China is perhaps the most glaring example of digital transformation that we have seen in the past decade or so in the context of Fintech environment, but another transformation that is taking place right now is just as exciting & revolutionary – in India. About 9 years ago a group of budding tech entrepreneurs came together with the vision of building a new digital infrastructure which would not only transform the Indian financial system but the whole economy. This also aimed at giving millions of Indian citizens access to financial services which would eventually serve the purpose of India’s growth prospects. This was the corner-stone which led to the foundation of India Stack.
The foundation of India Stack is the establishment of a new digital bio metric ID system. This system included the finger prints & iris scans for every individual who is issued a digital ID – since 2010 over 1.2 billion people in India have been issued with such IDs. This process is the largest IT project rollout in the history of the world. This was the first level – whereby the digital identity made it possible for the immediate authentication of the individuals.
Electronic Payment system
The second level of was built on an electronic payment system that employs an open API which means that it is available to traditional banks, government organizations, startups & developers. The payment system allows seamless digital transactions from one folder to another thus democratizing the payment structure. With digital records of the individuals tied with their digital identity with no need for massive amount of paper trail & storage.
For India, till about four years ago, had about 1/3 rd of its population or about 350 million had a bank account but as a result of digitizing initiatives whereby all the government salaries, pension/benefits & agricultural supports are now all paid directly into individuals’ bank accounts there has been an explosion in the number of bank accounts. In the past 5 years alone, over 300 million bank accounts have been opened where India stack provides a single interface to all the banks for digitizing wallet & payment services. For individuals, this means that more than half the population of India has a bank account that is linked to their digital ID & an electronic payment system allowing instant payments across the digital financial system of the country.
The final element of the system takes us to the idea of KYC (Know your client). e-KYC is basically a digital (paperless KYC) system, where individuals have a digital folder where they can place all their documents needed for KYC requirements for a range of financial institutions. As a result of this new system & a combination of associated factors, India is leap frogging to a paperless, cashless & completely digitized financial system which is inclusive of the majority of its population. Added benefits include the reduction of time taken for opening an account & associated corruption emanating from the red tape of a cash based economy.
Apart from this digital transformation of the financial system, the government of India announced a bold experiment called the demonetization in November 2016 – whereby ₹500 & ₹1000 bank notes circulating in the economy (86% of the total money in the financial system) were deemed invalid & had to be returned to the bank accounts or exchanged for newer bills to be issued. The basic intention of this exercise was to crack down on corruption & black money that was operating outside the realms of the regulated financial system.
The bigger impact, however, of this demonetization came in the form of driving the digital transformation of the Indian financial system. And that was made possible because of the infrastructure already put in place via the implementation of the India Stack strategy. This forced conversion has caused hundreds of millions of people in India to use digital forms of money for payments, lending & investing which was previously cash based. The increase of money available in the financial system has reduced the interest rates & raised the liquidity available for startups seeking to raise money in the economy.
As was the case with China, countries around the and world, specially in Asia have been watching the digital transformation initiatives in India with great interest & seeking to develop similar strategies in leap frogging to the newer & efficient digital financial models.