How digital public infrastructure can support financial inclusion

Understanding DPI

With digital transformation of economies and societies progressing at an increasingly rapid pace, the global community has recognized the need for clear policies, increased financing, creative innovation, and effective regulation of digital technologies to serve the public good and enhance financial inclusion of underserved populations. Digital public infrastructure, or DPI, brings together these priorities in a holistic framework for countries to adopt and adapt per their own developmental objectives. The Group of Twenty (G20) New Delhi Leaders’ Declaration defines DPI as “a set of shared digital systems that are secure and interoperable, built on open technologies, to deliver equitable access to public and/or private services at a societal scale.” As in the case of India, successful DPI requires a symbiotic and mutually reinforcing relationship between the public and private sectors on public policy, digital assets, and market innovation (Figure 1).

Operationalizing DPI and financial inclusion

DPI spurs innovation for financial inclusion in myriad ways. Most notably, if implemented well, it expands access to digital services for even the most remote consumers and businesses who might otherwise be underserved by incumbent financial-services offerings. New products and services built on top of DPI targeting previously uncovered populations significantly expand the potential consumer base.

For the financial-inclusion benefits of the new digital infrastructure to be fully realized, entrepreneurs and other private-sector innovators must be able to identify large enough market opportunities for various last-mile use cases and be rewarded for the risk they undertake in solving such user challenges. By adopting the right mix of incentives and regulations, countries should be able to attract private-sector investment to fund their exponential growth and reach sustainable scale.

The India model and its global relevance

How India has used DPI to foster financial inclusion    

DPI has been at the heart of India’s digital transformation, and financial inclusion has been at the heart of India’s DPI. While other countries, such as Brazil, have also taken a similar approach, India’s experience stands out for both its scale and scope. By enabling a policy framework that fosters data privacy and empowerment, mandates interoperability, and promotes market participation accompanied by public investment in digital assets, India’s DPI has expanded the market for goods and services. Over the last decade, this approach has transformed and dramatically increased the country’s financial inclusion, also helping India meet its SDG goals.

India’s DPI framework

Access to financial services has increased globally over the last decade. According to the Global Findex Database 2022, 71 percent of adults in developing economies now have a formal financial account, compared to 42 percent in 2011. The gap in access between men and women in developing economies has fallen from nine percentage points to six percentage points, indicating a closing of the gender gap in financial inclusion.

Even given this improvement, India’s experience stands out from those of other developing countries largely thanks to its innovative DPI. Nearly 80 percent of all Indian adults (age fifteen and up) had a bank account in 2021, compared to 35 percent in 2011. Two-thirds of the new bank accounts were opened to receive government transfers targeted at the bottom 40 percent of the population, including the rural poor, mainly through the Pradhan Mantri Jan-Dhan Yojana (PM-JDY)—the national mission to provide financial access—from 2014 onward     .

This was followed by the creation of the Unified Payments Interface (UPI), which leveraged Aadhaar, electronic know your customer guidelines, and smartphones—the so-called Jan Dhan– Aadhaar– Mobile (JAM) trinity. India’s UPI is currently the world’s largest instant digital- payments system with a 46- percent share in global transactions volume. While available to all Indians, UPI-based payment applications are being utilized by previously cash-dependent and vulnerable populations, such as the urban and rural poor.

Beyond the technology stack itself, India’s DPI has benefitted from the country’s enabling environment for digital inclusion. India has one of the lowest costs of mobile access and data transmission globally, at  16 cents on average, largely due to low telecommunications tariffs for mobile internet access as well as widespread fourth-generation (4G) coverage. India has also implemented policies and programs to promote bank account ownership, such as the PM-JDY and the licensing of payment banks as a special category of banking institutions. While questions remain about the regulation of payments banks, as shown by the Reserve Bank of India’s recent actions against Paytm, the move to license these banks set the precedent for a banking institution focused on both digital and financial inclusion. These factors, among others, have enabled India’s DPI readiness by fostering digital inclusion that could serve as a model for other countries to follow. Of course, for all of its strengths, India’s model of financial inclusion is not necessarily a one-size-fits-all solution and might need to be adapted to better suit countries that do not have both a large population and technological capacity.

Lessons learned from India’s stack    

India’s DPI model has the potential to help other countries in the Global South leapfrog previously necessary steps and systems to create inclusive government services and financial systems. Because these countries lack legacy systems, they can also— to some extent—avoid impediments to technological innovation associated with creating their own DPIs. By leveraging technology and a network approach, efficiency, accuracy, and effectiveness of financial-inclusion programs can be vastly improved, and India can help this process by sharing its DPI technology and expertise.

There are also some lessons to keep in mind about the Indian model. The first is that its degree of centralization is both a positive aspect and an area for caution and improvement. The centralization introduced by Aadhaar and leveraged by other layers of India’s DPI contributed to its efficacy and reach, increasing financial inclusion for many underserved individuals and communities. However, centralization raises questions about data security and the government’s intention with centralizing that much personal data, which may in turn introduce doubts among potential users and inhibit their participation.

Second, ensuring constructive and equitable cooperation between the government and private sector will help promote a healthy competitive ecosystem for DPI. India has experienced challenges in this regard. For instance, on the UPI, the National Payments Corporation of India has sometimes been at odds with foreign investors seen as proponents of privatizing DPI. Given the scale at which India is operating, there is significant space for the private sector, both domestic and foreign, to be included in the DPI ecosystem. For optimum outcomes, the “public” in digital public infrastructure should not mean government dominance or control of infrastructure      but, rather, public ownership and prioritization of the public interest. Developing robust cooperation methods and mechanisms for the public and private sectors will help maximize innovation, regulation, and collective ownership and accountability, enabling high-quality and high-impact DPI.

To enable this ecosystem flywheel, successful DPI should neither prevent nor discourage commercialization in financial services, including in payments, digital savings and credit, fintech infrastructure, and insurance. A healthy DPI ecosystem must encourage both private and public innovation with appropriate fee structures, funding mechanisms, data guardrails, and stable, predictable regulatory frameworks. DPI can accelerate every aspect of financial innovation for local inclusion, especially in markets with less mature financial services industries. Examples can include new neobanks for mobile money, monthly subscriptions for insurance and other key products, supplemental data to encourage better and more affordable underwriting for under-banked populations, and merchant solutions for small businesses with limited digital footprints to grow their businesses. A robust mechanism for ongoing collaboration with the private sector, civil society groups, and technology innovators is also critical for successful, sustainable, and inclusive DPI. Enacted thoughtfully, DPI has the potential to spur an entire new Silicon Valley of financial-services innovation in new geographies to expand what’s possible for financial inclusion.

Balancing regulation and innovation in the DPI ecosystem

There are two additional lessons of India’s financial-inclusion experience that can be built upon as the idea of a DPI-based financial inclusion diffuses globally. The first is that financial inclusion is not the same thing as financial access. Inclusion in this context entails financial stability, security, and trust in the system, which requires specific attention. Second, components of the DPI stack, such as the use of biometric ID for authentication and a digital-first approach to payments, might leave certain vulnerable groups behind, especially the elderly and the rural poor. Efforts to mitigate these adverse effects should be part of the DPI design, not an afterthought.

Policy recommendations    

Financial health and well-being are integral to thriving individuals, communities, institutions, and economies. The current discourse on DPI and financial inclusion has focused on access and usage while disregarding other factors that lead to a financially healthy life, especially in a digital-first environment. These include capacity to interact with the digital ecosystem, building trust and ensuring security, and creating an innovation ecosystem that supports inclusion and well-being. Taking a holistic, outcome-based approach vis-à-vis the role of DPI in the financial ecosystem will enable policymakers to set objectives, provide financing, track outcomes, and monitor progress toward the achievement of the Sustainable Development Goals (SDGs). 

I. Enable and rigorously evaluate digital readiness.  

Countries seeking to develop DPI should invest in enabling factors for digital readiness, including internet access, cellular network coverage, technology governance, and other infrastructure to build a robust foundation for DPI. These are essential to build applications that run on DPI rails, especially financial inclusion and digital payments.

II. Adopt a holistic approach to digital financial inclusion.    

Policymakers should follow an outcome-based and people-first approach to digital financial inclusion. This approach should advance financial inclusion by working toward      measurable outcomes that demonstrate progress and impact— for example, by tracking Global Findex indicators for financial account ownership and usage and linking it to the DPI stacks.

III. Prioritize user centricity and trust.    

Countries following the DPI approach should center the interests and well-being of individual users and their communities to ensure adoption and promote trust in digital financial services, broadly defined. Countries should seek to balance innovation and regulation so that they reinforce each other (Figure 2). A robust mechanism for ongoing collaboration with the private sector, civil society groups, and technology innovators is also critical for a successful, sustainable, inclusive, and trustworthy DPI. Governments can also support and empower innovation hubs to pilot new financial technologies in controlled environments with regulatory support—for example, through sandboxes.

IV. Align public and private-sector incentives.    

Stakeholders should work to align public and private-sector incentives to achieve an optimal balance of innovation and regulation in DPI. Private-sector innovation should be sought, and space should be created for the private sector to experiment. Governments and regulators should focus on the objectives of public interest and data safety by directing the private sector rather than being a lead, solo actor on DPI.  

V. Prioritize sustainability, durability, and literacy.    

Countries should invest in the long-term durability of DPI through investments in digital literacy and capacity. Sustaining DPI in the long run requires a skilled workforce of developers, including fostering of an open-source technology community, to maintain existing and build new infrastructure as countries seek to expand their technology stacks. By developing their own human and technical capacity, countries can ensure ongoing DPI innovation and make it a sovereign pursuit that utilizes their citizens’ expertise and creativity. Moreover, for the end users—particularly in developing countries—many citizens are getting their hands on technology, particularly the internet, for the first time. Digital literacy  is, therefore, a key area for governments to focus on. Digital etiquette and know-how—from simple aspects like how and where to securely store passwords and information to utilizing DPI for day-to-day activities such as bill payments—are best initiated by governments to ensure maximum reach and create a digitally responsible populace.

Working group leaders

• Katherine Hadda, CSIS
• Anit Mukherjee, ORF America

Co-authors

• Heba Shams, Mastercard
• Ajay Chhibber, AC and GWU
• Ananya Kumar, Atlantic Council
• Aran Mehta, ASG
• Melissa Frakman, Emphasis Ventures
• Rakhi Sahay, Access Assist and UNCDF
• Aran Mehta, ASG 
• Jeff Lande, The Lande Group & Atlantic Council 
• Atman M Trivedi, ASG & Atlantic Council 
• Srujan Palkar, Atlantic Council 

This report was made possible in part by the generous support of Mastercard. 

This report is written and published in accordance with the Atlantic Council Policy on Intellectual Independence. The authors are solely responsible for its analysis and recommendations. The Atlantic Council and its donors do not determine, nor do they necessarily endorse or advocate for, any of this report’s conclusions.

Issue Brief
Oct 21, 2024

Finding security in digital public infrastructure

By
Justin Sherman

As governments worldwide adopt Digital Public Infrastructure (DPI), the need for robust cybersecurity and privacy protections has never been greater. This paper delves into the critical risks and opportunities associated with securing DPI systems. With examples from India, Ukraine, and other nations, it explores how governments are managing data privacy, addressing cyber threats, and building trust in digital services. The paper highlights key considerations for policymakers, including the balance between openness and security, the role of encryption, and the importance of resilience in digital systems. As more nations turn to DPI, ensuring the safety and privacy of citizens’ data is essential to creating sustainable, trustworthy digital infrastructures.

Image: A fingerprint is pictured.
George Prentzas via Unsplash