Simplicity, Scale and Security – The key for democratizing access to financial services

Niti Aayog’s ongoing Fintech month witnessed another interesting session today. Here are some key takeaways from the wide-ranging discussion on digital economy architecture, digital public goods infrastructure, the cruciality of an empowered ecosystem, and the continued need for a simplistic approach.

Decoding the Digital economy architecture

Sharing that the Indian Government’s collaborative approach (a partnership between regulators and private players) has led to the creation of a unique digital highway or backbone for a digital economy, Pramod decoded the three pillars of the digital economy:

1. Digital Identities (Who I Am) – Digital ID’s and Electronic Verifiable Registries – e.g.: Aadhar

2. Digital assets (What I have) – User owned, controlled, portable, tradable assets (digital and physical) including data and credentials – e.g.: DigiLocker

3. Digital Transactions (What I Do) – Interoperable, decentralized, open network of platforms – e.g.: UPI and Account Aggregator Model.

Highlighting the relevance of an empowered open ecosystem, he shared that when the identity is decentralised, asset ownership (beyond normal assets like money) is decentralized, thereby decentralizing the ability to participate in transactions. For an individual or SME to feel empowered to participate, they will need choice, opportunities, access, and freedom to transact. He further added that user empowerment will need to be driven through interoperability and necessary diversity and inclusion as no single app can solve a Billion population’s problems.

Ecosystem empowerment critical to scale

Agreeing with Pramod on the significance of an empowered and decentralized ecosystem, Dilip shared that India does not accommodate the one institution, one user or one owner thought process. By taking a collaborative approach, India has fueled the growth by building digital public goods like Aadhar and UPI, creating an overlay by empowering the ecosystem that is built up and allowing the creation of multiple use cases that have facilitated nearly 250 million people to participate in the digital payment ecosystem. Opining that he sees the digital payment ecosystem as the base or the denominator on which traditional financial services can build, he underlined that the more we do on the digital payments the better it is for the ecosystem to be able to expand on credit, insurance and investments – pertinent pillars that can drive the wellbeing, economy, and wealth creation within the country. He stated, “So, in my assessment, now the challenge is going to be how do we take these 250 million to 500 million or 700 million people? The whole ecosystem might want to look at this challenge very differently.”

Sharing that every NPCI employee and the UPI ecosystem dreams of a billion transactions a day [5X of the current 200 million transactions (approx..)] Dilip further added that the challenges from the 200 million transactions to a billion transactions a day are going to be very different, and every stakeholder will need to take a differentiated view to a complex challenge.

A simplistic approach to tackle exponential complexity

To deal with exponential complexity, simplicity is the ideal approach else execution is bound to fail. There cannot be a monolithic solution approach, said Pramod. Highlighting UPI as a classic example of a simple approach to a complex problem that had a remarkable impact, he explained the core concept with which UPI was envisioned. UPI was a protocol and a network play. The network facilitated unification and the protocol for UPI was all about moving money from any virtualized payment address, any currency, any device, any authentication. The separation of authentication, authorization and execution at a protocol level led to seamless execution without being bound by a monolith.

Do more for the digital payment ecosystem to Be More

Dilip highlighted that the digital payment industry is still at a nascent stage and it has a long way to go. In addition to the number of payments, he shared the three critical aspects that keep the ecosystem running – (1) The number of users; (2) The number of use cases supported (3) Building high-velocity behavior and patterns in each of these layers which will ultimately result in phenomenal growth. He mentioned that the regulator is already ahead of the curve with efforts like tokenization, taking a simplistic approach, enabling low transaction values of Rs. 200 and seamless offline transactions, all of which add up to a great customer experience. Additionally, decentralized technology, the power of the token, and the power of smart contracts will increase use cases, which in turn will get more business and contribute more to the economy. Rahul concurred with Dilip that growing the digital payments ecosystem itself presents so many opportunities – from education, awareness to detection of fraud and many more. He added, moving 700 million people to the digital payment ecosystem is a herculean task and there are a lot of opportunities.

Web 3.0 and its implications to building digital public goods:

While there is no solution yet for the transactions pillar of the digital economy, a decentralised internet based on blockchain technology or Web 3.0 is still in the journey mode, and it is evolving on a day-to-day basis. Dilip shared his fascination and delight in the decentralized technology and highlighted two aspects – 1) smart contract - which gives programmability to the whole approach in terms of dynamically deciding the transaction terms and conditions, and (2) power of the token – representing an asset with multiple use cases whether it's the securities market or financial markets or insurance. He emphasized that the power of tokens and smart contracts is very fascinating. And when you look at whether it's a protocol play, a decentralized play or a centralized play, he assessed that it will be an ongoing journey. India is a diverse country and putting more control in the user’s hands and giving them a choice is important. Over the next three to five years some of the platforms may become completely decentralized, some of the platforms may run on protocols, some of the platforms may be completely Federated and some of the platforms may still be centralized. Web 3.0 has great promise and will spread like wildfire, but it will coexist with what we have built now, which is the India stack. Sharing another perspective on the topic, Pramod said that it is important to establish high trust in a decentralized session network and one of the ways of doing so could be to centralize the negative list. Positive lists are easy to be decentralized but not so much in the case of negative lists.

Establishing trust through fraud resolution

For a country as vast and diverse as India, fraud detection and prevention is a complex problem. Emphasizing that we would need to look at traditional cyber fraud chain and set up mechanisms for each link of the chain, Dilip shared insights on each step of the process:

Step 1 - Prevent:

1. Awareness – Awareness is the single most important solution for prevention. In addition to regulators and Government, Fintechs must also have the ability to deliver compliance and awareness as that is the only way they can grow big and scale.
2. Design - The second aspect is to have privacy by design. For example, in case of UPI, the regulator has included ODR for real-time dispute resolution

Step 2 - Detect

Detection is a critical step in the fraud prevention and resolution process. For efficient detection, there needs to be significant investments in technology so that the negative list can be communicated to the larger ecosystem to avoid further fraud replication. While there is sharing of fraud data and negative lists, and technology such as AI-based fraud detection and real-time decline also exists, there is a lot more technological support required to effectively detect frauds.

Step 3 - Respond

The Ministry of Home Affairs (MHA) has operationalised a national helpline number and reporting platform for preventing financial loss due to cyber fraud, to provide a safe and secure digital payments ecosystem. The facility empowers both the banks and the police, by leveraging new-age technologies for sharing online fraud-related information and acting in almost real-time. The loss of defrauded money in online cheating cases can be stopped by chasing the money trail and stopping its further flow before it is taken out of the digital ecosystem by the fraudster. Dilip shared that every state needs to build the ability to prevent, detect and respond in real-time to ensure a safe and secure ecosystem for citizens.

Step 4 - Recover

The Reserve Bank of India (RBI) has been ahead of the curve and has created a recovery guideline where if an individual understands that money is debited from his/her account and reports this to the bank within two days, the bank will trace and recover the money.

He added that despite steps being taken in this direction, a lot of effort is still required in the fraud detection and prevention process. While some parts are progressing, there is no doubt that there is a lot more that needs to be done not only by NPCI, but also by the law enforcement agencies, the larger Fintech ecosystem, and the telephone operators. Pramod shared that often fraud processes and systems are batch-based, and heavily human-centric which makes it time-consuming.

Rahul concurred with Dilip and Pramod and recommended that an SLA with an automatic resolution mechanism would facilitate the entire process seamlessly. He also added that considering digital payments is a high-frequency use case and the gateway to getting more people into the fold of digital financial services, a central registry that serves all financial verticals, emerging from the digital payment ecosystem could be beneficial.

Approach to implementation:

Opining on the idea of a central registry, Pramod said that instead of creating a central ecosystem, bringing the power of all regulatory bodies together will have a higher impact as it will be a collective effort. Additionally, the implementation will require a systematic layered approach as there have to be volumes for specific use cases and readiness amongst society to accept it. He also added that we are serendipitously lucky as Indian regulatory bodies are very progressive and ahead of the curve, however, the regulators will need to look at two aspects – 1) Is there a large demand from the society 2) they will have to wear the risk hat and see if the risk can be mitigated with controlled measures. Regulators, while very progressive will have to take a cautious approach as they are highly accountable for issues within the system, concurred Dilip.

Key Remarks:

Dilip Asbe: “We are sitting on a tipping point. Whether it's technology, coverage, or use cases, there is an opportunity for India to lead the world and I think we will.”

Pramod Varma: “User empowerment will need to be driven through interoperability and necessary diversity & inclusion as no single app can solve a Billion population’s problems.”

Rahul Chari: “Expanding the digital payments ecosystem itself presents so many opportunities – from education, awareness to detection of fraud and many more. Moving 700 million people to the digital payment ecosystem is a herculean task and there is a lot of scope for phenomenal growth.”