Should Other Countries Build Their Own India Stack?
In India today, digital finance is connecting individuals, government and businesses in dramatically simplified ways. A person who just five years ago would have struggled with documentation, delays and denials when trying to open a bank account can now open one easily and instantly. Not only that, she can now link her account information to a virtual payments address to send or receive wages, remittances or government payments.
This interconnected set of systems, collectively called “India Stack,” simplifies complex processes such as identifying account owners and routing payments. Three basic layers make the stack work: a biometric identity database, virtual payments addressing, and digital payments interoperability. To learn more about these layers, see this short video:
Taken individually, these layers are not unique to India and can be found in different forms elsewhere. What is special about India Stack is that these pieces of infrastructure are connected to each other to improve the user experience. For instance, a resident can link her ID number to her bank account and consolidate these under a virtual payments address, which looks similar to an email address. To receive money from the government, an employer or a family member, she only needs to remember and provide this address.
There are many other attractive features of the India Stack, and other countries might do well to build parts or all of the new system for their own residents. The Indian experience suggests several lessons.
The biometric identity database was the foundational layer in India, but other countries could begin with other layers first. The Indian journey is linked to the biometric identity database, which was established in 2009 and has now surpassed more than 1 billion registrations. This system may be difficult for other countries to replicate, but it is not a precondition for building the other layers. Countries without biometric ID systems may find it hard to replicate the ease of account opening now achieved in India; however, these countries could start by enabling residents to conduct transactions across different digital value accounts with simple, email-like payments addresses. By allowing customers to expose only this address while transacting, they can make it easier for people, government and businesses to send and receive money.
It is not necessary to start with a “grand design”: the stack can be built layer by layer and connected over time. The components of India Stack began to be built in 2009, quite separately at first, and there was not a grand plan at that time. While the government’s Unique Identification Authority of India (UIDAI) was gaining traction from 2009 to 2014, a consortium of banks formed the National Payments Corporation of India (NPCI) and in parallel started to create new layers of interoperability. UIDAI and NPCI only began to discuss ways to link their infrastructure later on, and the term “India Stack” did not emerge until much later.
Specialized public utilities can play a key role in building the layers. UIDAI and NPCI are both nonprofits that do not seek to maximize revenues, though each does earn modest fees for their services. Both have a strong public utility mindset and are focused on building something for society at large. While the Indian government established UIDAI as a statutory authority, the NPCI is a cooperatively owned utility with banks (primarily publicly owned banks) on its board. NPCI was formed in close association with India’s central bank. This public utility character has made it easier for UIDAI and NPCI to collaborate and build something relatively open and market-wide, rather than thinking narrowly about their own revenues or market share.
India Stack is not mandated. There is a healthy debate today about whether getting a unique ID number is de facto required by the government. Most, but not all, Indian residents have an ID number today. The India Stack, however, is not a mandatory system for businesses, people or government. People can still open accounts with traditional documentation, and banks and businesses can still process payments through other means. Interoperable arrangements are not required of banks, though many do feel compelled to participate for business and other reasons, given India’s unique history and size. If India Stack or a similar infrastructure play is to succeed, however, it will need to do so based on providing a more persuasive service for its users.
Should other countries build their own version of India Stack?
India Stack is not a panacea for financial inclusion. There are healthy debates about what protections should be built into India’s ID system, and digital finance requires much more than a stack to succeed for the masses (a point CGAP’s CEO, Greta Bull, raised in a recent blog). The stack reduces the complexity of many identification and payment processes, but it does not solve the challenge of mass distribution and agent locations for the majority of consumers. That is a challenge other systems will have to solve in order to complement India Stack.
Nevertheless, India Stack has made possible some impressive advances in financial inclusion. When NPCI launched a smartphone app for cross-bank payments, 20 million people downloaded it in less than three months, and more than 10 percent actively used the app. Much more will be learned as India Stack gets tested and we see how far and wide its use can go. As that happens, it will also be interesting to see what influence India’s new financial infrastructure might have on other countries.