The India Stack

This is Part 1 of a series on Digital Identities around the world. Part 1, this post, is a focus on India. Subsequent posts will discuss the US, UK, EU, and the Nordics as well as additional implications of Digital Identities.

If you have never heard of the “India Stack” you are not alone but it is REALLY important to understand if you are at all interested in Financial Services, FinTech and/or RegTech. What the Indians are building is the 21st century infrastructure for the future of their financial services industry and, by inference, their whole economy. In short, it is VERY cool.

The Indians took a step back to think about their challenges holistically. How do we provide financial services to every single citizen (100% financial inclusion)? How do we eliminate waste and inefficiencies (endless paperwork and long customer service lines)? How do we incorporate cutting edge technology solutions into our economy? How do we avoid the mistakes of legacy systems currently in use by many countries in the Developed world? How do we leapfrog to the 21st Century?

Enter the “India Stack” which is the realization of the above and is nothing short of brilliant. If one were to draw up the perfect blueprint to deliver 21st century financial services, the India Stack would be the beginning with its initial 4 layers. In later posts, we will explore more layers. For now, let’s go over the basics of the initial 4 layers. 

Layer 1: The “Presence-less Layer”. How can you offer financial services to citizens if they are not “real” people? To a banker or the government, a “real” person is a known person, a known identity. If they are unknown, they are unbankable. In India, much of the population has no ID card, no bank account, no Driver’s License, nor the equivalent of a Social Security Card. In the developed world, we take identities for granted (albeit very poorly managed). In the emerging world, IDs are essential but virtually non-existent. Therefore, the Indians had to create a new ID system as a foundation. The “Aadhaar” system is a Digital Identification with biometric authentication using 13 imprints (10 fingerprints, 2 Iris scans, and 1 picture.) In other words, it is immutable (if presented). Has the system been a success? Indeed. 1 BILLION Indians have created their digital ID since 2010.

Layer 2: The “Cashless Layer”. Cash is a huge problem in Indian society. Cash is insecure, un-taxable, and a target (for theft.) Why is cash used so predominantly in India? Aside from tax avoidance or nefarious activities, the main reason is that most Indians do not have a bank account. Why? See Layer 1; without an ID, one cannot open an account. Yes, this is great AML/KYC which keeps out the bad actors. However, it also inhibits “good” citizens from getting an account (or any other financial service).  Therefore, with Layer 1 in place, the Indians wanted to encourage bank account usage (and discourage cash use). Layer 2 is a single interface to all of the country’s bank accounts and wallets (ie bank accounts for everyone) which allows for frictionless bank account opening. Over 340mm Indian bank accounts have been linked and opened via Layer 2 since inception. What can be done with a bank account? The government can deliver basic transfer payments at a minimum (health, pensions, welfare payments etc). The private sector will obviously benefit too because the target market for financial services just increased by +30%.

Layer 3: The “Paperless Layer”. Imagine a Department of Motor Vehicles or a medical center filled with paper files, fax machines, duplicate forms etc. Now imagine that paper based system for 1.2 billion people. Exactly, it’s a nightmare and virtually unworkable at scale. With Digital Identities and Bank Accounts, the average Indian bureaucracy can now deliver services digitally.  Layer 3 is a common payment API built on a universal platform supported by RBI. This allows digital records to move with an individual’s digital identity, eliminating the need for massive amounts of paper collection and storage. Since inception, over 3 billion interactions have been completed on the API platform.

Layer 4: “Content Layer”. Building off of the 3 layers, it is easy to see how an Indian Citizen can now have control of their digital lives. They have a Digital ID, a verifiable bank account, and digital documents controlled by their IDs. The next logical step, admittedly a very large one, is for citizens to actually control their own data. Yes, we can control our Facebook or LinkedIn profiles (otherwise known as Identities) but we don’t control our own data in the US/UK. Facebook, Google, and Apple control that data. Is that best for consumers? Of course not. Therefore, Layer 4 was designed specifically to enable Indians to retain eventual control of their own data (and perhaps monetize it—See upcoming post for some potential new layers.) Specifically, Layer 4 is a series of eKYC initiatives to enable individuals to own their own data and to use that data for financial services (share that digital identity as they chose).  Since inception there have been 150mm eKYC authentications.

What are the societal implications of the India Stack? I believe we will see PROFOUND growth of financial services in India including massive gains in financial inclusion, incredible productivity gains in the economy, marked reduction in tax evasion, and the beginning of the end of Indian poverty.

What are the investment implications of the India Stack? Here are just a few guesses. 

·     Existing/Incumbent payment systems will be at risk

·     Digital payments systems will grow rapidly

·     Merchant acquirers will likely be dis-intermediated

·     Peer to Peer payments will boom (Venmo for example)

·     New ecosystems will flourish (Airbnb etc)

·     Cash-based businesses will collapse

·     Digital micro-payment systems will grow

·     Traditional cross border remittance businesses will be doomed

·     Banking, insurance and wealth management businesses will grow massively over the next decade

What are the RegTech implications?

·     Front end AML/KYC solutions are much less valuable (although back end solutions still have the opportunity to drive down costs)

·     Anti Fraud solutions are less valuable

·     Blockchain data registries are more viable and more valuable

·     GDPR compliance solutions are less valuable (in countries with digital IDs)

·     PSD2 based businesses are potentially much more interesting

What other implications do you see?

And now for a few negatives:

·     I want to highlight one very, very critical point about the India Stack. This was created by the GOVERNMENT. ALL citizens are REQUIRED to sign up for a digital ID. While that doesn’t sound horrible, there are many in the world who do not like the idea of a National Digital ID system (ie Big Brother or the Matrix). As a pseudo Libertarian, I can’t argue with the concern. However, the benefits to the Indian society and economy are undeniable. 

·     Perhaps more importantly, while the overall goal of the India Stack is Financial Inclusion, cash is how the world’s poor operate. Any system that seeks to eliminate cash needs to do so carefully and thoughtfully else the most vulnerable will be severely harmed. This cannot be a technology love story between Economists and Government.  The transition to digital payments and currencies must be managed carefully and slowly in order to avoid shock and pain for those who can least handle the transition.

·     Finally, the India Stack is bank driven, not telecom driven. This is important because a country must have the digital infrastructure to support a digital financial services industry. Unfortunately, India is far behind on digital infrastructure ranking 42nd out of 50 according to the HBR Digital Evolution Index. Because telecoms were not part of the system initially, they were/are not incented to invest in their networks which are the backbone of digital financial services. One could argue that the strategy of India is good but the execution could have been improved.

On a related note, in November 2016, Prime Minister Modi eliminated large denomination cash/currency bills overnight, with no warning to the country. The short-term result has been chaos; the government effectively took 86% of cash out of circulation in what is a cash dominated economy. Modi believed that the short-term pain will shock citizens into moving into the digital world (and will hurt bad actors more than citizens). The short-term pain will result in long-term gains. That indeed is the case I am making here in this post. However, the pain to India’s poor must be mitigated immediately in my humble opinion.

Back to the beginning, if you had not heard of the India Stack, I hope that you now understand why we believe that Digital Identities are so powerful and so critical to the future of financial services.  My partner Pascal Bouvier has written extensively about Digital IDs. For those of you who haven’t read his blogs, please do so now that you have a very basic but real world understanding of the power of Identities. Pascal recently posted his FinTech forecasts for 2017 which included an expectation that VC investment in digital ID-related companies will jump.  I suggest that you read his Forecasts but also his work on digital identities. www.finiculture.com

In future posts, we will explore several vectors: 

·     What are the additional layers one can add to the India Stack?

·     Is there anything close in the developed markets? Hint: The Nordics

·     What is happening in the US, UK and continental Europe?

·     What are the global investment opportunities and Challenges?

·     What do Regulators think about Digital Identities?

Looking forward to hearing your comments!