A digital infrastructure known as the India Stack is revolutionizing
access to finance

A decade ago, India’s vibrant local markets were filled with people
buying and selling goods with we­ll-worn banknotes. Today, they are
just as likely to use smartphones. Advances in digital finance mean
that millions of people 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. COVID-19 has accelerated the use
of contactless digital payments for small transactions as people try to
protect themselves from the virus. These advances build on the India
Stack—a comprehensive digital identity, payment, and data-management
system that we write about in a new paper (Carrière-Swallow, Haksar,
and Patnam 2021).

The India Stack is widening access to financial services in an
economy where retail transactions are heavily cash based. A digital ID
card dramatically lowers the cost of confirming people’s identities.
Open-access software standards facilitate digital payments between
banks, fintech firms, and digital wallets. And access to people’s
personal data is controlled through consent. The expansion of digital
payments, facilitated by the stack, is an important driver of economic
development in India and has helped stabilize incomes in rural areas
and boost sales for firms in the informal sector (Patnam and Yao 2020).
Other emerging market and developing economies could learn from the
experience.

Layer 1: Digital identification

The first step in the creation of the stack began in 2010 with the
launch of a biometric digital ID system dubbed Aadhaar—Hindi for
“foundation.” The government initiated a campaign encouraging people to
have their photograph, fingerprints, and other biometric details taken
at enrollment centers across the country. Each person received a unique
12-digit identification number that could be used to access a range of
services. Remarkably, 1.2 billion people—almost 90 percent of India’s
population—signed up for a digital ID in less than a decade, about half
of them linking their new ID to their bank account (see chart 1). Legal
limits on the mandatory use of digital IDs helped protect people’s
right to privacy.

Prior to Aadhaar, patchy record-keeping meant that nearly half the
population lacked a nationally accepted ID card. Driver’s licenses,
voter ID cards, and the like could provide authentication for a
patchwork of services. However, the complexity of verifying identity
made it costly to deliver banking and other services. After all, who
would lend money to someone whose identity was unknown?

India’s central bank saw the potential for Aadhaar to transform
banking. It developed an electronic procedure so that commercial banks
could verify a new customer’s identity instantly through the Aadhaar
database. These biometric checks reliably verify the identity of the
holder, thus reducing the likelihood of false identities and fraudulent
claims. An ambitious financial development policy (Pradhan Mantri Jan Dhan Yojana) was launched to provide a bank
account to all households in India. In just one year, 166 million
people had opened accounts as part of the program. The number had risen
to almost 384 million by 2019.

Government benefits could be paid directly into these newly opened
accounts, and people could access their funds conveniently through
debit cards or smartphones. It represented an impressive fast-forward
of traditional financial development. Only a decade earlier, just one
in three adults in India had a bank account. Similar expansions in
financial access elsewhere have taken almost half a century (D’Silva
and others 2019).

Persuading people to open bank accounts was just the start, however.
Nearly half of all bank accounts in India are inactive, meaning they
never receive a deposit—the highest number of inactive accounts in the
world (Demirguc-Kunt and others, 2018). Further progress depended on
adding more layers to the stack.

1.2 billion people—almost 90 percent of India’s population—signed up for a digital ID in less than a decade, about half of them linking their new ID to their bank account.

Layer 2: Interoperable payments

Even as the government was widening access to bank accounts, India’s
fast-growing fintech firms were launching digital wallets and mobile
money. These innovations made it cheap and simple to store and transfer
money digitally—even for those without a bank account. This prompted an
innovation by the authorities. They introduced a new layer to the
retail payment system, known as the Unified Payments Interface (UPI),
so that banks could exchange messages and payment orders with nonbank
firms. This formed the second layer of India Stack.

With the new system in place, street vendors and small traders without
a bank account could receive payments for goods or services through a
digital wallet. They could transfer funds instantly to someone else—a
struggling relative in a remote village, say—so long as the recipient
too had a digital wallet. In many other countries, in developing
economies especially, transfers like this would take days or even weeks
and would likely involve depositing cash at a distant bank branch and
paying hefty transfer fees.

As with the Aadhaar digital ID, a crucial feature of the system was its
interoperability: users could transact with all actors in the financial
system, public and private, large or small. To participate in the UPI,
fintech firms were required to partner with a bank or obtain their own
special license. Keeping all participants under the watchful eye of the
regulator allowed the central bank to promote financial inclusion while
safeguarding stability. The system has expanded rapidly and has also
seen the swift entry of big tech firms. Most small retail payments in
India are now channeled through the UPI (see chart 2).

Layers 3 & 4: Trust through consent

Data is emerging as a key part of the digital economy. Access to, and
control over, it increasingly determines an economy’s growth, equity,
and stability (Carrière-Swallow and Haksar 2019). A third “paperless
layer” of the stack allows for verification of digital
documents that can replace traditional paper equivalents, increasing
efficiency and integrity. More important, the fourth and final layer of
the India Stack (which is not yet fully operational) is formed of
aggregators that intermediate the flow of financial data between
individuals and financial firms.

These data go-betweens (“fiduciaries,” in the jargon) are responsible
for managing personal data. Regulations state that they must obtain
people’s consent before they process personal data. Fiduciaries may not
access or store any data that has been shared, but they can charge for
their services. This is a very different approach from those in many
other countries. Elsewhere, aggregators typically offer services in
exchange for access to data, which they can then use to sell other
financial services.

Data fiduciaries can offer the trust that adds synergies to the various
layers of India Stack. They can authenticate individuals’ identity,
based on their digital ID, and confirm to third parties that data do
indeed describe a particular person. Fiduciaries can also use the
stack’s application programming interface (API), an open-access
software standard that allows different applications to communicate
with one another, to certify the veracity of digital documents. These
documents might include statements of financial assets, liabilities,
and cash flow—a powerful basis for establishing trust in the digital
economy and a way for people to leverage the data their activities
generate. It can also

support access to financial services for people in the informal
sector who can produce few records proving their creditworthiness.

Lessons from India

No single aspect of the India Stack is entirely unique. However, its
comprehensiveness 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.

YAN CARRIÈRE-SWALLOW
is an economist in the IMF’s Strategy,
Policy, and Review Department and European Department.

MANASA PATNAM is an economist in the IMF’s Strategy,
Policy, and Review Department and European Department.

VIKRAM HAKSAR is assistant director of the IMF’s Monetary
and Capital Markets Department.

Opinions expressed in articles and other materials are those of the authors; they do not necessarily represent the views of the IMF and its Executive Board, or IMF policy.