India: the technology stack

The Unified Payments Interface (UPI) is creating a cascade of innovation

The India technology stack is underpinned by the Aadhaar and the Jan Dhan program (a scheme that facilitated the opening of bank accounts with zero balances for the unbanked population). This infrastructure has accelerated the take up of UPI and created a cascade of innovation in e-commerce and fintech.

UPI is a digital payment system providing an application programming interface (API) to technology developers. It uses a mobile number and bank account to increase financial inclusion by making and receiving payments easier and is experiencing rapid growth. In July 2023, 9.9 billion transactions were recorded, up 50% from the prior year and threefold from two years ago.¹ This compares with a 27% increase in global mobile transaction volumes in 2021.²

The National Payments Corporation of India (NPCI) estimates individual digital payment users will grow to 750 million by 2027 and merchant users could double to 100 million. Currently 473 banks are part of the UPI, double the number from two years ago.³ The NPCI currently supports 17 e-payment solutions built on the India stack.⁴

An example of leveraging the India stack to broaden the spread of beneficiaries is the government’s Direct Benefit Transfer program. This scheme digitizes the transfer of state benefits and subsidies including pensions, scholarships and LPG subsidies directly into the bank account of the beneficiary.

Using Aadhaar with the Jan Dhan program enables this. It is specifically targeted at reducing fraud and corruption, which was a serious obstacle to getting state benefits and subsidies into the hands of the rural poor. Innovations based on the India stack and the non-profit Open Network for Digital Commerce have the potential to further accelerate the development of new business models through increasing access to the infrastructure behind e-commerce.

Funding for startups

Following a quintupling of venture capital investment in 2021 to US$39 billion, capital supplied for Indian startups declined in 2022 to US$26 billion.⁵ A cooling in enthusiasm for consumer technology investments mainly caused the slowdown. Investments in fintech maintained their market share as investors continued to favor the sector.

Investment in electric vehicles in fiscal year (FY) 2022 rose significantly as investors were attracted by forecasts that the industry could achieve revenue of US$100 billion by 2030 as the government prioritizes investment in electric motorcycles and an electric car for the masses.⁶

India continues to punch above its weight in the creation of unicorns (privately held startup companies with values of over US$1 billion), with 23 added in 2022, pushing the total number to 100, the third highest globally after the US and China.⁷

In a recent report, Bain cited⁸ four factors supporting the take-off of Indian venture capital financing in recent years:

1. Large consumer opportunity
2. India stack
3. Fiscal and monetary policy discipline
4. China+1

Looking ahead, Bain highlights three drivers of increased venture capital funding: the India stack, India’s growing status as the “workplace of the world” and the rapid formalization of workers in the economy. The latter is driven by “digital rails”⁹ (including the Open Credit Enablement Network), which are attracting people to become part of the formal economy to enable access to consumer credit.

The democratisation of access to credit

Household access to credit has been a weak link in India’s growth story. However, innovation coupled with fintech firms identifying an underserved segment of the economy are breaking down the barriers. The Aadhaar and Jan Dhan programs have boosted the number of people holding bank accounts from 17% in 2009 to over 80% in 2023.¹⁰ This has created the infrastructure for low-income households to access credit in the formalized economy.

Bain forecasts 13% growth in consumer credit between FY 2019-2026, valuing it as high as US$800 billion.¹¹ Fintech and non-bank financial companies will largely drive this. The former is expected to grow its market share from <1% in FY2019 to 10% by FY2026.¹²

Democratizing access to credit also includes small- and medium-sized enterprises (SMEs) in India, which account for 84% of total employment.¹³ Some of the challenges faced by SMEs include: a lack of bargaining power, local as opposed to national market focus and access to credit.

E-commerce is opening up a wider market for the goods SMEs produce, giving them greater insight into pricing trends and increasing their bargaining power with suppliers.

Of even more significance are fintech firms who are working with SMEs to electronically capture their transactions on e-commerce platforms. This data is, in turn, provided to lenders (for a fee) who now have access to real time cash flow data.

This can, in turn, enable collateralization of their accounts receivables, resolving one of the biggest challenges for SMEs accessing credit, namely collateral.