Over the past decade, India and the world has seen a virulent shift to the virtual world where the global citizens are taking the internet route for every avenue we can think of, from retail to payments. While a decade back, bickering for cash and change at vegetable markets might have been a usual sight, presently it’s commendable how we see digital payments being used for such grassroot level errands as well. This journey has been a testimony to all the efforts the governments have been making for ‘Digital Financial Inclusion’ of the entire population. A major driver for this revolution has been ‘India Stack’ which is the moniker for a set of open APIs and digital public goods that aim to unlock the economic primitives of identity, data, and payments at population scale.

It has been rightly said that ‘Data is the new oil’. In the 21st century, it’s the era of Digital Economy and data today holds the same fundamental value that oil did in the 18th century, whose discovery brought about the industrial revolution. Thus, a data repository infrastructure is one of the most valuable assets that any nation can currently hold.

India has created a national identification and digital payment 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 roads, bridges, and ports. To promote financial inclusion at even grassroot levels, India has turned to the method of Open Banking which can be defined as a mechanism where data is shared freely with the consent of the consumer, in order to generate the required analytics and to provide financial and other services.

Aadhar which has become equivalent to a national ID and UPI (United Payments Interface developed by the NPCI) are the two major components of India Stack which due to their interoperability have opened avenues for various fintech start-ups for inclusive growth. India Stack is delivering on the government’s objective to expand the provision of financial services. While each individual component of the India Stack is important, its key overarching feature is a foundational approach of providing extensive public infrastructures and standards that generates important synergies across the layers of the Stack. 

Until recently, most of India had been reliant on cash owing to lack of access to formal banking. The expansion of mobile-based financial services enabled simple and convenient ways to save and conduct financial transactions and provided a novel alternative for expanding the financial net. The Stack’s improved digital infrastructures allowed for a rapid increase in the use of digital payments and the entry of a range of competitors including fintech and big-tech firms.

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India Stack has been an ambitious overhaul whose main objectives have been to promote financial inclusion through increased access to financial services, improve the delivery of public services and benefits, and increase competition in the Indian financial sector. The Indian approach has had early success in promoting large increases in the number of individuals with bank accounts and access to digital payment services among India’s large previously unbanked population, earning praise for the speed with which financial inclusion has been increased (D’Silva et al., 2019). Moreover, these measures have set in motion a significant expansion of digital payments, with a more gradual progression in active use of new bank accounts. Its greatest promise lies in the trifecta of digital ID with a low entry cost, a system of open APIs facilitating interoperability in payments, albeit in a regulated space, and—perhaps most importantly—a mechanism to operationalize individuals’ control over their personal data. It serves as a key step in operationalizing a data policy framework that grants individuals and companies rights to control access to their data.

Over the past decade, 4 layers of India Stack have been introduced gradually. The first is the ‘presence less layer’, featuring the Aadhaar digital ID system that allows for identity verification and for the mapping of information across datasets. The second is the ‘cashless layer’, built on the Unified Payments Interface’s interoperable payments system. The third is the ‘paperless layer’, which allows for the verification of digital documents that can replace traditional paper analogs. The fourth is the ‘consent layer’ which is in the trial stages that will involve the operation of data fiduciaries. These fiduciaries act as intermediaries between individuals and financial companies and will be charged with the responsibility of facilitating the aggregation of individuals’ financial data across their accounts at multiple financial institutions, and sharing that data with interested third parties subject to the individual’s consent. The core of open banking systems which is the interoperable payments system has been working since 2016 through the two layers in other jurisdictions.  

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While similar experiments with open banking have been carried out throughout the world, since its origin in Kenya, India has been able to establish itself as a benchmark. The pillar that has set the Indian approach apart from all others is its foundational approach based on the provision of extensive public infrastructures and standards. This has provided a platform for operationalizing user-authorized data portability and interoperability across the economy. According to an IMF Working paper on ‘India’s Approach to Open Banking’ the key differences of the Indian approach are: (i) comprehensiveness, in the sense of the stack seeking synergies across multiple infrastructure layers; (ii) introduction of a centralized digital ID that has helped millions of people get an ID for the first time and that allows for e-KYC verification, (iii) introduction by the public sector of standards and open APIs facilitating (but not mandating) interoperability of payments, and (iv) operationalization of consent for user data sharing by data fiduciaries in finance and, eventually, in other sectors.

Never in the history of Indian infrastructure projects have we seen such a successful working partnership between civil society, government ministries, bureaucrats, payment companies, regulators, banks, non banking financial services companies, and fintech organizations, with largely no political interference. The world has taken cognizance of the highly remarkable feature of India Stack that its design has encompassed existing financial intermediaries and new tech entrants, including smaller fintechs and large bigtechs.

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The road ahead is difficult with challenges of fuller participation and evil perils of cybercrime but the structure and the government have been trying to efficiently combat these. To attract more fintech entrants, the government has come up with a renovated model of ‘Payments Bank’ with lower requirements and regulation in the perceived area of deployment i.e., reaching the deeper rungs of the population. The planned introduction of Data Fiduciaries aims to reduce some of the risks to privacy and identity theft that may in principle arise from the more widespread sharing of data envisaged in other open-banking applications. A proposed Open Banking Regulating Authority could be set up to overlook interoperability and inclusion as well as the functioning of this budding sector that may be more focused on data and consumer protection practices. Arguably, the approach in India could raise the threshold of entry for smaller tech providers in the system with certain trade-offs but the experience so far has successfully established India at greater heights.