A digital infrastructure known as the India Stack is revolutionizing access to finance
A decade ago, India’s vibrant local markets were filled with people buying and selling goods with well-worn banknotes. Today, they are just as likely to use smartphones. Advances in digital finance mean that millions of people in the formal and vast informal economy can accept payments, settle invoices, and transfer funds anywhere in the country with just a few screen taps. COVID-19 has accelerated the use of contactless digital payments for small transactions as people try to protect themselves from the virus. These advances build on the India Stack—a comprehensive digital identity, payment, and data-management system that we write about in a new paper (Carrière-Swallow, Haksar, and Patnam 2021).
The India Stack is widening access to financial services in an economy where retail transactions are heavily cash based. A digital ID card dramatically lowers the cost of confirming people’s identities. Open-access software standards facilitate digital payments between banks, fintech firms, and digital wallets. And access to people’s personal data is controlled through consent. The expansion of digital payments, facilitated by the stack, is an important driver of economic development in India and has helped stabilize incomes in rural areas and boost sales for firms in the informal sector (Patnam and Yao 2020). Other emerging market and developing economies could learn from the experience.
Layer 1: Digital identification
The first step in the creation of the stack began in 2010 with the launch of a biometric digital ID system dubbed Aadhaar—Hindi for “foundation.” The government initiated a campaign encouraging people to have their photograph, fingerprints, and other biometric details taken at enrollment centers across the country. Each person received a unique 12-digit identification number that could be used to access a range of services. Remarkably, 1.2 billion people—almost 90 percent of India’s population—signed up for a digital ID in less than a decade, about half of them linking their new ID to their bank account (see chart 1). Legal limits on the mandatory use of digital IDs helped protect people’s right to privacy.