Building A Data Driven Financial Ecosystem – The India Story

Increasingly, innovation in Indian financial services has been driven by data-driven digital disruption in business models as well as operational processes. Rapid smartphone penetration, affordable, high-speed Internet and mainstreaming of artificial intelligence has propelled the entire ecosystem, supporting the customer-centric idea of ‘bank in your pocket’.

Key to this rapid transformation has been a public policy led financial inclusion in the society, which has led to erstwhile unbanked population getting access to banking and credit. This has enabled both banks and fintech firms to service the hitherto underserved customer segments. Data led business models are now powering hyper-personalisation of banking and wealth services and behaviour-driven insurance.

However, this fast-paced change necessitates a strong design, based on the principles of data governance, data privacy, and interoperability in data sharing and usage. Developing an ecosystem that judiciously harnesses the use of data, standing on the three pillars of privacy, business model innovation and customer benefits is an evolutionary process. This requires collaborative effort from the government, regulators, industry associations and marketplace entities to develop an environment conducive for co-innovation.

The India Stack

India has been steadily making significant strides towards building a layered digital infrastructure that incorporates the above-mentioned design principles. The India Stack is a four-layered set of digital public goods, geared towards a broader financial inclusion and delivery of public service and benefits. Driven by the Digital India mandate “Power to Empower”, it is a unique and concerted initiative that has seen the convergence of government, technology and regulatory frameworks.

The Presenceless Layer comprises the, now ubiquitous Aadhaar technology that allows authentication of the identity of an individual. Aadhaar has long overcome the refutation of naysayers and is core to digital banking.

The Paperless Layer includes the electronic know your customer (KYC) application programming interfaces (APIs) that leverages the Aadhaar biometrics and other utilities like eSign and Digital Locker. This layer digitises and automates the entire customer onboarding process, which were earlier paper-based.

The unified payment interface (UPI) is the key service under the Cashless Layer and democratises payments by providing a single interface to all bank accounts and wallets. A system which was only launched in 2016, UPI has now become indispensable to Indian public life, registering a monthly volume of over 3 billion transactions valued at over Rs 6 lakh crore in July 2021.

The digital services offered under the India Stack need to be built around a robust and scalable data exchange technology infrastructure that brings together all market participants. This is where the fourth layer, Consent Layer comes into play. The recently launched facility of account aggregation based on the Data Empowerment and Protection Architecture (DEPA), allows data to move freely and securely using a consent-driven data sharing ecosystem. Using this facility, consumers will be able to avail of innovative financial services by sharing their data with service providers.

When various components of India Stack come together, innovation can blossom limitlessly. The most recent example is the Open Credit Enablement Network (OCEN) launched in April 2020. OCEN aims to democratise credit availability to micro, small and medium enterprises (MSMEs) that have traditionally been underserved, due to their inability to provide adequate historical financials and physical collateral.

OCEN provides a set of APIs that allow lenders to plug-in and consume the data shared with the consent of MSMEs, to offer structured and customised credit products. The main entity enabling OCEN are lending service providers (LSP), which act as agent of the borrowing MSMEs, by virtue of having a strong business relationship with them. Lenders like banks, NBFCs and fintechs, by virtue of being on OCEN can leverage the forward-looking data captured by LSPs. This includes order books, invoices and order fulfilment status, allowing them to offer cash-flow based credit products of varying ticket sizes and duration shifting away from the traditional collateral-based lending.

The OCEN framework has already seen some early success in the form of Sahay Government e-Marketplace (GeM) implementation. The GeM, an ecommerce portal launched by the government, provides direct access to almost 18 lakh MSMEs and acts as the LSP. Sahay GeM enables the registered sellers to avail of consent-based invoice financing via empanelled lenders, on the basis of accepted orders on the GeM platform.

The unique and tremendous potential of OCEN lies in its graduation into an ecosystem of marketplaces. This framework can help develop new cohorts of LSPs such as B2C e-commerce players like Amazon and Kirana-tech entities, food-tech players like Zomato and Swiggy and agri-tech providers. While widespread adoption will require continuous public-private enterprise collaboration, OCEN can certainly accelerate and eventually revolutionise credit access for individuals and small businesses alike.

Neo-banking is another example of a data-driven digital business where fintechs seamlessly combine various components of India Stack such as eKYC, UPI and consent-based aggregation of an individual’s bank and investment accounts,to offer comprehensive personal financial management services.

India is leading the global data-led disruption of the financial services business models. India’s approach keeps the open banking philosophy at the heart of this sectoral transformation, yet provides huge space for fast-paced technology and business innovation. Proactive, technology-led public policy design has played a pivotal role in this journey. The ingenuity of open-architecture platforms like UPI and OCEN lies in their ability to unlock value for Indian customers as well as promoting a new breed of globally competitive entrepreneurs.