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A Leapfrog moment for Indian Banking

At iSPIRT, our belief is that banking will change more in the next five years than it has in the last 50 years. For a variety of reasons, the changes happening in India will follow a path that is very different from other countries. Indian Banks therefore have two choices: Create a new playbook to deal with these changes, or stick to the old rulebook and risk being disrupted.

In mid-2015, Nandan Nilekani gave a talk titled, The Whatsapp Moment in Banking that went viral within banking circles. The analogy was derived from the manner in which the sharp growth of Whatsapp had hit the SMS revenues of the global telecom industry. SMS used to account for 10-15 percent of the global telco industry revenues but Whatsapp, a company that had a mere 40 people in 2009 easily eclipsed them with a traffic of 30 billion messages per day. As against this, all the incumbent telcos of the world put together accounted for just 20 million messages per day! Similarly, a growing confluence of technologies would allow new age banks to handle millions of customers at a very low cost, without costly branches and expensive technologies; and with a minimum staff strength.

Responding to this challenge, Mrs. Arundhati Bhattacharya, the Chairman of the State Bank of India, India’s largest bank, brought a team of more than 30 senior leaders from SBI to Bangalore for a half-day session on how banking is being transformed in July 2015. This session became the forerunner for a forum called the FinTech Leapfrog Council (FTLC) that iSPIRT set up to help incumbent banks navigate the disruptive changes facing them.

001For incumbent banks to transform themselves is a truly difficult challenge, but given that these banks cumulatively account for more than 30 percent of the Indian banking sector, their transformation is of national importance. In the first phase of FTLC, four banks — SBI, Bank of Baroda, Axis Bank and IDFC Bank — were invited to join FTLC, and all four of them accepted. FTLC then helped the banks through quarterly workshops that consisted of deep-dives focused on disruptions in areas like alternative lending, payments and analytics; and emerging technologies like the Unified Payment Interface, and the IndiaStack, which enables cashless, presenceless and paperless transactions with a consent layer on top. Some of the industry leaders who spoke at FTLC workshops, which attracts the CEOs and top management of the four banks are:

  • Shamir Karkal, Head of Open APIs at BBVA Bank, Spain, and co-founder of Simple Bank
  • S Ramakrishnan, former Chief Data Officer of Citibank
  • Prof. Saras Sarasvathy of the Darden School of Business
  • Nandan Nilekani
  • Sharad Sharma, co-founder of iSPIRT
  • Sanjay Swamy, Managing Partner of Prime Ventures.

While everyone agrees that what a bank looks like 5-10 years from now would be radically different, no one can predict exactly what the bank of the future will look like. In this situation, banks face one of the most disconcerting forms of change that we call non-linear change. In the FTLC taxonomy, there are three kinds of change:

  1. Incremental change focussed on process improvement — for example, approving a loan in five days as opposed to seven days
  2. Disruptive change which is very painful, but where the end state is well known. Several MNC IT services companies faced this, when they recognized that they had to embrace the Global Delivery Model perfected by Indian services companies. In the last few years, many of these MNCs turned around their business models and reached a point where most of their employees are in India. The change was painful, but they had a sense of where they were and where they need to be.
  3. Non-Linear Change, where the end state is difficult to predict. In the telecom industry, who would have predicted that Whatsapp would carry 30 billion messages a day? In the transport industry, who would have predicted that Uber, a company founded in March 2009, would be valued at $62.5 billion in June 2015?

To navigate the Non Linear Change, iSPIRT helped the FTLC banks embrace Non Predictive Control (NPC), a method researched by Prof. Saras Sarasvathy of the Darden School of Business. While strategic planning helps organizations in situations where the future is predictable, NPC helps banks in situations where the future is unpredictable. For instance, its is clear that a large expansion will take place in non­-collateralized debt to the under­banked, but it is impossible to know what this alternative lending system will exactly look like. Hence, it’s imperative that banks bet on several competing scenarios, monitor progress on all of them, and then retire or double down on each bet. iSPIRT curated a set of startups in Alternative Lending and Payments, and set up several pilots with the FTLC banks, to help them master the NPC methodology.

For Indian banks, another development, unique to our country, is the emergence of the IndiaStack, a powerful set of Open APIs to enable cashless, presence less and paperless transactions with a consent layer that empowers users with control over their data. iSPIRT has been closely involved in the development of the IndiaStack, which rides on top of the JAM trinity consisting of JanDhan bank accounts, Aadhaar biometric identification and Mobilephones.

The Government promoting financial inclusion through Jhan Dhan Yojana, has led to over 263 million new bank accounts being opened. With RBI giving licences to over 20 new banks, including small banks and payment banks, the competitive intensity of the sector is set to increase. Over 1 billion Indian residents now have Aadhaar, an online biometric identity, and smartphones are expected to reach a penetration of 700 million by 2020. One can visualise a future where every adult Indian has an Aadhaar number, a smartphone and a bank account. Already over 367 million Indian residents have an Aadhaar linked bank account and more than 1 billion DBT (Direct Benefit Transfer) transactions have happened, whose value is in the billions of dollars. Those banks that leverage the JAM trinity and the India Stack will be able to reach out to a vast new set of customers, at a dramatically lower cost. For example, it is estimated that the cost of complying with the mandatory Know Your Customer (KYC) norms can be brought down from Rs 1,000 to Rs 5, by using the IndiaStack. This alone can enable the process of financial inclusion for millions of Indians.

Industry experts, like Bill Gates, and many others who have been following these developments, feel that India is set to leapfrog the rest of the world in financial inclusion. The FTLC program combines global best practices with a home-grown, world-class architecture for financial inclusion, and helps incumbent Indian banks create a “leapfrog roadmap” for their organizations.

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Payments 4G (aka UPI) The Best is Yet to Come!

Last week was a landmark week for all Indians and by sheer coincidence; the country witnessed the launch of two generational shifts. The one that has everyone excited is Jio, a pure, data-only high-speed mobile network.

The other that perhaps will have equal transformational impact is its peer in the world of digital payments, the Unified Payment Interface (UPI). As soon as I had my first experience with UPI, I realized that its impact has barely been appreciated by most, including me.

Why Payments 4G?

Similar to data networks in telecom, which were built on top of the existing voice/SMS infrastructure, most innovations in Payments are layered on Card platform, a solution conceived in the 70’s. Almost all large-scale payment systems today run on the rails of card-based systems, operated globally by Visa, MasterCard, AmericanExpress and adapted in other regions by companies like UnionPay in China and RuPay in India. While innovators like PayPal, Venmo and Paytm in India have attempted to create close-loop systems, some with more success than others, the interface to the external ecosystem was still mostly card-based.

With UPI, the payment rails have been rethought and built from scratch, a de-novo system that was conceived in the year 2015 and implemented within 12 months. From the ground up the system is built with the idea of SmartPhones and Mobile Internet and like all things in Digital India, ZERO Vendor Lock-in.

A few key capabilities in the UPI architecture are fundamental game changers:

1)   Real-time, inter-bank authorization and settlement from one bank account to another: It sure is fascinating to see a live transaction with someone who receives a notification and can do a balance refresh to see their balance updated instantaneously using ANY application!

2)   SMTP for Payments: Just as you can use any email client (e.g. Outlook, Gmail to access any email account), UPI has decoupled the payment instrument (application) and store of funds (bank account). During the first week of its launch, two of my colleagues showed me a demo of transferring money between each other’s accounts with the same bank and neither of them was using that bank’s mobile application.

3)   Support for all types of payments: It can be anything from one-time, recurring, pull, push, pre-authorized, on-us, off-us, etc. The flexibility in the platform that is exposed to the banking ecosystem as an API is immense.

4)   A concept of Virtual Payment Address (a la email) that enables privacy and security and in effect as much of anonymity with auditability and traceability.

India has largely been a cash economy. For digital payments to takeoff, it is important to be able to bring as many of the real attributes of cash as possible, notably in Real-Time, with 100% value and allowing anonymity between payer and payee. Additionally, digital transactions have the benefit of auditability and traceability, both of which are important in the case of dispute resolution.

For once we have a payment system that is built on a whole new rails and I believe its impact will be nothing short of revolutionary. Coupled with the Smart-Phone and Mobile Internet penetration and an aggressive business model, there are five areas that will be impacted significantly.

1.    P2P – P2P is set for lift-off!

a.   Until now P2P payments in India have been largely done in a batch manner using NEFT or RTGS platforms and even with the launch of IMPS (the underlying foundation of UPI), few had used the slightly clunky interface. With virtual addresses, it becomes easy to send money to someone or send a collect request too. This means Social Payments, Bill Splitting, Gifting and other such use cases will come to the fore.

b.   Additionally two fundamental changes are likely to happen

i.    Informal sector merchants will be happy to accept payments into their bank accounts because they are real-time and zero charge – which can be a great way to get them into the system. Of course once they recognize the value of being in the formal sector, they may have to pay a fee – or alternately a bank may leverage the data for services like loans etc. and keep the payment transactions free.

ii.    Everyone automatically becomes an ATM machine , which in essence can be a catalyst for digital transactions. A large part of the population keeps cash because they may not have access to an ATM, but knowing that an ATM is always around the corner will give people the confidence to keep their money digital. One company has built an app to do just this and could be an exciting one to watch.

2.    Acceptance – from Rates to ROI/Impact will drive decisions

In the enterprise and mid-market sectors, the previous generation of payments innovation, notably SmartPhone-based Mobile POS solutions that have enabled businesses like insurance companies, e-commerce companies, utilities, police departments, and several others to enable digital payments – although on the same rails as the card system. These initial forays have proven the improvement in agent efficiency and productivity, often an increase of up to 10%.

With UPI, the stage is set for SmartPhone/POS to go mainstream and for payments to be integrated into business workflows. Businesses will hence make buying decisions not based on Merchant Discount Rates but more by choice of applications, availability of SDK’s, breadth of payment offerings and by trying to quantify ROI and productivity gains. We expect such sales processes to no longer be driven by banks but done more in partnership with Application or Flexible Payment platform providers.

3. Consumers – Win with rich choice of front-end applications

Until now, consumers could only transact with a card issued by their bank (credit/debit/prepaid) or the mobile banking app of their bank. With the 4-party model of UPI, consumers can use any UPI-certified app to transact via their SmartPhone. This is a breakthrough in that consumers will be spoilt for choice and can pick the best app. While the initial restriction is that a bank must develop such apps, there are some examples of banks allowing third parties to build differentiated experiences. Over time it is clear that there will be an abundant supply of apps and consumers can use any app they like. While this might seem like banks are giving up control but in reality banks that develop a partner-ecosystem can benefit the most by getting visibility into transactions with customers who may not even be banking with them. It’s surely a shift from the banks’ perspective but a big opportunity nonetheless.

4. Convergence – Online & Offline

Historically in Card-based systems, there was a lot of importance given to Card Present vs. Card Not Present . However as we move to a “Phone-present” world, there is fundamentally no difference between a face-to-face transaction and a remote transaction. We are already seeing use-cases like Uber where the service is delivered in a face-to-face manner but the payments are processed in an online manner. We expect more and more of this to happen and business wise the system should start treating all payments the same. I expect to see one simple business model for payments in the near-term.

5. New Metrics – Mining the digital exhaust

Business Metrics will change – from Stores to Flows!

The most fundamental thing that will change with UPI is the business metrics. In the past for banks, CASA (Current Account Savings Account) count and balances were always the primary metrics that were tracked, along with Merchant Discount Rates and transaction fees. However in the UPI-enabled world and the four-party architecture, it is clear that the most important isn’t just to be the store of funds, but to be in the flow of the transaction. As such banks will need to start tracking the use of mobile apps by them or partners, use of such apps by existing customers and customers of competitors as well as the use of competing apps by their customers. With switching costs now becoming close to zero, banks that encourage the creation of an ecosystem and giving the maximum choice to their customers are likely to emerge as winners. Mining the digital exhaust will be key for banks to make the most of UPI.

While exciting, it’s still early days in India. UPI has barely gone live in the past one-week, and already we’re seeing some dramatic impact it is having on the system. The next few months and years promise to be truly exciting for the Indian consumer, retail or corporate, as well as the banking sector which stands to gain a great deal from this innovative approach to payments. Indeed the real-time architecture of UPI will truly make it the envy of many a payment regulator and industry expert around the world.

Watch this space, the best is yet to come – but one thing is for sure – UPI will usher in a disruptive step-function in the growth of digital payments in India. There is no precedent from developed economies – India is blazing a new trail and writing the new chapter in the world of Real-Time Payments!

PS: All images are courtesy iSPIRT

Guest Post by Sanjay Swamy, Entrepreneur & Early-Stage VC! IndiaStack Evangelist. Reblogged from here

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Instant, Automated, Remote: An Introduction to Digital Credit

There is today in many countries a proliferation of new digital credit services. These have been especially prominent in mobile money markets in sub Saharan Africa. The poster child has been M-Shwari out of Kenya; though there are a burgeoning array of new varied services in many places. The signals of deep interest from India are strong and India Stack may well position this market for an exciting ride.

At CGAP we have come to use the term “Digital Credit” to describe this new kind of service; though there may well be other terms. We hold that digital credit has three attributes that distinguish it from conventional credit:

  1. instant – decisions and transactions happen fast from application to disbursement to collections
  2. automated – while lending decisions are carefully calibrated each individual decision happens within a decision tree framework along a set of (evolving) algorithms, and
  3. remote – the services are delivered without relying on in-person interactions.

As we have examined nearly a dozen digital credit deployments in the past year, we saw many exciting innovations but also many early stumbles. To help new entrants get up the learning curve faster we developed, delivered and tested a set of training materials. These materials have been refined thorugh more than half a dozen deliveries with a wide array of banks, fintech firms, analytics firms and mobile money operators. We have put these materials together into An Introduction to Digital Credit. .

The introductory course is available for wide public dissemination and use. We built it around five main sections:

  1. An introductory session describes what digital credit is and distinguishes between two key models. One is new products – like M-Shwari – that are direct to individuals. As contrasted with new digital credit services that are delivered via a merchant or value chain aggregator. These two approaches entail quite different risks and business models.
  2. A second sections covers credit scoring and uses of new alternative data, such as mobile phone call records, are often part of the new innovation in digital credit. There is an introductory session for those new to credit scoring that describes how scoring is developed, how to tell if scorecards work, and an introduction to various kinds of data for scorecard building.
  3. A third section covers some of the product and service design considerations. This includes product details such as tenor, loan size, and initial pricing. There is in particular some very early research on consumer protection concepts pioneered by CGAP – a particularly important issue where given how fast digital credit can be delivered.
  4. A fourth section covers some of the financial considerations. While digital credit can be extremely low on branch and staff costs, often requiring no physical infrastructure to reach clients, it still incurs other costs. This section details a basic financial model for how digital credit business models can be built and highlights some of the unique financial dynamics.
  5. The final section is on partnerships. This is often the biggest source of failure is around partnership and blockage to experimentation. This concluding section on partnership highlights critical roles and provides a basic tool for how interested parties can consider and build out potential partnerships.

Whether you are already operating a digital credit service or planning to do one, the course aims to provide a structured high level view based on real deployments. It is a starting place to benefit from others that have tested and tried the idea.

At CGAP, we are excited about the potential of digital credit to expand access and also realistic about what more we need to do to make lending responsible amid the speed new technology. India’s fast moving changes in digital finance will provide a new array of opportunities and we can’t wait to watch and learn from what happens next.

Guest post by Gregory Chen, Regional Lead for Asia at CGAP, a resource center on financial inclusion housed at the World Bank.

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India’s reverse Brexit: Passing the GST Bill will create millions of formal sector jobs

Imagine a warehouse of more than one crore square feet in Central India – around five times the size of the largest football stadium in the world. It would have an eight lane highway that is connected to all four corners of the country on one side. It would have one of India’s largest railway container terminals for handling enormous goods trains on another side. It would have an all-cargo airport terminal operated by a partner on another side. And on the fourth side would be a cluster of manufacturers supplying the warehouse in real time based on big data analytics of national demand and inventory for their products.

This warehouse is not even on the radar today but can become a reality with the GST Bill. Passing the GST Bill – India’s reverse Brexit moment that will end state-by-state rules and create a national market for goods to be supplied from anywhere to anywhere – will create millions of formal jobs.

Currently, supply chains for e-commerce companies are not optimised but distorted by regulatory cholesterol that prevents us from offering customers the lowest cost or fastest delivery. We are unable to supply goods worth more than Rs 5,000 to UP because our customers have to go to a tax office and complete paperwork. We are unable to keep goods from our 90,000 suppliers in our warehouses across Karnataka due to double taxation. We often face confiscation of goods and cash in Kerala because of their approach to tax domicile, which conflicts with supplying states.

With GST, all of this will be history.

A seamless national supply chain that is agnostic to supply or demand destination is urgent, important and overdue for three reasons. First, it is India’s development trajectory to reduce poverty. Second, it will improve enterprise productivity. Finally, it is about empowering consumers and producers.

Let’s look at each of them in more detail.

We need to evolve very differently from China as we do not have the same global manufacturing and trade opportunity China had in 1978. Plus, democracy imposed some very desirable but real fixed costs on infrastructure building and growth. Harvard professor Ricardo Hausmann suggests that the best predictor of sustained prosperity is “economic complexity” and India’s economically complex economy is a great opening balance for building on domestic consumption growth to reduce poverty. Essentially, instead of the traditional formula of large manufacturing, exports and large enterprises, i think India’s destiny lies in services, domestic consumption and small and medium enterprises.

The second point of enterprise productivity is important because poverty can be eliminated by improving productivity. We are thinking hard about individual productivity like skills and education, but we must recognise that India’s problem is not jobs but wages. Our official unemployment rate of 4.2% is not fudged. Everybody who wants a job has one, just not at the wages they want. India’s enterprise stack is largely informal, unproductive and built on self-exploitation. Of our 63 million enterprises 12 million don’t have an office, 12 million work from home, only 8.5 million pay taxes, only 1.5 million pay social security, and most tragically, only 18,000 have a paid-up capital of more than Rs 10 crore.

Drying this swamp is key. The US economy is nine times our size but only has 22 million enterprises. Ninety per cent of India works informally (this is the same number as 1991 and means that 100% of net jobs in the last 20 years have been created in informal enterprises). Many factors go into enterprise productivity but the main one is market access: connecting with buyers.

The final point is about consumer and producer empowerment. The majority of India’s 600-million-strong transacting consumers do not have access to quality products at affordable rates. Similarly, lakhs of producers are denied market access. Because of geographical constraints and artificial restrictions placed by the current tax regime, quality products are expensive and affordable products suffer from poor quality.

Here technology can come to the rescue post-GST. The ‘India stack’ framework for transactions (paperless, presenceless and cashless) is being first applied magnificently to finance but has huge implications for production and consumption once GST is passed. An unintended consequence of implementing the India stack across supply chains will be big data analytics for government that will not only improve compliance but greatly expand formal economic activity and create a virtuous cycle for credit, employment and wage rises.

One of the most remarkable books about India is The Integration of Indian States by V P Menon. It describes wonderfully how the 562 maharajas that administered more than 40% of India’s land and 25% of our population in 1947 were brought into the Indian state by 1951 in a project led by Sardar Patel, which secured the political unity of India. Passing GST will have similar impact on our economic unity. It will be a gift to first-generation entrepreneurs who don’t have connections or money but just the courage of their hearts, the sweat of their brow and the strength of their back.

Coming soon after Brexit – the UK’s economically baffling decision to leave the European Union – passing GST would also signal to the world that India’s economic ambitions have new rocket fuel. India’s regulatory cholesterol has been hostile to small entrepreneurs. GST rights that wrong and makes a new appointment with India’s missed tryst with destiny. This is one that she must keep.

Guest Post by Sachin Bansal, Co-founder & Executive Chairman of Flipkart

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Bill Gates meets with iSPIRT

Bill Gates met with members of iSPIRT in Bangalore in December to learn about the organization and its volunteers’ efforts to solve India’s hardest problems through the use of technology.  Nandan Nilekani played host to the event and also present in the room were Sharad Sharma (iSPIRT co-founder), Nachiket More (former Board member of RBI, now senior advisor to the Bill & Melinda Gates Foundation (BMGF)), and various senior members of BMGF.

Bill-Gates1There were three broad themes that were covered — finance, healthcare and education — each of which forms an important part of the Gates Foundation’s work in philanthropy. Product demos included the IndiaStack, a suite of technology services currently being developed around identity, payments and personal data management for all Indian citizens; three of the leading startups in the healthcare space — Practo, Logistimo, and Swasthya Slate; and EkStep, an education-focused nonprofit that focuses on facilitated learning.

Shashank presenting to BillBill Gates observed that India is producing cutting-edge work and there are few countries which can boast of a digital infrastructure as sophisticated as we are producing here. With such positive encouragement from one of the most accomplished individuals in the world, the vision of transforming India at large through application of technology has received a new impetus.

the panel with BillGuest Post by Saurabh Panjwani, iSPIRT

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India Stack takes the Digital India campaign to a whole new level

India is the third largest smartphone and mobile internet user market in the world with over 200 million internet users in 2013. The figures are expected to touch a staggering 500 million users by 2017, including 314 million mobile internet users according to a report by IAMAI and KPMG. Clearly, mobile phones are the ‘computing device of choice’ for the country. To keep up the momentum, the Government of India is keen on developing the digital infrastructure of the country under the Digital India program.

Digital India is a revolutionary program that will empower the masses and leapfrog India into the next generation of government services. Fortunately, the lower level of investment in earlier generation technology means India has skipped the legacy era and waited for the right technology to arrive at its doorstep. To kick-start and empower the Digital India program in a very democratized form and involve the great innovation talent of the nation, the Government of India has launched an open API policy. An open API, often referred to as a public API, is a publicly available Application Programming Interface (API) that provides programmers with programmatic access to a propriety software application. This set of open API is known as the India Stack and these would enable the ease in integration of mobile applications with the data securely stored and provided by the government to authenticated Apps.

India Stack is a complete set of API for developers and includes the Aadhaar for Authentication (Aadhaar already covers over 940 million people and will quickly cover the population of the entire nation), e-KYC documents (safe deposit locker for issue, storage and use of documents), e-Sign (digital signature acceptable under the laws), unified payment interface (for financial transactions) and privacy-protected data sharing within the stack of API. Together, the India Stack enables Apps that could open up many opportunities in financial services, healthcare and education sectors of the Indian economy. What this essentially means is that developers and tech startups can now build software and create businesses around the readily available infrastructure offered through India Stack, thus opening a huge potential to tap into the booming smartphone market in the country. Since the consumer market in India is very large, such startups could also hope for institutional funding and gain from the early mover advantage.

Through the digitized elements like e-KYC, e-Sign, digitized Aadhaar information and digital locker, the entire ecosystem has now become a presence less, paperless and cashless based system. A Digital Locker enables users to have all their legal documents in a digitized format that is stored online and can be accessed from any part of the country. The e-Sign makes it simple for people to sign deals, contracts and legal documents through their phones and the Unified Payment Interface lets people make payments with ease through their smartphones from anywhere.

India Stack makes a user base of over a billion people readily available through its API. This means that startups and tech companies can build over this to be able to integrate various functions for their businesses or for larger enterprises. Every bank or telecom operator scans through tons of paperwork every day to be able to verify customers and generate KYC documents. Now imagine the impact if this entire process could be digitized by building an application which would integrate India Stack and the user base of over a billion Indians!

With the technology, documentation and sample code available, entrepreneurs and startups can get started with innovating, prototyping as well as building India Stack enabled applications. The commercial applications are endless with multiple opportunities, as the large user base opened up by India Stack is nascent, solution-hungry and largely untouched by technology. Now even a local vegetable trader can take an intra-day loan almost instantly through his mobile phone and pay it back the very same or next day without even physically visiting the bank or wasting any time (time is money when earnings are proportional to time spent)! With their e-KYC documents and digital signatures, a loan can be processed almost instantly and the money transferred through the Unified Payment Interface. Long queues at banks, telecom offices and all other government and non-governmental processes should be the thing of the past, through proper integration of India Stack.

The nation is looking for “a transition from technology-poor to innovation-rich society” and entrepreneurs have a good role to play. The problems (read opportunities) in financial services, healthcare and education are all so large that only the right technology can cost-effectively solve them. Solving these scale problems would mean great business sense too.

iSPIRT, the non-profit software product industry think tank powered by industry veterans, has been actively involved in the development of India Stack and is helping entrepreneurs make the best use of business opportunities provided by India Stack, while building their startups. iSPIRT believes that India Stack creates a whole new generation of business opportunities around the mobile phone and early movers would have tremendous market advantages.

On a recent visit to India, Bill Gates commented on India Stack saying, “India is on the cusp of leapfrogging!” And it truly is; considering it is the only country in the world offering such an open and secure API, India is certainly looking at taking the Digital India campaign to a whole new level.

The future is here and now is the time to act.