India Stack: Investing In India's Digital Transformation

India Stack is a set of open APIs and digital public goods that aim to unlock the economic primitives of identity, data, and payments at a population scale. It is a digital infrastructure that is revolutionizing access to finance in India. By providing a unique digital ID, India Stack has dramatically lowered the cost of confirming people's identities, enabling them to access financial services more easily. This has also facilitated the expansion of digital payments, which has boosted the country's economic development. Additionally, India Stack has opened up new opportunities for commercial companies, allowing them to access new consumer segments and enabling small vendors to conduct all their transactions digitally. With the growing adoption of digital transactions and low-cost fund transfers, India Stack is paving the way for a more secure and accessible financial world in India.

The Aadhaar-enabled payment system

AEPS allows a bank customer to use their Aadhaar number as their identity to access their Aadhaar-enabled bank account and perform basic banking transactions such as balance enquiry, cash withdrawal, and remittances. To use AEPS, a customer must have a bank account with a bank participating in AEPS and their Aadhaar should be linked to this account. Transactions are completed using biometric authentication, such as fingerprints or IRIS.

AEPS facilitates transactions such as cash withdrawals, balance enquiries, mini-statements, and Aadhaar-to-Aadhaar fund transfers. It also enables C2B and C2G payment transactions, with fund transfer limits defined by the banks. The system is designed to work with both online and physical transactions, providing convenience and accessibility to users.

The Unique ID Authority of India (UIDAI) manages the Aadhaar system, which has been instrumental in promoting financial inclusion and social inclusion in the country. With the rapid adoption of AEPS, India has made significant strides towards a cashless economy, empowering individuals and businesses to conduct secure and efficient financial transactions.

Unified Payments Interface (UPI)

UPI is a safe and secure method of transferring money between two parties and eliminates the need to transact with physical cash or through a bank. It works by transferring money between two bank accounts along with a mobile platform. The system uses existing systems, such as Immediate Payment Service (IMPS) and Aadhaar Enabled Payment System (AEPS), to ensure seamless settlement across accounts. It facilitates push (pay) and pull (receive) transactions and even works for over-the-counter or barcode payments, as well as for multiple recurring payments such as utility bills, school fees, and other subscriptions.

UPI has been a huge success in India, with the platform having over 300 million monthly active users in November 2022. In 2023, the total annual value of UPI transactions in India reached ₹182 lakh crore (equivalent to $2.2 trillion), reflecting a 59% increase in transaction volume and a 45% increase in transaction value compared to 2022. UPI transactions in July 2024 averaged ₹1,430 per transfer, with the system processing 5,390 payments every second. The success of UPI has made it a soft power tool for India, and it has become one of the most successful deep-tech financial innovations the country has produced.

UPI has also gained international recognition, with countries such as Brazil, Bahrain, Saudi Arabia, Singapore, the United States, and the European Union exploring options to implement a similar system in their domestic markets. In December 2019, Google suggested that the US Federal Reserve Board should follow UPI as an example in developing FedNow, a real-time payment system for the United States. UPI has also been integrated with Singapore's similar payment system, PayNow, allowing users with Indian UPI to make online or real-life payments in Singapore and vice versa.

UPI offers a range of features that make it a convenient and secure way to send and receive money. It eliminates the need to enter bank details or other sensitive information each time a transaction is initiated, making it a safe way to bank. It also provides a two-click factor authentication process, ensuring the security of transactions. Overall, UPI implies fewer cash transactions and potentially reduces the unbanked population, contributing to the financial inclusion goals of India Stack.

Digital identification

India Stack is a set of open APIs and digital public goods that aim to unlock the economic primitives of identity, data, and payments at a population scale. The project was conceptualized and first implemented in India, where it has been rapidly adopted by billions of individuals and businesses, promoting financial and social inclusion and positioning the country for the Internet Age.

The first layer of the India Stack, known as the "Presenceless Layer", involves storing biometric data such as fingerprints for every citizen. This layer enables citizens to authenticate their identity without being physically present or producing ID cards. The biometric data is stored in a centralized government database, with a unique 12-digit Aadhaar identification number serving as a key. This layer has revolutionized the process of identity verification, making it more convenient and secure for individuals and reducing the cost of confirming identities for businesses.

The second layer, the "Paperless Layer", enables personal records to be associated with one's online identity. Each Aadhaar number is tied to a set of documents that live in a digital locker, including records issued by government agencies, third-party organizations, or the individual themselves. Individuals can choose to share documents from their locker with any entity that requests the information, such as a hospital requesting medical records. This layer eliminates fraud, reduces administrative burdens, ensures anytime/anywhere document access, and gives individuals control over what they wish to share.

The third layer, the "Cashless Layer", provides a single interface to all national banks and online wallets, enabling cashless payments. This layer includes the Unified Payments Interface (UPI), which acts as an instantaneous payments bridge between any two entities. The UPI has revolutionized the way money is transferred in India, making it cheap and simple to store and transfer money digitally, even for those without a bank account.

The fourth layer, the "Consent Layer", aims to maintain security and control of personal data. This layer involves obtaining individuals' consent before processing their personal data and allowing them to determine how much of their digital world to share with others.

Interoperable payments

India Stack is a set of digital infrastructure components that enable various entities, including governments, businesses, and individuals, to interact and conduct transactions electronically. It is designed to provide a secure and interoperable platform for the delivery of various services to citizens, leveraging the power of technology and data.

The Unified Payments Interface (UPI) is a crucial component of India Stack, facilitating interoperable payments. The UPI was introduced as a new layer to the retail payment system, allowing banks to exchange messages and payment orders with non-bank firms. This layer is known as the Unified Payments Interface (UPI) and has enabled street vendors and small traders without bank accounts to receive payments for goods or services through digital wallets and instantly transfer funds to others with digital wallets. This has transformed the speed and convenience of transactions, especially in developing economies, where transfers previously took days or weeks and involved high transfer fees.

The interoperability of the system is a key feature, allowing users to transact with all actors in the financial system, regardless of size or ownership. Fintech firms must partner with a bank or obtain a special license to participate in the UPI, and all participants are regulated by the central bank, promoting financial inclusion and stability. The rapid expansion of the UPI has also witnessed the entry of big tech firms, with most small retail payments in India now channelled through this system.

The NPCI-owned layer of India Stack, which includes IMPS, AEPS, APB, and UPI, has reduced the costs of digital financial transactions. This layer is a crucial component of the overall framework, enhancing the efficiency and accessibility of digital payments in India.

Data fiduciaries

The concept of data fiduciaries is centered around the idea of putting the interests of individuals ahead of their own. In the context of the India Stack, data fiduciaries are responsible for obtaining consent from individuals before processing their personal data. They are not allowed to access or store any shared data but can charge for their services. This approach differs from traditional models, where aggregators offer services in exchange for access to data, which they then use to sell additional financial services.

The India Stack's data fiduciaries play a vital role in establishing trust and adding synergies to the various layers of the stack. They authenticate individuals' identities based on their digital IDs and confirm to third parties that the data accurately represents a particular person. Additionally, they can utilize the stack's application programming interface (API) to certify the authenticity of digital documents, such as statements of financial assets, liabilities, and cash flow. This enhances trust in the digital economy and enables individuals to leverage the data generated by their activities.

The upcoming Digital Personal Data Protection (DPDP) Bill in India will introduce a category of "high-risk significant data fiduciaries," subjecting them to more stringent regulations and compliance requirements compared to regular data fiduciaries. This categorization aims to address the risks associated with processing large volumes of user data or critical user data.

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