While global stock markets reset and U.S. tech unicorns readjust to new expectations and valuations, India’s tech renaissance is just beginning to flourish.
Infosys founder Nandan Nilekani calls it India’s “WhatsApp Moment,” echoing how a simple software solution from Silicon Valley turned the Asian telecommunications industry upside down, making obsolete decades of infrastructure, business models and loyal customer relationships with massive telecom operators.
Just as WhatsApp surpassed all incumbent telecom operators in its messaging scale, financial technology is poised to become the next sector ripe for radical change. In this piece, I’ll explore how a single innovator could surpass the scale of all financial incumbents in all emerging markets combined.
Moreover, I’ll show how this disruption is different from other domestic leapfrog stories in India and China — because if it delivers as promised, India’s fintech revolution will have global repercussions, affecting all publicly traded banks and payment companies by the end of the decade.
Lack of incumbents
Until now, India has been a place where low-cost services and “Fill-in-the-Blank of India” solutions have driven the technology market. While India’s unicorns have innovated successfully, they pose no threat to their international counterparts and competitors.
The Indian fintech story is different. The Indian government has a massive problem with an opaque, cash-based economy that has dominated the country for decades. With the majority of its citizens lacking access to formal banking services, India had nothing to lose by encouraging out-of-the-box innovation that would seem insane to the U.S. financial services establishment.
The only benefit of having poor infrastructure is that once in a generation — when people, policy and timing align — a country can reboot and leapfrog the developed world because there is no material incumbent investment or scale to protect. The fintech innovation in India today has been built completely outside the established “way of how things work,” and with minimal concern for which incumbents may suffer or go out of business as a result.
The mobile revolution
Ten years ago at my first startup in India, we spent a significant amount of time and resources worrying about how to approach customers who predominantly used SMS and bare-bones Symbian handsets. While the mobile internet user figures were superficially interesting, consumers weren’t really comfortable using the mobile internet as a replacement for offline transactions. Betting on mobile banking and payments 10 years ago was premature, and private sector velocity was hampered by a lot of environmental headwinds.
The government has made financial inclusion and transparency a stated priority.
Today, the situation in India is much different. Google, Amazon and a set of private sector companies poised to launch 4G services next year have made a mobile-internet world not only a reality, but a certainty on which private sector companies and the country can base 10- to 20-year business models. India is now the world’s third largest market for smartphones and will reach 314 million mobile web users by 2017.
Today any company with a three- to five-year horizon can assume that every relevant target consumer will have access to a $40 smartphone connected to an ecosystem of thousands of mobile apps built and securely run on cloud-computing infrastructure. The maturation of India’s mobile network into a legitimate platform for software services on par with the U.S. is critical to why India’s fintech story is happening now after a decade of promise.
Proactive public policy is encouraging the private sector
Over the last 24 months, the government has made financial inclusion and transparency a stated priority — and there is proactive policy and pressure to empower the private sector to help deliver results. A favorable regulatory stance from the Reserve Bank of India, coupled with the Indian Prime Minister’s “Jan Dhan Yojana” (financial inclusion for the masses) program, are working to bring all citizens onto the financial grid at unprecedented velocity and scale. As a result:
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More than 200 million bank accounts have opened in the just one year and more than 300 million new debit and credit cards have been issued in the last four years, bringing the total number of cards to more than 600 million.
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More bank accounts have been created in India in the last year than there are bank accounts in the U.S. overall.
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In the last 12 months, more than 100 million new mobile wallets were created, from a base of almost zero, mostly driven by startups that didn’t exist five to 10 years ago.
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More than 1 billion citizens came onto the digital grid through India’s Universal ID project in five and a half years, making it the fastest digital service growth in history. (Android hit 1 billion in 5.8 years; WhatsApp took 7 years.)
After decades of slow innovation and investment from public and private sector banks, India also granted a slew of new banking licenses this year to promote competition, expansion and faster deployment of new digital services. What was interesting is that most of these banking licenses were not given to traditional banks, but primarily telecom, software and IT services companies — most of whom have a strong track record of scaling by dramatically lowering operating costs and disrupting existing business models.
An Indian-born tech stack
The “spark” that will unleash the WhatsApp-like disruption is the “India Tech Stack,” a unique suite of API-based services that lift the veil off every major government-mandated customer service. The first was India’s Unique Identification through which any person can be identified with a simple biometric check using commercial handsets.
The second major leg of the Unified Payment Interface (UPI) was launched last month by Raghuram Rajan (Reserve Bank of India Governor), Nandan Nilekani and the head of almost every major bank in India. UPI is a platform through which any person can transfer money to another person’s bank account or financial instrument of choice by knowing their mobile phone number. Moreover, the underlying technology has been exposed as a service to the entire app developer ecosystem.
The implications are huge, as it democratizes all of the IP and infrastructure that made financial and government systems proprietary, unnecessarily bloated and difficult for startups to reinvent.
If the India experiment works, the U.S. would have to seriously consider adopting the “India Stack.”
PayPal, Square and Apple Pay are visions of the future, but ultimately still conform to the old walls of financial services. Imagine an interoperable world where any app built by two college kids could allow you to move money at no cost from one bank account to another. Whichever app delivered the most utility would own the value and marketshare… the exact way that WhatsApp won. In the four weeks since UPI’s launch, I have seen dozens (and soon to be hundreds) of apps built by small teams that will have the power and capability of PayPal on steroids.
The last time a single core technology was exposed in an open-manner like this was when the U.S. government opened GPS in 2000. The result a decade later was Uber, Google Maps and driverless cars.
India has exposed six core technologies: UID, UPI, eKYC, Mobile-based Digital Signature, Digital Locker (which eliminates the need to submit a paper document after the first time) and Digital Consent (which allows people to easily, transparently and securely make their profile and transaction data available to third-parties for services). In combination, these real-time digital services will enable startups to digitize and simplify everything from bank account creation to border security, from voting and subsidy distribution to tax filing and refunds across the world.
Innovation moving from emerging markets into established ones
The fact that the payments infrastructure in the West has existed for so long (and is pretty good) has actually had a dampening effect on the adoption of digital payments technologies. People in the West still overwhelmingly use credit cards when checking out in retail stores, even if they could pay on their phone. Why? Because whipping out a credit card is pretty painless, so there is not much incentive to change behavior. In Asia, consumer behavior is changing rapidly and consumers are already leapfrogging traditional forms of payments to use mobile.
If the India experiment works, the U.S. would have to seriously consider adopting the “India Stack,” and if it does, entire layers of the financial service technology and business stack will become either obsolete or commoditized, moving the value to mobile software companies and non-traditional banking units.
Banks that you grew up with would become commoditized and replicable using open services; your telecom operator or Facebook could become your bank. Billion-dollar hardware and processing companies will become obsolete or go out of business, like what happened with Nokia, Lucent and AT&T.
Not only will the United States and Europe be importing disruptive technology and business models from Mother India, but also, instead of Amazon and Uber attacking Indian or Chinese markets, Bank of America, TurboTax and PayPal may be fighting off battle-tested and efficient Asian product companies that could become the dominant players in the U.S. Now that’s a revolution.