payments Limited, to offer licensing and consulting services to other countries. The NPCI has also conducted several global information exchange sessions and built exploratory partnerships with Discover Financial Services in the US, the Japan Credit Bureau, and Union Pay International in China. In July 2021, Bhutan became the first country to use the NPCI’s BHIM mobile payments app and to adopt UPI standards for its Quick Response (QR) deployment. In August 2021, NPCI International Payments Limited partnered with Mashreq Bank in the United Arab Emirates to offer UPI to the 2 million Indians traveling there each year. In September 2021, India’s central bank, the Reserve Bank of India (RBI), announced an agreement with the Monetary Authority of Singapore to allow cross-border instant money transfer, by linking India’s UPI with Singapore’s PayNow.
The India Stack has clearly given the world a model for closing gaps in financial inclusion, growing the economy, and effectively delivering services to citizens. But as governments and companies outside India think about how to mimic that success, they should keep the following lessons in mind:
Think of payments as a public utility. “Globally, there will be a significant benefit if we reimagine payments infrastructure as a public good, with open standards and interoperability as the key features,” says Praveena Rai, the NPCI’s chief operating officer. Unlike the proprietary systems of private-sector card companies or governments, the India Stack is premised on a philosophy of openness. That openness allows authentication, authorization, and clearing messages to flow seamlessly between banks, the intermediary channels, and the customer. It also eliminates the need to lock in with a particular vendor or proprietary system.
Design a robust legal and regulatory framework. To build a public utility platform, governments must, in parallel, create a legal framework that is in line with the country’s unique regulatory history and culture. In 2007, the Indian Parliament passed the Payments and Settlement Systems Act, designating the RBI as the authority for regulation and settlement of payments. This then allowed the central bank to form the NPCI. Subsequently, the RBI has taken a pragmatic approach, ensuring regulatory oversight but allowing the NPCI a great deal of operational freedom. Recently, the RBI mandated interoperability among payment issuers and increased transaction limits to ensure the growth of digital payments.
But the legal and regulatory framework also needs to be able to respond to criticism and evolve. In 2016, when India passed a law to make Aadhaar mandatory for receiving government benefits, activists argued that marginalized segments of society would be left out. There were also debates around data protection and data privacy. In 2018, the Supreme Court of India ruled that Aadhaar could not be made mandatory. The law now allows voluntary use of Aadhaar as proof of identity for opening bank accounts and procuring mobile phones but doesn’t require Aadhaar for government services and payments. A new Personal Data Protection Bill is now in the works, and the central bank has also put on hold plans to allow foreign private-sector companies to create competitor payments infrastructure systems.
Create leadership teams from both government and industry. The India Stack has been led by experienced managers from private- and public-sector enterprises. The chair of the Unique Identification Authority of India (UIDAI), which issued the Aadhaar cards, was Nandan Nilekani, cofounder of the software company Infosys, and the CEO was R.S. Sharma, a veteran of India’s civil service. When the NPCI was set up in 2009, it had strong buy-in from banks with varied customer bases, technological capabilities, and payment systems histories. The initial funding for the NPCI was provided by ten of India’s leading banks, which received a 10% stake. Subsequently, the investor base has been opened, and many in India’s financial-services sector are now investors. The NPCI appointed A.P. Hota, the RBI’s chief general manager, as CEO, thus bringing in an element of regulatory oversight.
Co-create with key stakeholders. UPI’s creation and evolution have involved multiple rounds of discussions, hackathons, iterative pilots, and course corrections. “By actively collaborating with banks, fintech companies, regulators, government, and developer communities, we have brought their respective strengths into play, to create a world-class payment system,” says Rai. Another interesting aspect of the India Stack is that it has been supported by tech think tanks such as iSPIRT, a nonprofit that evangelized the concept and helped developers build capabilities to implement the India Stack’s systems.
Allow entrepreneurship to thrive. Reimagining payments as a public utility also means allowing those closest to the ground to build customer-facing solutions. The government cannot possibly step in to solve every social need, nor can it devote all its energy to constantly innovating for the future. Those jobs are best done by the market. By becoming an enabler and reducing the cost of doing business, government can allow entrepreneurship and innovation to thrive, as has happened in India.
Fund or create a stable revenue stream. The Aadhaar project was funded directly by the government. The RBI transferred to the NPCI the National Financial Switch (the nation’s network of automated teller machines, which at the time was processing a majority of India’s debit and credit card transactions). Along with revenue from check clearing operations, the money from these ATMs made the NPCI viable.
Make it a national project. For a project like the India Stack to succeed, the political climate has to be conducive. The India Stack, initiated in 2009, was backed by the center-left United Progressive Alliance, led by then prime minister Manmohan Singh. In 2014, when the right-leaning Bharatiya Janata Party won nationwide elections, the incoming prime minister, Narendra Modi, continued to support the initiative. In 2016, the NPCI, in a patriotic gesture, chose the name BHIM for its payment app as a nod to Bhimrao Ambedkar, architect of the Indian constitution.
Make it easy for people to go digital. The biggest hurdle for digital payments in India is the preference for cash, which is still used for 90% of transactions in the country. A large informal economy and a culture of tax avoidance make progress toward digital payments difficult. Thus, it’s important to make digitization attractive by offering increased convenience, a wide range of valuable services, and zero transaction costs.
Build safeguards for the weakest sections of society. The Aadhaar project has been hampered by implementation errors, leading to hardship and financial loss for some of India’s most vulnerable citizens. The press has published reports of starvation due to difficulties in accessing the public food distribution system, as well as instances of fraud and data breaches. Some errors are inevitable in large projects, but failsafe mechanisms and measures designed with empathy for the marginalized (like extending enrollment periods and keeping old systems running for those having trouble accessing the new ones) are essential.
Don’t let perfect be the enemy of good. Many aspects of the India Stack, such as the Aadhaar identity cards or the Jan Dhan Yojana universal banking project enabled by Aadhaar, are indeed inclusive of everyone. Detractors point out, however, that the apps used to access the India Stack are of little use to the 880 million Indians who do not have a smartphone. We must realistically accept that it is difficult for a complex, multidimensional digital initiative to reach everyone—particularly the most deprived segments of the population—on the first try. But given the increasing popularity of smartphones, and their falling prices, it’s logical to make a long-term investment in a platform based on smartphones. Besides, the India Stack is not just about financial inclusion, but also about gradually pushing the whole country toward digitization.
The way forward
Never in the history of Indian infrastructure projects have we seen such a successful working partnership among civil society, government ministries, bureaucrats, payment companies, regulators, banks, nonbanking financial-services companies, and fintech organizations, with largely no political interference. But India isn’t resting on its laurels. In September 2021, the country’s central bank launched an account aggregator framework, a key move toward “open banking.” Account aggregators work as technology intermediaries between those entities that want customers’ financial data and those holding that data. Several banks have signed up to try out the service.
Another initiative is the Open Credit Enablement Network (OCEN), which allows any customer-facing company to plug lending capabilities into its current operations. Built by iSPIRT, OCEN enables consent-based access to verified information about borrowers, from multiple public and private data sources, leading to seamless credit delivery. Traditional lenders such as banks will be able to create products for small businesses, and any company that has a network of merchants or customers will be able to seamlessly embed lending products in their offerings. When OCEN goes live, India will have built three distinct “rails” or utilities: UPI for payments, account aggregators for data, and OCEN for credit. Government and business can ride these rails to transform the way they work, giving Indian citizens access to faster and more targeted services.
It remains to be seen how this “open banking” ecosystem will develop and whether it will truly help extend financial inclusion in the long term. What cannot be disputed is that these are exciting times in the Indian digital infrastructure space. Trendsetting changes are happening, and at a dizzying pace. The rest of the world stands to learn a lot.