For emerging markets where large parts of the population live in remote or rural areas, digital technologies offer a way to overcome the serious infrastructure, logistical and financial markets challenges that have long posed the biggest barriers to financial inclusion. Continued expansion of internet access, the increasing ubiquity of smartphones — and the whole host of digital innovations those technologies give users access to — promise to close the remaining gap further.
India, a massive country where a large swath of residents and businesses have historically lacked access to financial services, presents a huge opportunity for policymakers and innovators to continue harnessing digital tools to drive growth and spread prosperity.
The way India’s investment in public digital infrastructure has succeeded in connecting much of the population with financial services while fostering a vibrant and cutting-edge private fintech scene serves as a model for how other emerging economies can make rapid progress on digital inclusion. Financial inclusion is widely recognized as a core prerequisite for achieving nearly all 17 of the UN’s Sustainable Development Goals: reducing poverty and inequality, driving economic growth, achieving gender equality and stimulating innovation. At the same time, the global financing gap for sustainable development remains large, underscoring the importance of scalable financial infrastructure.
The use of digital technologies represents a generational opportunity for developing countries to leapfrog on financial inclusion metrics, just as the advent of smartphones enabled many countries to skip over building out expensive wired networks of telephone connections. India presents a prime opportunity for this sort of leapfrogging.
Dominated by tough-to-serve small businesses
India’s micro-, small-, and medium-sized enterprises (MSMEs) face a significant credit crunch — despite forming the bedrock of India’s industrial sector. MSMEs account for 30% of GDP, 46% of exports, and employ 62% of all workers in the business sector. But only 14% of India’s 64 million MSMEs have access to credit. That is partly because this segment is challenging for banks and other lenders to serve, given that small businesses typically are after small-ticket loans while having little credit history to help judge risk. These firms also tend to be concentrated in smaller cities and towns, further away from most banks and other formal financial institutions. The landscape of these businesses is heavily skewed toward micro firms, those with an annual turnover of less than $600,000, which account for 99.5% of India’s MSMEs.
Indian households also face widespread financial exclusion. As recently as 2011, only 35% of adults had a bank account, 12% saved at a financial institution and 8% borrowed from a formal financier, while most payments were transacted via cash. India’s large informal sector — which includes the vast majority of the 85% of Indian households that earn less than $12,000 annually, including street vendors, farmers and migrant workers — has traditionally been underserved by the formal banking system. Small-holder farmers, representing almost 90% of the farming community, have frequently relied on high-interest-bearing informal lending channels, which helps perpetuate cycles of debt and poverty. Financial literacy constraints remain significant, with relatively low overall literacy levels, particularly among women.
Financial inclusion initiatives in India predate digital infrastructure, including priority sector lending norms, rural banking institutions and specialized development banks. However, more recent progress has been driven by several concurrent factors. The Jan Dhan Yojana program, launched by Prime Minister Narendra Modi in 2014 to give widespread access to basic financial services, has expanded bank account access significantly. Payment banks, expanded point-of-sale infrastructure, cheaper mobile data, smartphone adoption and digital literacy initiatives have all contributed to increased adoption of digital financial services.
Public investment driving access
Notwithstanding these pivotal steps forward in India’s financial inclusion journey, the very foundations of India’s digital finance revolution arguably rest on the government’s creation of Digital Public Infrastructure (DPI), or the “India Stack.” DPI created a shared set of technological infrastructure that can be described as three big interoperable building blocks: identity infrastructure, payments infrastructure and a data-sharing or consent layer. Those building blocks which can be combined, leveraged and used to build innovative solutions. It can be thought of as akin to railroads — the provision of core infrastructure that private operators can build upon rather than rebuilding the basic infrastructure each time.
Just as the internet unleashed widespread innovation due to the interoperability of the HTTP base framework, DPI seeks to enable a complete digital transformation of the economy by providing technological protocols and standards to ensure interoperability and portability of key infrastructure. The goal is to unleash private sector competitive forces, with the foundational architecture creating an open and fair playing field. That is also designed to prevent vendor lock-in of critical national infrastructure.
Aadhaar, India’s unique biometric identification system, is the world’s biggest ID system. In 2010, the system covered just 4 million people — and now covers over 1.3 billion people, roughly 97% of the population. Aadhaar-based e-KYC has enabled banks to avoid lengthy paperwork and verification, bringing down compliance costs and making lower-income and remote clients easier to serve. Hundreds of millions of bank accounts are Aadhaar-linked.
The Aadhaar-enabled Payment System extends this infrastructure into financial services. Customers can use their Aadhaar number on micro-ATMs and point-of-sale devices to access their Aadhaar-linked bank accounts and perform transactions including withdrawals, remittances and payments. These transactions often occur through a “phygital model” via business correspondents who bring micro ATMs to customers’ doorsteps. This has enabled financial services to reach residents in rural and remote areas where bank branches are scarce.
Aadhaar also supports government benefit delivery. Rural citizens have been able to directly receive government benefits into Aadhaar-linked accounts, significantly lowering leakage of funds. Benefit funds used to routinely go missing through duplicate beneficiaries, pilfering by intermediaries or squandered on administrative inefficiencies. Billions of dollars have been transferred through multiple schemes, generating substantial fiscal savings while improving inclusion and transparency.
‘While financial inclusion in terms of access to accounts has improved dramatically in India, financialization — the actual use of financial instruments — remains inadequate.’
The rails beneath the rails
The payments layer is anchored by the Unified Payments Interface, UPI, which was launched in 2016. The interface is best described as India’s “rails” for real-time money transfer. It consists of open-architecture interoperable protocols and governance mechanisms enabling secure real-time routing and processing of financial transactions across bank accounts. Users can transfer money using identifiers such as mobile numbers or virtual payment addresses without needing to share bank account details. The system is device- and platform-agnostic and supports both peer-to-peer and peer-to-merchant payments.
UPI adoption has grown rapidly. Its zero-cost-to-user model and ease of use have made it consumers’ preferred choice for digital payments. Billions of transactions take place monthly via UPI, involving hundreds of millions of users and merchants. QR code payments are widespread, including among small merchants and street vendors. Transaction data generated through these systems can support credit underwriting and customized lending solutions for small-scale businesses that used to lack the kind of accounting and business records which banks need for assessing loan risk.
UPI has also supported government transfers. During the pandemic, billions of dollars were transferred directly into bank accounts of beneficiaries, including workers, farmers, and women. Innovations such as digital prepaid vouchers expanded targeted benefit delivery.
Despite questions around operating costs, UPI has enabled significant savings for the financial system as a whole, with estimates suggesting tens of billions of dollars in economy-wide savings on transaction costs.
The third layer of DPI focuses on data sharing. The basic premise of the Data Empowerment and Protection Architecture is that data should be decentralized at the individual level and that citizens should have full control over storage and sharing of their data.
Account aggregators provide digital platforms for users to view financial data across institutions and share it securely with financial service providers. They are designed to be data blind and do not store data themselves; they merely act as conduits for encrypted data sharing. This enables faster digital access to financial products such as loans, insurance, pensions and investments. Pilot programs indicate small-ticket loans can be disbursed digitally within minutes. Hundreds of millions of accounts are enabled for data sharing under this framework.
‘Just as the internet unleashed widespread innovation due to the interoperability of the HTTP base framework, DPI seeks to enable a complete digital transformation of the economy.’
India’s DPI has catalyzed fintech innovation across payments, lending, wealth management, financial literacy and banking-as-a-service. The country now hosts thousands of fintech firms and ranks among the largest fintech ecosystems globally by funding and scale. Many firms focus specifically on underserved populations, including rural customers, micro-enterprises, farmers and small merchants.
These developments indicate the pivotal role of India’s DPI in enabling increased access to financial services through greater ease in opening accounts, making payments faster and cheaper, and providing the infrastructure for better data sharing.
Digital payments growth has been dramatic. Retail digital payments have grown roughly a hundredfold in recent years, from around 1.6 billion transactions in 2012-13 to over 160 billion transactions in 2023–24. Ease of use, affordability and real-time functionality have driven widespread adoption, including for small everyday purchases.
Access without adoption
While financial inclusion in terms of access to accounts has improved dramatically in India, financialization — the actual use of financial instruments — remains inadequate. Dormant account levels remain relatively high, insurance and pension penetration lag global averages, and equity market participation remains limited. Gender gaps persist in credit access and digital usage. Cash continues to play a significant role in transactions, with many beneficiaries converting digital transfers into cash instead of depositing them into accounts or investing them.
Going forward, improving financial literacy, expanding affordable digital technologies and strengthening regulatory frameworks will be essential to ensure financial stability, cybersecurity and consumer protection as digital finance continues to scale.
India has made significant strides in extending digital finance capabilities and is a world pioneer in establishing Digital Public Infrastructure. These efforts have significantly improved access to basic financial services. With the base infrastructure well set up and multiple complementary initiatives underway, India’s digital finance moment has arrived.
This article draws on a book chapter authored by Vikram Gandhi and Radhika Kak in “Sustainable Digital Finance,” Springer, 2026.
