India’s digital leap in financial inclusion

Leveraging digital public infrastructure to achieve development targets

India’s financial landscape has had a monumental transformation in recent years. The implementation of the country’s digital public infrastructure, which includes Adhaar (digital ID system), Unified Payments Interface (fast payments system) and DigiLocker (digital document wallet) has not only revolutionised the financial inclusion landscape in India; it has captivated global interest and adoption.

Transforming financial inclusion through DPI

India Stack, the country’s DPI, has contributed to improving the access, usage and quality dimensions of financial inclusion. Its layered infrastructure consists of government-backed application programming interfaces, that enable third parties to develop software with access to government IDs, payment networks and data. This interoperability allows private companies to integrate apps with state services, providing consumers with access to various services, including social benefit transfers, bill payments and loan applications.

The foundational layer of the stack, Adhaar –  the biometric identity system introduced in 2009 – has had an enormous impact on reducing barriers to entry to formal financial services. As of August 2023, 1.3bn Indians (of a population of 1.4bn) were covered under the scheme. Since its inception, 462.5m low-cost bank accounts have been opened in India – 56% of the new account owners are women.

The payments layer, UPI – introduced in 2016 – has also transformed the payments landscape in the country. There are more than 300m consumers and 500m merchants on the platform. Approximately 40% of all payments in India are now digital, and the platform processes over 11bn transactions monthly. The third layer includes data storage of official documents linked to individuals’ Adhaar card details, which can then be verified and shared with consent.

The pivotal role in India’s DPI reaching the last mile was evident during the Covid-19 pandemic. Panellists at a roundtable hosted by OMFIF’s Digital Monetary Institute highlighted that approximately $4.5bn was directly transferred into the bank accounts of 160m beneficiaries based on the unique ID numbers, showcasing the agility and responsiveness of the digital infrastructure.

The success of the development and deployment of the DPI in India can be attributed to three factors. First, the strategic clarity at the top echelons of power to transition towards digital payments, creating an enabling policy-making environment. The second was the emergence of new players in the space, where domestic and international fintechs, multinational companies and startups came in to provide services. Third is the continued innovation and evolution of the system, to make it more efficient and increase use cases on the platform – extending to investment in the stock market, toll collection and bill payments.

India’s belt and road initiative?

The success of India’s DPI model has found resonance in other countries. Described by some as ‘India’s belt and road initiative’, policy-makers in India have worked to elevate the status of DPI on the global stage. At the roundtable, panellists noted that India, with its experience and success in implementing DPI, stands ready to collaborate with other nations, offering protocols, source codes and expertise to pave the way for a more interconnected and efficient global financial ecosystem.

To this end, a Modular Open Source Identity Platform was launched in 2018 to offer a publicly accessible version of Adhaar-like technology to other countries. The Philippines has issued digital IDs for 76m citizens and Morocco trialled the technology in 2021 to make it available to 7m people. On the payments system front, UPI was connected with Singapore’s PayNow system and to the United Arab Emirates through Mashreq Bank’s Neopay system earlier in 2023. While Nepal and Bhutan have been using UPI since 2022, agreements have also been signed with other countries around the world in line with India’s ‘digital diplomacy’ drive.

With regards to international cooperation, India has been able to further the conversation around DPI, asserting itself as a thought leader in the area. Under India’s G20 presidency, an outcomes paper was published, where the ministers recognised the importance of DPI, provided a working definition for the concept and detailed principles that can be considered in its development and implementation. DPI is also recognised as a means to advance financial inclusion in the Global Partnership for Financial Inclusion’s action plan, which was endorsed by leaders in New Delhi this year.

Scaling up nationally and internationally

Looking ahead, the potential for growth appears boundless. With the current UPI ecosystem capable of handling up to 100bn transactions monthly, the roadmap for the future envisions real-time cross-border payments and increased financial inclusion.

Interlinking payments systems, such as linking UPI with systems in Singapore and UAE has the potential to address some of the issues plaguing cross-border payments – especially remittances. Reducing the cost of remittances has been a standing agenda of the G20 since 2014, in line with the sustainable development goals’ target to reduce the transaction cost of remittances to below 3%. The extension of DPI – particularly extending the payments layer to more countries – could potentially address the issues related to high costs and low transparency, by providing near-real-time settlement of payments.

At the national level, while there is scope for more transactions to be hosted on the platform, some challenges remain. Sustaining efforts for financial inclusion remains a formidable task, requiring commitment from governments and key stakeholders. Ensuring regulation is at pace with innovation is crucial for responsible and sustainable expansion of digital financial services. While UPI has more than 300m users, a panellist at the roundtable noted that bridging the gap to the next 200 to 250m users requires concerted efforts in enhancing financial literacy and expanding proliferation of smartphones in the country.

Despite challenges and concerns around privacy and data protection surrounding the India Stack, panellists stated that other countries can learn from the importance of high-level policy support, collaboration between public and private entities and the innovation to drive the adoption of real-time, low-cost digital payment systems. India’s journey with DPI provides a compelling model for nations aiming to foster financial inclusion and further embrace the digital future.

Arunima Sharan is Senior Research Analyst at OMFIF.

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