From Platforms to Protocols: India’s Story of Leapfrogging Financial Inclusion
Author: Divya Goel, Master of Public Administration in International Development 2022, Dr Pramod Varma, CTO EkStep Foundation, Chief Architect Aadhaar and India Stack, Co-founder Beckn Foundation
Introduction
In the last two decades, India has built the world’s largest digital biometric identity and real-time payment systems. The state-of-the-art digital infrastructure helped India leapfrog to a financial inclusion of 85% of the population that otherwise would have taken 47 years to do given India’s GDP and the fact that only 20% of the population could access formal banking just a decade ago. The digital infrastructure being replicated by many other countries like Togo and Ethiopia consists of many interconnected and interoperable platforms that the government developed. The technical design of these platforms makes the infrastructure cost-efficient, secure, and scalable and allows the government to address market failures while enabling and regulating markets.
Over the years, the experience of implementing government platforms, combined with the growing awareness of the drawbacks of private big tech platforms such as Facebook and Google, has led to an intellectual shift toward using more protocols (rules of communication or data exchange between networks or communication systems) in the technical architecture. In India’s digital infrastructure, these protocols make the platforms accessible to private and public sector innovators. In this article, we discuss the country’s journey of building platforms and the consequent shift toward protocols.
The current digital infrastructure in India
India’s digital infrastructure, known as the “India stack,” consists of a set of interoperable and independent single-purpose platforms connected through open-source APIs (application programming interfaces). APIs can be accessed by any private or public player through protocols. While these single-purpose platforms alone don’t do much in isolation, they have huge effects when combined to perform a general task.
In addition to helping the government provide social securities efficiently, the digital infrastructure enables financial markets to provide services to the poor. Previously, services by the private sector were financially unviable because of information asymmetries that led to high costs in customer acquisition and retention. However, with the current digital infrastructure, both the public and private sector can innovate to create products that operate within a regulatory framework. As some may describe it, the Indian government takes the middle path where it doesn’t completely leave it to market players to solve all the problems, nor does it resort to fully state-owned services and solutions. It balances the two by being an orchestrator rather than a player, building minimal public digital infrastructure for markets to leverage, and facilitating innovation on top, an approach that complements its historical welfare society leanings.
The digital infrastructure reduced multiple costs of financial markets by incorporating three key elements:
- Digital identity: Aadhaar and GSTIN (Goods and Services Tax identification number) provide unique digital identities to individuals and establishments, respectively. With open APIs and digitally verifiable identities for every individual and establishment, it has become easy to claim, “I am who I claim to be.” Aadhaar, which is linked to a person’s unique biometrics, authenticates and verifies identities for banks and other institutions at a very low transaction cost. This has reduced the cost of customer acquisition and brought large sections of the society under the formal financial system.
- Payment interface: Unified Payment Interface (UPI) is an instant real-time payment system developed by the nonprofit National Payments Corporation of India, which is promoted by the Reserve Bank of India. UPI has brought down the cost of account-to-account transfers to just 1/700th of a dollar and helps retain customers by facilitating convenient transactions by catering to the typical low-value transactions in India. With 4.5 billion transactions monthly, UPI is not only the largest real-time payment system in the world but also the most preferred payment mode in India, making the country the global leader in digital payments in terms of volumes.
- Data sharing rail: The data sharing rail empowers customers to access and share their data (generated through high volumes of digital transactions, e.g., in UPI) with institutions and individuals at their own consent. In the financial domain, account aggregators facilitate the consent management and transfer of financial data between various regulated financial institutions (banks, securities firms, insurance companies, pension funds, etc.). Apart from its application in the lending sector, the individual-centric approach for digital data sharing is relevant for healthcare (e.g., to allow patients to access and control their own health records) as well as the labor market (e.g., to allow potential employees to validate their employment history or credentials).
The Diagram below developed by the Bank of International Settlements (BIS) shows how different elements come to play in the India Stack.
Benefits of protocols over platforms
As opposed to just monolithic platforms, the use of decentralized networks based on open protocols that connect many platforms in an interoperable manner makes this infrastructure unique and powerful. First, the design fosters competition by lowering the barriers of entry for private players as any private player can use this infrastructure at minimal costs. Given that the government also provides a basic service (e.g., BHIM (Bharat Interface for Money) for payments) at the lowest possible cost, private players are forced to provide competing products at affordable prices that meet the demands of an average Indian and address the diversity of solutions that are needed to cater to a billion people. Second, customers are empowered because they are provided multiple service providers to choose from, including those that may be more privacy centred. The protocols do not replace platforms, but rather amplify the existence of multiple platforms. Third, it also allows the emergence of players that help customers control and use their own data to access services such as loans and insurance by eliminating the monopoly of data control through the existence of multiple players.
To understand how protocols compare with platforms, the following example provides a clear overview. Email is a protocol that allows multiple private players to emerge and provide various services to customers, and its rules let people with email accounts on different service providers like Gmail, Yahoo, or Google communicate with each other. On the other hand, platforms like WhatsApp or Telegram require the user to have an account on the platform to communicate. While a person owning a Gmail account can communicate with someone owning an outlook account, this is not possible in the case of WhatsApp or Telegram since different platforms are governed by the rules of different private players and, by design, are not interoperable. To access instant messaging, all users are required to be on a single platform. As the platform becomes popular, consumers are left with no “meaningful choice” but to be on those platforms if they want to avail any of these services.
However, in the case of email, customers have a choice. They could choose Gmail (which could use their data for customer’s advertisements), use ProtonMail where emails are encrypted, or even set up a private email server. The problem with platforms is even bigger because they own consumers’ data and use it for their own benefit rather than the consumers’. In contrast, protocols give control and decision-making to the consumers rather than keeping it centralized among a small group of very powerful companies. They also foster competition and empower consumers to choose from a variety of options that best suit their needs.
Scaling up of protocols across the world
The use of networks based on open protocol is a way of going back to the foundations of the early days of the internet when email was invented. Common protocols are also the reason why global mobile networks are connected and interoperable. When the public stopped with protocols, monopoly platforms by private companies such as Uber, Facebook, and Google sprang up to provide services that protocols didn’t.
While India is a successful story for creating digital infrastructure based on protocols, scaling up a network that is interoperable across the world may not be straightforward. For example, we could imagine a world of payment networks that is interoperable across the world. There could be a set of protocols for payment transactions that are universally agreed upon, like in the case of mobile phone networks, which allow money to be routed anywhere across the globe without any one entity being the intermediary. While a central bank may have some nodes for security and regulation, the protocols could be versatile enough to handle individual-to-individual payments directly without banks.
However, questions related to the How, the Who and the What of protocols require deliberation. Each country’s needs and agendas are different, which makes consensus on the use case and the rules (protocols) difficult. Furthermore, the use cases need to be chosen in such a way that once scaled, they create massive opportunities without inhibiting innovation for the future. What would be criteria to decide on a protocol that works for all and how will global politics play a role in deciding what ultimately gets made? While some of the earliest protocols were a product of cutting-edge research in universities such as UCLA and Stanford, it is plausible to have a committee of influential and technical experts to lead the way. For example, in India, the decentralized networks are developed by the not-for-profit entity setup and funded by the network participants themselves and other non-Govt institutions.
Currently, a D-6 alliance that includes Australia, Japan, and India is exploring how personal data can be liberated through open protocols. But there needs to be more of such conversations and efforts across the globe to unlock the full potential of protocols.
Conclusion
India pushes the frontier of innovation in digital government. Beyond UPI and Aadhaar, India is rapidly expanding its use of protocol-based networks to sectors such as e-commerce, health and education. While addressing Startup India Innovation Week, Nandan Nilekani stressed on how the infrastructure of Open Network for Digital Commerce (ONDC), built on open source beckn protocol, will support the transition of the trillion-dollar retail economy in India to e-commerce. Similarly, the Ayushman Bharat Digital Mission launched by the Prime Minister that uses the Unified Health Interface (UHI) will provide an interoperable infrastructure to health care providers to transform the health sector.
With over a decade of experience with India Stack, India seems to have learned what works in their context and is taking giant leaps in different sectors with a rapid speed. It sticks to its fundamentals of creating a decentralized infrastructure that solves the problems of its 1.3 billion population, controls monopoly, allows innovations and sets regulations.
Just a decade ago, the predominant approach for digital government practitioners was to move from products to platforms (e.g., Irembo (Rwanda), GOV.UK). Today, India’s success shows the game-changing potential that protocols offer over platforms.
