Written By: Magnus Almqvist
| 10.July.2023 | 15 min read
At the beginning of May, seven countries partnered with India to adopt its digital public infrastructure (DPI) model. Members of the Shanghai Cooperation Organization (SCO), including China, Kazakhstan, Kyrgyzstan, Pakistan, Russia, Tajikistan, and Uzbekistan, have recognized the need for the development of interoperability and common standards between the different digital systems. While the likes of the Bank for International Settlements (BIS) and various central banks have had many discussions regarding the development of DPI models, India’s model provides an interesting perspective as to what the backbone of the new digitized economy could eventually look like. It is also taking place in what is now the most populous nation on the planet.
What Is the India Stack?
The India Stack describes a collection of government-backed APIs upon which third parties can build software with access to government IDs, payment networks, and data. The digital infrastructure is interoperable – or “stacked” – meaning that private companies can build apps integrated with state services. This public-private partnership approach provides consumers with seamless access to services incorporating welfare payments to loan applications.
Part of the India Stack involves an innovative, consent-based solution called the Account Aggregator (AA). This enables electronic sharing of data between participants, such as investments and bank accounts, as well as providing further automation to fintech ecosystems. Lending is expected to be the biggest application of the AA, which will extend the India Stack from payments into credit, personal finance, wealth management, and insurance. Further, India has aggregated all financial regulatory powers into a single agency called the International Financial Services Centres Authority (IFSCA) to enable regulatory innovation and deeper integration of Indian financial services into the global ecosystem.
Proponents of India’s DPI model cite the usual perks of digitalization, including operational efficiencies and reduced costs. Enabling financial inclusion, in terms of adding growth across developing countries, is by far the most compelling argument for the system. Open APIs and easy integration into payments and other capital markets infrastructures (such as ID verification) will provide safe and easier access for everyone to credit, savings, and investments.
Detractors, on the other hand, have strong concerns about breaches involving digital privacy, especially in those countries which lack strong data protection regulation as afforded by citizens of the EU. Cybersecurity and data breaches also cause concern. There are additional worries about equal access to the system since not everybody has internet access, the same degree of digital literacy, or, indeed, literacy in general. Luis Breuer, the IMF’s senior resident representative to India told the FT: “The big challenge here is dissemination of technology and to what extent will it reach the bottom half of the pyramid. To the extent that [digital public infrastructure] leads to productivity gains, you might have some inequality issues become even more exacerbated.”
Impact on Stock Exchanges
The digitalization of financial services could eventually mean stock market investors do not need to transact directly with the stock exchange to buy or sell a stock, but rather with simply their mobile device. This democratization of access to trading will most likely mean an explosion in retail investment. In today’s world, institutional trading is managed via brokers, who intermediate and trade in blocks or clips suitable for stock exchange markets. These brokers then offer liquidity downstream to retail investors, often in several steps, with each step representing an increase in cost as each step takes its cut.
Stock exchanges will need to adjust, therefore, to the influx of retail traders by either accommodating smaller order sizes or allowing for new order types that protect the slower and smaller quantity orders from new retail trading apps. The exchanges will also need to enable their technology to connect to a Web3 world with an integrated mobile and web presence. To do so they will need to offer trading APIs whereby authorization and market access are integrated deep into the background, and trading access is seamless and intuitive.
In addition to these retail benefits, institutions can also capitalize on the infrastructure technology. The current settlement process means capital is in essence locked into a system of inertia for three to five days, benefitting no one. A digital integrated infrastructure system should mean a great step forward, however, towards the ambition of same-day settlement, incorporating much smoother and faster transactions. By having a more liquid market, an enormous amount of capital (we’re talking trillions of dollars) would be unlocked to positively benefit the real economy.
New Model for Development
As we can see from the interest shown by the SCO Group, India’s digital infrastructure template is beginning to provide a new model for development around the world. It is yet to be seen if Western countries will follow suit, though there is an argument that governments could champion DPI models in the same way the UK and EU did via Open Banking initiatives by forcing banks to open up their APIs to fintechs… Read the full article on TabbFORUM
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