iSPIRT works to transform India into a hub for new generation software products, by addressing crucial government policy, creating market catalysts and grow the maturity of product entrepreneurs. Welcome to the Official Insights!
Author: Nandan Nilekani
Chairman of UIDAI, Author of 'Imagining India', Philanthropist & Former Entrepreneur.
In 2011, just over 3 out of 10 Indians had bank accounts. This number was, according to the Bank of International Settlements’ analysis, in line with that of other countries with a similar GDP per capita. By 2018, more than 8 out of 10 Indians had bank accounts and around 330 million people had been brought into the formal financial system. This rate of progress in GDP would normally take about half a century, as per the BIS; India managed it in just under 8 years. In the talk embedded below, I explain what made this progress possible.
The last two decades have brought to life the power of technology platforms in reshaping economies. Amazon, Google, Facebook, and Uber have changed the game for e-commerce, information access, communication, and private transport. But what many miss is that most of these innovative platforms rely on shared digital infrastructure often invisible to the end consumer. For example, look at the TCP/IP protocol that powers the Internet, the GPS signals that allow navigation, or the SMTP protocol that makes all email interoperable. While visionary entrepreneurs are adored and admonished prominently, it is this class of silent public technology investment that made their innovations possible.
India embarked on a journey to solve for the challenges faced by a typical micro-enterprise owner. Let’s call her Nandini. In the process, the country built a series of digital public infrastructure over the course of a decade that addressed the many layers of bottlenecks she faces. For instance, Nandini’s first verifiable digital ID allowed her to more easily open a bank account, where KYC regulations and gender barriers held her back previously.
Possibly her biggest impediment is a lack of access to loans that could keep her business afloat. Her receivables tend to come in with significant delays, leading to short-term working capital shortages. Yet, less than 8% of MSMEs like hers have access to formal credit, and these figures have been on the decline. Share of credit to MSMEs of total bank lending dropped from 17.3% in 2010 to 13.6% by 2018, leading to a current estimated credit shortfall of about ₹26 trillion.
India recently kicked off the Data Empowerment architecture, a framework for consented data sharing across the financial sector. This allows Nandini to share data on her business’ regular invoices or GST payments seamlessly and securely. Any bank or NBFC can now offer a regular stream of small-ticket working capital loans based on her demonstrated ability to repay. This is in sharp contrast to the status quo, where banks typically offer only larger loans backed by collateral. Using cash flows rather than collateral as the basis for credit is known as Flow-Based lending. Because producing collateral is a roadblock for the poorest Indians, Flow-Based lending may be their only opportunity to access the credit they sorely need for growth.
Our work is not yet done. But I’m confident that with continued political will, proactive regulators, and further innovation, India will continue to surprise the world with its solutions.
2018 has been a significant year in our relationship with Data. Globally, the Cambridge Analytica incident made people realise that democracy itself can be vulnerable to data. Closer to home, we got a first glimpse at the draft bill for Privacy by the Justice Sri Krishna Committee.
The writing on the wall is obvious. We cannot continue the way we have. This is a problem at every level – Individuals need to be more careful with whom they share their data and data controllers need to show more transparency and responsibility in handling user data. But one cannot expect that we will just organically shift to a more responsible, transparent, privacy-protecting regime without the intervention of the state. The draft bill, if it becomes law, will be a great win as it finally prescribes meaningful penalties for transgressions by controllers.
But we must not forget that the flip side of the coin is that data can also help empower people. India has much more socio-economic diversity than other countries where a data protection law has been enacted. Our concerns are more than just limiting the exploitation of user data by data controllers. We must look at data as an opportunity and ask how can we help users generate wealth out of their own data. Thus we propose, that we should design an India-specific Data Protection & Empowerment Architecture (DEPA). Empowerment & Protection are neither opposite nor orthogonal but co-dependent activities. We must think of them together else we will miss the forest for the trees.
In my talk linked below which took place at IDFC Dialogues Goa, I expand more on these ideas. I also talk about the exciting new technology tools that actually help us realise a future where Data can empower.
I hope you take away something of value from the talk. The larger message though, is that it is still early days for the internet. We can participate in shaping its culture, maybe even lead the way, instead of being passive observers. The Indian approach is finding deep resonance globally, and many countries, developing as well as developed, are looking to us for inspiration on how to deal with their own data problem. But it is going to take a lot more collaboration and co-creation before we get there. I hope you will join us on this mission to create a Data Democracy.
In May of 2017, the cover of the Economist proclaimed that Data is “The world’s most valuable resource”. The proof of this proclamation can be seen by the domination of Tech Giants in virtually all major global markets. Moreover, they are quickly gaining ground & unseating incumbents in more traditional industries such as transportation, media, entertainment, advertising and payments. In the talk embedded below, I explain why this is a strategic challenge for India.
Fuelling the rapid growth of tech giants is the Data of users such as you and me. For Data controllers, Data is the ultimate truth about what your customers like, dislike, need, and pay for. With the power of AI, Data knows when, where, and how much their customers will pay, even before they do. This can be seen in all markets disrupted by Data giants, who have consistently outgrown competition and established their dominance. I present some examples in my slides embedded below. Moreover, the virtuous cycle of data feeds itself. More Data helps create better products. Better products have more users, who in turn, create more Data. This property of Data creates winner-take-all scenarios.
Data controllers understand this new power equation, and have rushed to create platforms. Platforms accelerate the creation of new and engaging products. Other companies, even competitors, are invited to build products on the platform. Large platforms then become the fertile grounds upon which all user interactions take place, and the data of those interactions is captured by the underlying platform alone Data is being locked into silos, so that the value extracted from the data does not have to be shared with anyone, not even with the users who helped create it. This sort of Data Domination, does not leave any oxygen for challengers to outgrow the giants. For such a powerful resource, that can change the face of $100B+ industries seemingly overnight, we seem to have very few regulations around it.
The problems around Data represent a triple-threat. We need to rethink Anti-Trust, Privacy & Data Colonization in the light of Data Domination. It is clear that the issues around data are not just a technology issue, but also a policy one. The argument here is not protectionism, it is that under the current regulatory & market conditions, Data accumulates in the hands of a few, and hence, so does power. This holds true equally for foreign as well as domestic firms. The EU is notifying the General Data Protection Regulation, a set of data protection measures placing extensive restrictions and penalties on data controllers. Similar protection as well as anti-trust efforts are underway in US, Japan and even the UK. But these countries don’t share the same socio-economic context as India.
India also managed to jump ahead of the curve in developing digital infrastructure as public goods. We have a billion users on the JAM trinity. We have strong national-level platforms such as GSTN, BBPS and UPI. The government has also developed the India Stack, a set of Open APIs that enable paperless, presenceless and cashless transactions dramatically driving down the cost of transactions. Between Telecom-OTP, Aadhaar Authentication and UPI PIN, we have three unique methods of authentication, that can be mixed and matched to design the level of security and robustness required.
With such a strong digital spine and a growing mobile-first citizenry, India can make a significant departure and develop a unique model for data protection as well as empowerment. We need to proclaim that users have a right to access their own data and should be able to share it in a safe, consented manner with anyone they choose. This is an inversion of the usage and ownership of data.
Inverting the Data is only about giving the user freedom and choice. The freedom to share their data, and the choice of multiple providers. Data portability will empower users to choose what their data is used for. Being able to share a rich data history, increases trust in transactions. This choice of sharing is as relevant for a rural farmer as much for an urban millennial. The more reliable and accurate data you share, the better the interest rates on a loan, whether you’re buying a tractor or a sedan. To empower users with Data, there are 3 steps India needs to undertake. First, we need to convince the government to open up big public data sets for users to consume. This includes data from national platforms such as GSTN, BBPS, etc. Second, regulators need to open up the data sets in their jurisdiction in a standard, machine-readable format. Third, we need a policy intervention to allow for the free flow of data with user consent in the private, unregulated spheres.
In today’s world, Data is power. History has shown us time and again, that we must not let power accumulate in the hands of the few. Instead we must empower all with their data. Your Data is your vote, and you should be able to choose whom you give it to. With 3 simple steps, India can lead the world in demonstrating a true Data Democracy.
Increasing penetration of smartphones, Aadhaar-linked bank accounts and a host of powerful open and programmable capabilities is set to create the ‘WhatsApp moment’ for Indian banking.
Once in a while a major disruption or discontinuity happens which has huge consequences. In 2007, the internet and the mobile phone came together in a whole new product called the smartphone. This phone, with its own operating system, such as the iOS or Android, could support over the top (OTT) applications. The messaging solution for the smartphone did not come from the giant telecom or internet companies. Instead, it came from WhatsApp, a start-up. WhatsApp does 30 billion messages a day, whereas all the telecom companies put together do 20 billion SMS messages per day. Such is the power of disruption!
Such a “WhatsApp moment” is now upon us in Indian banking. This discontinuity has been caused by several things coming together. Smartphones are growing dramatically and are expected to reach a penetration of 700 million by 2020. Over 1 billion Indian residents now have Aadhaar, an online biometric identity. The government promoting financial inclusion through the Jhan Dhan Yojana has led to over 200 million new bank accounts being opened. With the RBI giving licences to over 20 new banks, including small banks and payment banks, the competitive intensity of the sector is set to increase. One can visualise a future where every adult Indian has an Aadhaar number, a smartphone and a bank account. Already over 280 million Indian residents have an Aadhaar-linked bank account and around 1 billion direct benefit transfer (DBT) transactions have happened, whose value is in the billions of dollars.
On top of this, a set of powerful open and programmable capabilities, that are collectively referred to as the “India Stack” by the think-tank iSPIRT, has been created over the last seven years. Aadhaar provides online authentication using one’s fingerprint or iris, which can be done from anywhere. This can make transactions “presence less”. The e-KYC (know your customer) feature of Aadhaar enables a bank account to be opened instantly, just by using the Aadhaar number and one’s biometric. The e-sign feature enables online documents to be digitally signed with Aadhaar. The “digital locker” system enables the storage of such electronic documents safely and securely. All this can make the entire banking process “paperless”.
The final two layers of the “India Stack” have great relevance to the future of banking. The Unified Payment Interface (UPI) layer, a product built by the National Payment Corporation of India (NPCI), a non-profit company collectively owned by banks and set up in 2009, will revolutionise payments and accelerate the move towards a “cashless” economy. So “pushing” or “pulling” money from a smartphone will be as easy as sending or receiving an email. This product from NPCI is the latest in several payment systems that they have developed, from the National Financial Switch, National Automated Clearing House, and RuPay cards, to the Aadhaar Payment Bridge, the Aadhaar-enabled Payment System and IMPS, a real-time payment system.
The move to a “cashless” economy will be accelerated by the Aadhaar-enabled biometric smartphones. So credential checking in banking will move from “proprietary” approaches (debit card and PIN) to “open” approaches (mobile phone and Aadhaar authentication). As such, the holy grail of one-click two-factor authentication, now available only to giants like Apple, will be available to kids in a garage to develop innovative solutions.
Finally, as India goes from being a data-poor to a data-rich economy in the next two to three years, the electronic consent layer of the “India Stack” will enable consumers and businesses to harness the power of their own data to get fast, convenient and affordable credit. Such a use of digital footprints will bring millions of consumers and small businesses (who are in the informal sector) to join the formal economy to avail affordable and reliable credit.
As data becomes the new currency, financial institutions will be willing to forego transaction fees to get rich digital information on their customers. The elimination of these fees will further accelerate the move to a cashless economy as merchant payments will also become digital.
This will also shift the business models in banking from low-volume, high-value, high-cost, and high fees, to high-volume, low-value, low-cost, and no fees. This will lead to a dramatic upsurge in accessibility and affordability, and the market force of customer acquisition and the social purpose of mass inclusion will converge.
These gale winds of disruption and innovation brought upon by technology, regulations and government action, will fundamentally alter the banking industry. Payments, liabilities and assets will undergo a dramatic transformation as switching costs reduce and incumbents are threatened. As the insightful report from Credit-Suisse has so well explained, there is a $ 600 billion market capitalisation opportunity waiting to be created in the next 10 years. This will be shared between existing public and private banks, the new banks and new-age NBFCs. It may even go to non-banking platform players, which use the power of data to fine-tune credit risk and pricing, and make money from customer ownership and risk arbitrage.
The public sector banks, which occupy the commanding heights of the economy with a 70 per cent market share, will be particularly challenged. Even as they deal with the inheritance of their losses, they will have to cope with, and master, enormous digital disruption. This will require their owners, the government, to give them the autonomy and freedom to experiment and innovate.
To quote Shakespeare, “There is a tide in the affairs of men, which, taken at the flood, leads on to fortune”. The $ 600-billion opportunity is here. The WhatsApp revolution went unnoticed by incumbents. Normally such disruptive changes (like bubbles) are only recognised after they have happened. In this case, the forces of change are evident and can be anticipated. The opportunity for the banking sector has been called, and it is equally accessible to incumbents, both in the public and private sector, to the new banks, to the NBFCs and the tech companies. The future will belong to those who show speed, imagination and the boldness to embrace change.
This article was written as foreword to a Credit-Suisse report on the Indian banking sector
Just over 12 years ago, I sat on the sofa outside my office in Infosys, and explained to Tom Friedman about how the playing field was getting levelled through technology. This inspired him to write ‘The World is Flat,’ an international bestseller that sold millions of copies and captured the zeitgeist of the era.
It was an era where technology and political change brought everyone closer. The Dissolution of the Soviet Union in Dec, 1995 was presaged by the fall of the Berlin Wall on the 9th of Nov, 1989. And, the Berlin Wall incident was set in motion by the invasion of the communist Grenada in Oct, 1983. Grenada’s regime change marked the beginning of the end of the Soviet empire. The design of the containerized ‘box’ laid the foundation for global trade in goods and the massive investment in telecommunication capacity and undersea cables as part of the ’dotcom’ boom and bust, laid the foundation for global trade in services.
In this context, last Friday’s Brexit is a momentous development. It marks the turning point in the Wests’ 35 years of globalization. It is truly a ‘Grenada’ moment, but in the opposite direction.
Over the next few years, the West will slowly turn back on immigration, outsourcing and economic integration. This will have major consequences for everybody in the world. India will have to focus on its own domestic market and not on exports. Automation and Chinese overcapacity will hit manufacturing, and growth will come in services. Employment and entrepreneurship will happen through platforms that aggregate – farmers, retailers, truckers and vendors. This will result in the formalization of the economy in a big way, as finally the benefit of being in the system thanks to affordable and reliable credit will be higher than staying out. India has the potential of many years of high growth as millions of Indians join the organized society. India Stack will be a key enabler for this to happen!
We have been thinking a lot about this scenario at iSPIRT. This presentation (pasted below) captures our view of such a future. Hope you enjoy it!
You can also catch my talk on the future of India in the age of technological disruption at Think Next 2016 in Bangalore (video pasted below the presentation here).
Innovation significantly expands your options, possibilities, and opportunities
That there is enthusiasm about entrepreneurship across India is apparent, and clearly visible. A number of our young citizens are now thinking about starting a business rather than taking up a job. And that’s a good thing, because we need more job creators.
However, in India, innovation is often not the starting point in our thought process for our entrepreneurial journey. Most of our innovators and entrepreneurs are not thinking of how we can solve the problem with a radically different solution or approach. Most of our aspiring entrepreneurs do not think of creating or inventing new products and solutions.
That’s why we see India falling to 76th position this year in the global innovation index. Even within the BRICS nations, we are the lowest-ranked country on this index. Interestingly, while all other BRICS nations have strengthened their position, India has slipped 10 points from 66 last year, to 76 this year.
This has to change.
There is nothing wrong in building a strong me-too business. However, me-too concepts or even incremental innovations on existing concepts limit your own options and opportunities. On the other hand, innovation expands your possibilities, options, and opportunities, significantly. It provides you a fresh new canvas to paint on, rather than trying to fit your signature on a painting that already has other signatures.
But, for innovation to become a part of our mainstream thinking, we need to create an enabling ecosystem and a conducive environment for innovators and entrepreneurs to convert their ideas into products and businesses. I am glad to note that things are improving on this front. A number of private initiatives are creating the infrastructure and resources for entrepreneurs to innovate. Initiatives like Innofest, of which I am a committed patron, which celebrate and showcase innovation, are important to bring innovation at the center of our thought process.
Innofest is a festival of innovation, ideas and inspiration, to be held in Bengaluru on the 22nd of August 2015. I will be there. I hope to see you there too.
