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• Aadhaar is a biometric ID card, but it is significant to financial services as a method of authentication. Using the card and a fingerprint or iris scan, it becomes possible to identify oneself accurately from anywhere, and without the need for a paper trail. A feature of Aadhaar called eKYC (electronic know-your-customer) allows a cardholder to open a bank account instantly, just using their Aadhaar number and their own biometrics. Subsequent initiatives linked to Aadhaar include a digital signature to make documents secure; and a digital locker to store those documents.
• Prime minister Narendra Modi was elected on a platform of inclusion, and on Indian Independence Day in 2014, from New Delhi’s Red Fort, he introduced a keystone initiative to ensure that every family living in India has a bank account. This is known as Jan Dhan Yojana (in full, Pradhan Mantri Jan Dhan Yojana, or ‘prime minister’s people money scheme’). Many open with a zero balance, but the idea is that it connects the disenfranchised to the economy. Also, it’s free, and comes with life cover. By June 2016, 220 million accounts had been opened, including 18 million in the first week in August 2014, which apparently got it into the Guinness World Records.
• One of the benefits that comes with a Jan Dhan Yojana account is the RuPay debit card, usable at ATMs, point-of-sale machines and e-commerce sites at cheaper rates than Visa and MasterCard. By May 2016, 267 million debit cards had been issued. “It was conceived to fulfil RBI’s vision to offer a domestic, open-loop, multilateral system, which will allow all Indian banks and financial institutions in India to participate in electronic payments,” says Puneet Gulati at JM Financial. Axis Capital calculates that RuPay has already built a 38% market share after four years of operations. A RuPay credit card will follow later this year.
• RuPay is one of many initiatives by the National Payments Corp of India, a fascinating institution that has been a key driver of banking technology (as has the Reserve Bank of India, which has encouraged it throughout). NPCI was set up in 2009 by the RBI and the Indian Banks Association, and is a non-profit organization owned and promoted collectively by 10 of the biggest banks in India, from public State Bank of India to private sector ICICI and HDFC, and foreigners Citibank and HSBC. It is an umbrella organization for all the retail payments systems in India. “It is creating infrastructure which rests on the principle of large scale and high volumes, resulting in payment services at a fraction of the present cost structure,” explains Priya Rohira, executive director at Axis Capital. The various products that have come out of NPCI have gone from handling 2 million transactions a day six years ago to about 22 million a day now, with an aim of reaching 100 million a day.
• Aside from RuPay, two key NPCI initiatives are the Aadhaar Payments Bridge System and Aadhaar Enabled Payments System, and this is where the interconnections between the various initiatives in India start to get interesting. Through these, the payment of government benefits, such as subsidies for natural gas, are handled automatically and paid into an account verified through the Aadhaar card. More than 1 billion transactions have been completed using the payments bridge so far, and 260 million bank accounts are directly linked to Aadhaar. This is the clearest illustration of what the government is trying to do: the Aadhaar ID has facilitated the opening of a bank account; the automatic payment of government benefits into it has made that bank account active; and suddenly that person is part of the financial mainstream, with the added benefit that wastage, corruption and fraud are removed from the system.
• Another NPCI success is the Immediate Payment Service, or IMPS, which provides mobile-based fund transfer. The smartphone is going to be instrumental to India’s financial journey, perhaps even more so than elsewhere; through it, Credit Suisse analyst Ashish Gupta argues that India is going to skip two generations in banking, largely going straight from branch banking to mobile banking. Gupta also expects virtually all bank deposit holders to own a smartphone by 2020. IMPS has been a huge success: transactions through it grew by 180% year on year in fiscal 2016, with Rs1.62 trillion ($24 billion) transacted through the system in a single year.
• However, the newest initiative, the Unified Payments Interface, launched on July 31, goes further still. IMPS is by most standards a great system, but it does have limitations: only banks that are members of NPCI’s IMPS system can access its database, meaning that mobile wallets are excluded from it; the process of transfer can be cumbersome at first; and it only allows for so-called ‘push’ transactions, through which the sender initiates the transaction. What is revolutionary about UPI is inter-operability, which means money can be transacted across multiple different bank accounts, cards, wallets and banks. (At least 15 banks are believed to have rolled it out on July 31, with others following.) Mobile numbers can be used to identify recipients. And where IMPS can only push, UPI can pull, too, where the recipient initiates the transfer – for example, a merchant’s billing system initiating a payment. “It’s the world’s first inter-operable mobile payments system,” says Nandan Nilekani, cofounder of Infosys. “Pushing or pulling money from a smartphone will be as easy as sending or receiving an email.”
• Next comes the Bahrat Bill Payment Service (BBPS), which is aimed specifically at regular bill payments. Credit Suisse reckons $115 billion of bills are processed in India each year, and paper-based payments constitute over 90% of those payments. BBPS will be an inter-operable system, operating as a single authority through which customers can pay all their bills electronically.
• This whole combination of elements is known generically as India Stack, a term coined by the think-tank iSPIRT. You might think of it as a pyramid, with Aadhaar as the foundation, and various other layers built on top of it, culminating with UPI, all of it assisted by the growing use of the mobile phone. Jan Dhan means everyone will have a bank account; Aadhaar means everyone has a unique identity for verification; mobile connectivity means anyone can access it all from anywhere.
• One other important point to understand, particularly from a banking perspective, is that all of this means that India moves from being data poor to data rich. “A large majority of Indians are today invisible to formal lenders due to them being thin-file or no-file customers from the point of view of lenders,” says Credit Suisse’s Gupta. “The result is low credit penetration and, in particular, low unsecured credit.” But one result of all these digital initiatives is that “more of modern life gets captured in digital data streams”, says Gupta.
• Consequently there is, perhaps, one layer left to build: Nilekani calls it the Electronic Consent Architecture. “There’s all this data that is going to start spewing out of every system, this digital footprint,” he says. “Is there a way to make it simple for an individual or business to leverage his own data for his own benefit? If I want a loan, and I can show through this data that I have a consistent record of payment, then it’s more likely I will get a loan.” He is talking with the Reserve Bank to see if this can be accessible to the financial sector as a standard way of assessing applicants. “And that,” he says, “hopefully, will be the last step.”
