IndiaStack - the silent revolution
Creation of a digitized society and digitized economy in India
IndiaStack represents the single most revolutionary development in modern times shaping the present and future of India. What makes it fascinating is that there is no direct comparable anywhere in the world. The ability to execute on this technology architecture at population scale in India could alter the country’s growth trajectory in unprecedented ways.
IndiaStack is the public architecture on which the digital world is being built. Unlike the West, it is created on the premise that the core technology architecture (the tech stack) is a public good, available to all. It provides the protocols using which goods and service providers can build their offerings. It prevents the creation of technology monopolies who build walled gardens, and in turn encourages competition and constant innovation.
Its impact has already been experienced across India in the form of AADHAR - the digital ID system and UPI - the interoperable digital payment rails.
Digital identification has become the primary tool for public and private services - e.g. passports, electricity & mobile connections, bank accounts etc.
Digital payments broke the walled gardens of payment firms by creating an interoperable system such that the transacting parties don’t need to be on the same platform. The explosive growth in usage has removed the need for cash for most daily payments - unthinkable less than 3-4 years ago.
Digital identification and payments are the building blocks of a new world which will take shape over the next few years. It will bring together the digital and physical worlds and create the future of our society and economy.
In this article, we present a comprehensive overview of what is being built and how it could potentially change the very face of India.
What is IndiaStack looking to solve in the future?
The big problems which IndiaStack is seeking to solve is to provide
Financial inclusion & access to credit to individuals and small businesses
Enable small businesses to benefit from the digital commerce ecosystem
Fill the trust deficit to ease friction in transactions in India
Solving these problems will formalize the economy and put India on a high growth path which large sections of the population can benefit from.
1. Financial inclusion and access to credit
India is starved of affordable, formal credit, which has hampered economic growth making it especially challenging for the millions of small businesses.
The lack of data and high costs of underwriting were not justified by the low ticket sizes needed by small businesses & individuals. The historical model of lending against assets is constrained by the ability of the individual or small business to have the capital to acquire assets in the first place.
The solution
OCEN - Open Credit Enablement Network is envisaged as the solution to the problem of providing credit access at population scale. This network has the following components to collectively solve the problem
Linking to the network - this is being done by digital ID, low cost mobile technology and the digital payments network to onboard large sections of the population into the formal financial system over the past few years.
Capturing the data - The Account Aggregator (AA) system collates data generated from transactions and financial holdings and provides the same to service providers based on consent from the owner of the data i.e. the individual or the business. Various banks came on the AA system last year as it went live. Tax information from Goods and Services Tax Network (GSTN) data should also get added soon.
Processing the data to automate underwriting - as data availability improves, the lenders are able to automate the underwriting process and hence offer small ticket loans at scale.
Creating a variety of small ticket credit products at scale - Various loan service providers (LSPs) act as the interface between the lenders and borrowers to design a range of credit products based on the use cases.
Tech ecosystem to close the loop - Technology partners allow the LSP and the lender to use OCEN APIs for a customer friendly interface and user experience. Payment firms (PSP) provide a ready infrastructure for both the disbursement of loans and collection of repayments.
This architecture will help the lending ecosystem to innovate at scale, while still allowing the regulators to maintain control. Cash flow based lending can catalyze a significantly faster pace of growth for the economy, as the need to block precious capital as collateral is removed.
2. Enable small businesses to benefit from digital commerce
The current e-commerce ecosystem is dominated by a few large players of foreign origin. It is detrimental to small business owners as sellers as they are completely dependent on the e-commerce platform. This can hollow out the supply chain and hamper inclusive growth and self-sufficiency - two key objectives of the current policy environment.
The solution
ONDC - Open Network for Digital Commerce is a set of protocols to create a digital commerce network where buyers and sellers can transact irrespective of the platforms or applications they use. It works on the principle of having the core architecture as a public good and let the private sector build on it.
Various selling /buying apps will connect to the network and consumers can access the product/services through any of the apps. Logistics services are available on the platform for final fulfilment. Financial service providers will also be able to link into this network and provide credit products.
ONDC will allow consumers to explore options without being restricted by the platform while small businesses can sell their products and services without needing to be tied to a single platform. This network is currently in pilot stage and likely to see an aggressive roll-out in coming months.
3. Fill the trust deficit and create programmable contracts
A key feature of a developed country is the existence of trust in the system that enables strangers to engage in economic activity. On the other hand, lack of adequate contract enforcement in developing countries like India due to different versions of the truth leads to a trust deficit. Market participants restrict themselves to doing business only where there is past association. This slows down innovation and creates a lot of friction to growth.
The solution
A model for solving this is already available in stock markets where strangers transact with each other due to the trusted settlement infrastructure and the ability to exchange money with securities via a transparent mechanism. The contracts are enforceable and a default invokes an auction process, whose charges are borne by the defaulting party.
To solve this problem in the real world requires a connection between the physical side of the ledger involving supply of goods and services with the money side of the ledger.
BADAL - Bharat Distributed Ledger - is envisaged as the protocol to solve this problem. The distributed ledger technology creates a database of past history of the counterparties to verify their credentials, while laying out terms for the future performance of the contract. It is an electronic contract whose features are executed programmatically making them binding promises.
The two-way programmable exchange of goods or services for money based on a binding contract makes this digital world function like stock markets. BADAL converts the goods or services contract into a claim on a non-monetary asset. This is effectively now a financial security which can be traded and monetized.
Central bank digital currencies (CBDCs) can act as the key enabler of this ecosystem as they offer programmable and digital money. Connecting CBDCs with the goods & services ledger will boost trust across the economy.
The Grand Unification - Putting it all together
Digital ID and payments were the initial building blocks for a sophisticated, futuristic ecosystem which is a public - private partnership in the true sense.
AADHAR and UPI led to a mushrooming of financial inclusion and creating a reservoir of data of financial transactions linked to identity.
OCEN powered by the Account Aggregator network will collate data across sources and be able to automate the appraisal, disbursement and collection process for loans of varying ticket sizes at scale.
5G / IOT technologies will simultaneously build vast amounts of data from machines. This will sharpen the links between supply and demand and make both operations and financing of economic activity more efficient.
BADAL will enable enforceable, digital contracts to build trust in the system and convert contracts into tradeable securities, attracting even more volume.
The RBI’s CBDC is the thread which links the digital economy above by providing a traceable, programmable and completely digital form of money.
All in all, this would create an explosive network effect which can turbo-charge India’s growth trajectory as the velocity of money is unleashed along with increasing supply of physical goods and services.