India, as a market for financial services, is ripe with untapped potential. With a population of over 1.3 billion, 80% of which is banked, the financial literacy rates remain low at 27%. Micro, small and medium enterprises (MSMEs) that contribute 30% to the GDP of the country, represent a credit gap of USD 397 billion. These factors present opportunities for reform and more open financial services enabled by technology and digital infrastructure.
The country’s fintech landscape has witnessed a flourishing symbiotic relationship between regulatory initiatives and infrastructure blocks, which have resulted in the perfect breeding ground for incumbents and insurgents to innovate upon. Over the last two decades, India’s zealous determination in bringing a paradigm shift in its vision for financial inclusion has led to the development of the India Stack, an initiative that aims to decode the country’s monetary problems through paperless, cashless, and presence-less API systems.
The four distinct technology layers, covering areas of digital identity, digital records, consent, and a democratised payments interface, lay the holistic foundation for synchrony between infrastructure and norms. The hybrid open finance model which doesn’t mandate participation but definitely incentivises it, creates healthy market competition for collaboration between the most established to the newly emerging players. In the world of fintech, India positions itself uniquely with this archetype that has broadened the horizons for both financial and digital services in the country.
With this piece, we revisit and analyse the intertwining DNA strands of regulatory policies and digital infrastructure that have evolved over the past two decades to create an open finance framework for the nation to thrive upon.
The 2000s Decade: Setting Up The Foundations
Building on the momentum of the liberalisation, privatisation, and globalisation (LPG) reforms of 1991, several credit bureaus saw the light of the day under the patronage of the Reserve Bank of India (RBI). TransUnion CIBIL was the very first to commence operations in 2000 followed by three additions—Equifax, Experian, and CRIF Highmark—in 2010.
During the same period, the country’s endeavour towards setting the stage for a national identity document for citizens was on the cards. A pilot project set in 2003 by the Vajpayee government instigated the movement, where a proposal to test the issuing of Multi-purpose National Identity Cards (MNICs) was devised. This was followed closely by the inception of the Unique Identification Authority of India (UIDAI) through the aggregation of two schemes – the National Population Register under the Citizenship Act of 1955, and the Unique Identification (UID) scheme of 2006. The UIDAI was officially constituted by the Central Government in 2009 for the purpose of issuing the unique ID that came to be known as Aadhaar.
Within three years of its launch, the 12-digit unique identification, originally intended to drive financial inclusion for below poverty line families, had registered approximately half of the country’s population. The quick adoption of the framework was thanks to the aim of building a digital ecosystem around the value of identity, which resulted in low operational costs and swift acquisition of an all-inclusive national identity. As of July 2021, Aadhaar numbers have been issued to 1.29 billion adults over the age of 18, which accounts for 99% of the adult population. The ID forms the bedrock of all official transactions taking place in the country and is a vital piece of digital infrastructure.
It goes without saying that the mutual reinforcement of the digital infrastructure components with that of regulatory directives set in motion the right direction for advancement towards the present as well as the forthcoming accomplishments.
The 2010s Decade: An Era of Multi-pronged Growth
The Payments and Settlement Systems Act of 2007 had brought the payment rails into existence, however, the heavy reliance on cash made these digitisation efforts ineffectual. Access to financial services didn’t gain much momentum up until 2011, before which only 35% of Indian adults held a bank account.
In order to integrate the banking functionalities into the framework, the RBI in 2013 enabled Aadhaar holders to authorize banks to have access to their biometric information through a simple electronic verification with the help of UIDAI. Aadhaar-based eKYC simplified the onboarding process for banks by taking into account only minimised and relevant data through the consent of the identity holder. By 2017, 90% of the population had been registered with the UIDAI, with half of the ID-holders also having their bank accounts linked to their Aadhaar number.
One notable framework that stimulated the acceptance and implementation of digital payments, so as to support affordable financial services, is that of the Unified Payments Interface (UPI). Launched in 2016 under the supervision of the National Payments Corporation of India (NPCI), UPI was a game-changer for retail payments through which identity holders now held the choice to link their debit cards to their Aadhaar ID. It also brought about the innovation congruence between banks and non-banks in terms of collaboration. The pillars of the UPI architecture are held strongly by prevalent Application Programming Interfaces (APIs), which makes it possible to have prompt and unbound peer-to-peer transactions and authorization for payments directly from users’ bank accounts.
For MSMEs, reforms introduced under the Goods and Services Tax Network (GSTN), such as eWay Bill, e-Invoicing, and Tax Information Exchange System (TINXSYS) have led to the standardization of business processes across the country. The launch of platforms like the Trade Receivables Discounting Systems (TReDS) and the Government e-Marketplace (GeM) enhanced financing and distribution mechanisms for small businesses. As per the Ministry of MSME, 58% of the order value on the GeM portal was from micro and small enterprises as of 2020. With the policy of mandatory e-invoicing for businesses with a turnover of more than INR 50 crore, the volumes of businesses actively participating in the GSTN are bound to increase. This will consequently improve the availability of high-provenance data to create better financing solutions for MSMEs.
Rounding off the decade, several crucial policy initiatives around data protection, account aggregation, and democratized lending for MSMEs were introduced. Key infrastructure components such as the Data Empowerment and Protection Architecture (DEPA), regulatory sandboxes introduced by RBI and SEBI, and the building blocks for the Account Aggregator (AA) ecosystem came into play to set the stage for the next decade of digital transformation.
The 2020s Decade: An Era of Cambrian Explosion
With technology comes responsibility, and the responsibility surrounding open digital infrastructures is that of data sharing, privacy, and security. While gradual progress has been made in introducing the various components of India Stack, the most crucial of all is the DEPA. Described as “a final layer of India Stack”, the architecture enables safe and trusted sharing of data in which privacy is preserved.
For this purpose of data sharing, RBI introduced the Account Aggregator (AA) framework in 2016, which saw development begin in the following years. The ecosystem went live on 2nd September 2021 with 16 institutions as Financial Information Providers (FIP) and Users (FIU), including 9 banks in various stages of implementation, and 7 account aggregators, 4 of which have received operational approval. Sahamati, a self-regulated collective of the AA ecosystem, inaugurated in 2019, is a guiding body for AA ecosystem participants in India.
Through the consent-based and trust-empowered engine, the aggregators connect data relating to financial assets and liabilities of the individual to their digital identity, enabling registered third parties to access only customer-consented data, all the while not storing any information for a minimal fee. Use cases built on top of this framework will empower the open finance use cases of this transformational era.
One such emerging use case is that of the Open Credit Enablement Network (OCEN) launched in 2020, which seeks to provide the open credit rails to democratise lending for the masses. Indian MSMEs, whose financing needs are met to the extent of a mere 16% by formal sources as per an IFC study, stand to benefit from this network exponentially. The OCEN-powered lending value chain will unlock opportunities for all stakeholders. Licensed lenders can leverage the system to build their balance sheets, while loan service providers can focus on the customer experience and provide intuitive financing solutions to those in need. Using components of the India Stack, including AA, processes from loan origination and underwriting to servicing, monitoring and collection can be streamlined.
Furthermore, avant-garde strategies, such as the advanced implementations of direct benefit transfer innovations like e-RUPI prepaid e-vouchers, Kashi (cash over internet) to provide small-ticket loans to lower-income households, and RBI’s expansion towards exploring the concept of Card-on-File Tokenisation, will enable better access to financial services for the underserved strata of society.
The beginning of this decade of India’s digital and open finance journey has already been a power-packed one. Open payment rails led by UPI have made India the leader in real-time payments globally, with monthly volumes surpassing 3.6 billion transactions. OCEN-led credit rails driven by the DEPA data-rails will usher in the next phase of open finance and foster financial inclusion in the economy. The upcoming decade, building on the strategic escalation of the past two, will unlock India’s trajectory towards becoming an economic superpower and establishing itself as one of the open finance first-movers.
Afshan, the co-founder and COO at WhiteSight, loves studying business models and understanding how things work. When she's not busy working, you can catch her experimenting with new recipes and flavours in her kitchen.