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Sahay, India’s fintech disruption sequel
Conceptualised and promoted by iSpirt, the powerful behind-the-scenes organisation run by volunteers, Sahay would enable hundreds of thousands of Indian MSMEs to access loans in as few as five minutes. The story of how it was built is more important than why its 21 May launch was canned.
By Arundhati Ramanathan, 8 May 2020
Synopsis
After Aadhaar and UPI, Sahay was going to be India’s next big mass-scale tech intervention. It had the same actors as UPI—JUSPAY, Aadhaar’s architect Nandan Nilekani, think tank iSpirt, and the same issues— of conflicts of interest, early access, ownership and accountability. In addition, the organisation meant to evangelise flow-based lending also means to become self-regulatory
As plans go, it was a great one. On 21 May, roughly two months after India imposed one of the strictest Covid-19 lockdowns the world has seen, a disruptive new fintech platform was to be unveiled. One that would run like electricity through the country’s financial system. “Sahay” (in Hindi, “help”), an ambitious online lending marketplace, would be targeted at the hundreds of thousands of Indian micro, small, and medium enterprises (MSMEs). Businesses that had probably been closed and financially decimated during the lockdown.
Sahay would allow them to access a loan from banks in as few as
five minutes. To do that, it would invert the established order and power equations between MSMEs and banks.
Banks generally baulk at lending to MSMEs because they’re too risky and the loan tickets are too small to be worth spending time on. So, instead of banks deciding which MSMEs they’d lend to, Sahay would let MSMEs decide which banks they’d borrow from. From a lender’s market, Sahay would turn it into a borrower’s one.
But inverting entire industries overnight isn’t easy. This is why, before Sahay could roll out, a complex web of events, systems, and companies had to fall into place. That included banks, borrowers, a data-driven GST system, and a host of regulators from India’s central bank—the Reserve Bank of India (RBI)—to sundry industry regulators.
It would also require the creation of a brand-new class of RBI-licensed entities called Account Aggregators (AA). These data intermediaries would act as consent brokers, helping expose a business’ operational data in real-time to lenders. If all of these pieces fell into place, out would emerge the concept of flow-based lending, where a borrower’s data would become the collateral for its loans. Sahay could do for the adoption of fintech lending what payments app BHIM did for the adoption of digital payments in 2016.
After India demonetised over 85% of its currency notes in December 2016, it announced the birth of Unified Payments Interface (UPI), a new, free digital payments protocol. To popularise UPI, Prime Minister Narendra Modi (then in his first term) launched a free app built on top of it, called BHIM. Modi’s star power, combined with the desperate economic vacuum of demonetisation, helped UPI go mainstream, eventually clocking over a billion transactions in a month.
Sahay was meant to be BHIM’s sequel, but for lending. BHIM-UPI filled the cash-starved void created by demonetisation. Sahay would do the same to fill the credit void for MSMEs struck by the economic slowdown since August 2019, exacerbated by the Covid-induced lockdown. But all of a sudden, on 5 May, Sahay was put on a “hiatus”, announced by a Bengaluru-based think tank called iSpirt.
“We realise small businesses need something much more urgently than cash flow-based solutions from the market. They need rescue and stimulus packages from the government to survive the health and economic distress brought on by Covid-19. When the lending cycle picks up again in the market, we will revive our efforts to bring cash flow-based lending products to the market,” said the
post.
As think tanks go, iSpirt is a class apart. Operating largely behind the scenes, it was the powerful architect behind two of India’s mass-scale tech interventions. The national biometric ID program Aadhaar (which now covers 1.2 billion people) and UPI (used by nearly 100 million people). Sahay would’ve thus been a three-peat for iSpirt. One made possible by a very similar set of actors and strategies as earlier. Fintech infrastructure company JUSPAY, Nandan Nilekani (the architect of Aadhaar and a payments maven), an unregulated industry body Sahamati, banks, startups with early access, and of course, iSpirt.
Though postponed for a few quarters, flow-based lending too risks being overshadowed by the same iSpirt controversies and conflicts that afflicted UPI. Ownership and power without accountability. Conflicts of interest and rules that are created on the fly. Having tasted success with UPI, iSpirt increasingly views Covid-19 as an opportunity for a wholesale reset. This is evidenced by its ambitions of influencing policy, regulation, and delivery of services in sector after sector. A 134-page presentation it made to its volunteers offers a small glimpse—credit, stimulus packages, telemedicine, contact tracing, affordable diagnostics, health records, etc.
Pics : Slides from iSprit's presentation to its volunteers in April 2020
“iSpirt’s involvement is much-needed as someone who brings the ecosystem together,” said an executive of a company that is part of the flow-based lending ecosystem. He did not want more details of his designation revealed as he did not want to speak against iSpirt publicly. “But they are involved in policymaking and people associated with iSpirt are also likely market participants. So you end up becoming a rule-maker, jury, and judge. This is not healthy for a market economy,” he added. Follow the UPI trail to know what that can look like.
Spot the differences
When it came to flow-based lending, iSpirt largely stuck to the playbook it created and perfected with UPI. After all, it must have felt, it had created and popularised a brand new digital payments system that consumers weren’t even asking for. Why couldn’t it do the same with business lending, something MSMEs were screaming for ?
That playbook started with informal sessions that brought together market participants. iSpirt’s early hackathon sessions to create UPI led to the birth of PhonePe, the first private app to offer UPI-based payments. PhonePe went from a startup to a multi-billion-dollar payments app in under three years. It is now owned by Flipkart, which in turn is
owned by Walmart. Yes Bank, a second-tier bank few people paid much attention to, became the preferred UPI-partner bank overnight; it ended up powering 40% of UPI transactions. Yes Bank would eventually be
run to the ground by its founders; it is now run by a consortium of other banks.
PhonePe and Yes Bank benefitted from UPI because both of them got early access to the software plumbing (SDKs and APIs) that girded UPI. Though the phrase didn’t exist back then, they were what iSpirt now calls early adopter “Wave 1” partners.
“We dive deeper with this Wave 1 cohort and iterate together to build on the ‘private innovation’ side of the original vision with their feedback,” said iSpirt spokesperson Siddharth Shetty, in an emailed response to
The Ken. “This is developed with the mutual commitment to sharing our work in the public domain, for public use, once we have matured the idea. We work with them and iterate till we surface a Minimum Viable Product for wider review. After Wave 1 partners co-create an MVP, we open up for wider public review and participation. We make public all of our learnings to help the creation of Wave 2 of market participants.”
Cut to 2020 and it’s Wave 1 all over again. On 13 March, a motley group of companies met in Bengaluru. It was a session called “Opportunities for Loan Service Providers” and was hosted by Sharad Sharma, the co-founder of iSpirt. Employees of companies like e-commerce major Flipkart, fintech infrastructure company Setu, credit bureaus like Experian, and loan origination startups were present, according to a founder of a company who attended the session.
“Those present were the first wave of companies getting together to make products around flow-based lending,” said the founder. Among banks, the one most interested in flow-based lending was IDFC First Bank. “Yes Bank made a lot of gains by being a first-mover. IDFC did not want to lose out on such gains,” said a senior bank executive involved in these discussions.
The new Wave 1 also included new actors. There’s Sahamati, a collective of account aggregators, promoted by Nandan Nilekani. Its centrality to flow-based lending is similar to that of the National Payments Corporation of India (NPCI), the banking industry body that was entrusted with running UPI. Incidentally, Nilekani has been an advisor to NPCI since 2015.
Older actors make a reappearance too. iSpirt, which designed the APIs and SDKs for BHIM, also did it for Sahay. It then contracted the same company, JUSPAY, to build Sahay as it had contracted to build BHIM. “JUSPAY is an active market participant in this ecosystem,” said iSpirt’s Shetty. “They volunteered to build an open-source implementation so that many marketplaces can come up quickly. We saw no conflict, in fact we appreciate this gesture on their part to open-source.”
Shetty also added that the decision to award the contract to build UPI app BHIM to JUSPAY was taken by NPCI, not iSpirt. “JUSPAY is a supremely talented engineering company with a strong ‘build for India’ bias. They have been market players who embrace some of our big ideas and have demonstrated a willingness to pay-it-forward,” he said.
In his responses, Shetty also referred
The Ken multiple times to a set of rules called
playgrounds-coda. There’s just one thing—the rules were published on 7 May 2020. The same day he emailed us iSpirt’s responses. When the actors are largely the same, so too are the conflicts.
Gatekeepers
When UPI was being built and rolled out, early access to the new technology didn’t mean
universal early access to all. It is an open secret in India’s fintech sector that early bank adopter (or “Wave 1 partner”) Yes Bank’s UPI SDKs were superior to others. Because of that, so was the quality of the product built atop it by its early—and for a long time, only—partner, PhonePe.
This is why few other competing UPI apps never tasted the same success as PhonePe, including Sequoia-backed payment company Citrus Pay (now Naspers-backed PayU), whose UPI ambitions
never took off even though it had better access to capital than PhonePe did then. (PhonePe had earlier denied getting preferential treatment.)
With cash-flow based lending too, the early “Wave 1” participants with iSpirt stand a chance to become the Yes Bank and PhonePe of lending. Who might these be ?
The five financial institutions that were to have been part of the first release of the Sahay platform, said a source, were IDFC First Bank, State Bank of India, Axis Bank, Bajaj Finserv, ICICI Bank. Four out of these five also feature as iSpirt’s “financial inclusion
donors ”.
The Ken reached out to Axis Bank, IDFC Bank, and Bajaj Finserv for comments. Bajaj said it was in its silent period and couldn’t comment. The other two banks did not respond to the emails.
When asked about this, iSpirt’s Shetty said he categorically denied a “pay-for-play” model and that his organisation “engaged with many more market partners who are NOT donors than donors who are market players. Their donor relationship and ‘market partner’ relationship with us are independent.”
Even iSpirt’s designing of the apps and SDKs for the concepts it wants to popularise are not free of concerns. An official of a company that is part of the flow-based lending ecosystem was concerned about the lack of broad consultation or inputs when it came to designing the API. He also had questions. Who is iSpirt
accountable to ? And who certifies India Stack independently ? Also, once iSpirt hands over the tech platform to the operating units, who guarantees end-use limitation of data. Who is accountable for breaches ? Who answers to the Data Protection Authority when it eventually comes up ?
iSpirt’s response was once again about “Wave 1” and “Wave 2” partners. “I can understand the confusion if your sources are not from Wave 1,” said Shetty. “They are open to participate in Wave 2. Before you allege that our process is not collaborative, please clarify with your source if they are confused about Wave 1/Wave 2.”
Set up in 2013, iSpirt, which stands for Indian Software Products Industry Round Table, was an alternative to Indian IT lobby group Nasscom. iSpirt operates through an army of 150 volunteers. Its volunteers play an active role in setting tech policy, bringing the various companies and institutions together and helping them make the right connections. They are serial entrepreneurs, founders of young startups. They are involved in making policy, making connections, writing code, and building solutions over a swathe of issues that would make the government take notice.
This invisible layer of volunteers operates at different levels based on their involvement and commitment to iSpirt.
One of iSpirt’s senior volunteers is Sanjay Jain, who is also the founder of the Bharat Innovation Fund, a $100 million venture capital
fund with capital from Indian banks, insurers, and corporates. Jain’s two hats place him in a vantage position.
iSpirt volunteer Jain’s knowledge of flow-based lending and the account aggregator framework would be tremendously useful to
venture capitalist Jain in deciding which early horses to back.
One such horse is Setu. Founded by a duo of former iSpirt volunteers, Sahil Kini and Nikhil Kumar, the fintech infrastructure company in April 2020 raised $15 million in venture capital, including from venture capitalist Jain’s fund. Coincidentally, Setu is also in the running to become an account aggregator. It has applied for a license with the RBI.
“Please refer to our model and feel free to report on when we have departed from our stated model,” said iSpirt’s Shetty. “Please avoid sensationalising our regular course of work, by cherry-picking two volunteers and attempting only a tenuous link.”
Except, as we pointed out earlier, the model was published on 7 May 2020. So it would be hard for
anyone to check how iSpirt has or has not deviated from it prior to that. Shetty was also lavish in his praise of Jain. “Sanjay Jain is not on top of trends because he was a volunteer at iSpirt Foundation. iSpirt is on top of trends because Sanjay Jain is a volunteer.”
He also added that once Jain moved to Bharat Innovation Fund as an investor, iSpirt’s Volunteer Fellows Council designed him and his activity within iSpirt to be conflict-free. He, therefore, does not participate in any of the Project Sahay related work. “The relationship between Bharat Inclusion Seed Fund and Setu is what would be expected in the ordinary course between a seed investor and one of its many portfolio companies,” said a Setu spokesperson.
The disruptive power of flow-based lending
UPI lifted India’s digital payments ecosystem to unprecedented heights, not just in the country but across the world. Swift, cheap, interoperable, and near-instant transfer of money saw billion-dollar companies like Google flocking to adopt it. Those who did not adopt it early, like WhatsApp, paid the price by being frozen out. Though it started working on a UPI payments product as far
back as 2017, it still hasn’t been allowed to launch formally in India.
UPI rendered payments to commodity status. Banks that didn’t pay much heed to UPI at the beginning had to acknowledge that it was a force to reckon with. And soon, payment companies were looking at payment and the data along with it to bring more services—from wealth management to lending, traditionally the remit of banks alone.
But just like payments, what if lending could be democratised across multiple platforms ? An e-commerce company like Flipkart or a food-tech company like Swiggy or a ride-sharing company like Uber ? Swiggy could potentially lend to restaurants based on the orders a restaurant did; Uber can lend based on the rides a driver-partner did; Flipkart can give out a loan based on their sellers’ invoices. Even a messaging app like WhatsApp could facilitate lending by simply partnering with AAs and banks for lending.
If tech companies cracked flow-based lending, they would be making a serious move on banks’ territory. This is the kind of lending where business flows like GST Invoice data or payment history could serve as collateral to get loans. The prize for getting to this opportunity is the credit gap worth a cool $262.9 billion-$328 billion that MSMEs need fulfilling as of March 2019, according to a report by former Securities and Exchange Board of India chairman UK Sinha.
Cue Sahay.
Sahay means help. Help is coming
UPI had the market opportunity of demonetisation to get out of the gate. Account aggregators, however, have been stuck at the door for three years now. There has been no opportune moment for the concept to find takers. Moreover, banks have been reluctant to make changes to their tech chops to allow for real-time lending. The other reason for banks’ reluctance to be a part of this network is because it could end up passing user info to other banks. That could cost it a potential borrower.
“Convincing banks to take part in a real-time loan disbursement has been nothing short of explaining a sci-fi concept,” said the co-founder of a startup that is working with banks. So iSpirt took the responsibility of creating a use case, which would inspire banks to be a part of it. So how is it supposed to work ?
The need for something like this came up because MSMEs are not exactly the bank’s favourite set of borrowers. They require small-sized loans (average size of about $6,600) costing upwards of 2% of the loan amount just to process it. For the same cost, lenders can disburse a larger loan to a larger business. This makes MSME loans an unattractive play. And because most banks don’t lend to MSMEs, they don’t know whom to approach even when among banks who do.
With Sahay, the idea is to reduce the cost of borrowing for borrowers by at least two percentage points, said the banker quoted above. “Through this model, we charge 16-24% for the loan. While we would typically charge 19-24% for a business loan,” he said. And since they are invoice-backed loans, they are not as risky as unsecured lending in a Covid-rid world.
Eventually, Sahay’s launch was to spur companies like Flipkart to adopt the framework and be able to partner with banks and AAs to give working capital loans to their suppliers, based on their invoices. “The outcome of Project Sahay, was not one app, as you have assumed, but to catalyse several credit marketplaces to come up to help MSMEs access formal credit,” said Shetty in his response.
Especially now during the pandemic, when MSMEs are hurting the most and a stimulus package aimed at them is still in the works, a solution like this would go a long way.
“The size and urgency of the need to get the economy—especially SMEs—back on their feet is daunting,” said Srikanth Rajagopalan, CEO of Perfios, an account aggregator. “In lending, AAs can digitise data aggregation, risk assessment, flow-based lending, and credit monitoring.”
But ironically, Sahay was called off because business, especially MSMEs’ cash flows, have been hit. Which made the attempt at cash flow-based lending at a time like this futile.
With Sahay now in cold storage, all eyes are now on the account aggregator framework, which was supposed to go live by 20 May. But it is still stuck in limbo as banks are in various stages of testing. No one has gone live yet. That has been the job of the one-year-old non-profit founded by Nilekani, called Sahamati. A collective of account aggregators.
Sahamati and the scope crawl
Sahamati has an
NPCI-sized task ahead of it.
“When UPI launched, NPCI played a crucial role in leveraging its infrastructure to help UPI scale. Similarly, account aggregators need an institution to coordinate and expand the ecosystem, so that the participants just focus on building new use cases and not worry about the plumbing. Sahamati has a big role to play,” said Rajagopalan of Perfios.
When it was set up, Sahamati was meant to evangelise the concept of account aggregator as well as supporting the implementation and integration of the concept. But there is still no clarity among the members about the roles and responsibilities of Sahamati. Some account aggregators
The Ken spoke to said Sahay will be owned and operated by Sahamati. But when asked, BG Mahesh, the chief of Sahamati and an iSpirt volunteer, told
The Ken that this was not Sahamati’s remit.
That leaves a now-in-hiatus product, conceptualised and designed by a private volunteer body, built by a private company, with no owner. “This is a case of putting the chariot ahead of a pony,” said the official of a company part of the flow-based ecosystem.
The collective, meanwhile, is in the process of applying to the RBI to become a self-regulatory organisation (SRO). It will be responsible for setting and enforcing operational guidelines and deciding how each market participant should operate. “Sahamati is like a GSM alliance or a Bluetooth alliance. We work with players to improve the technical specifications, interoperability, certification, and evangelisation,” said Mahesh. In a May 2019 report titled Deepening of Digital Payments, author Nilekani suggested that RBI allow new interventions such as letting the account aggregator framework operate as an SRO.
One reason organisations clamour for an SRO status is if they believe regulators don’t know how to regulate a sector. “They think regulators
ko akal nahin hain (don’t have much sense),” said a senior banking veteran aware of how SROs function. He didn’t want to be named as he is no longer an active participant in the financial services ecosystem. In any case, self-regulatory organisations have rarely worked in India. For instance, mutual fund body AMFI, Indian Banks’ Association, aspired to be an SRO but didn’t because of the inherent flaws in being one.
“There is a fundamental dichotomy in an organisation also wanting to be an SRO,” said the banking veteran. His reservations come from the fact that those who are members of the organisation are also competitors, who are now involved in regulating themselves. “Every member eventually feels someone else is breaking the rule and they don’t want to be regulated by a competing member. They believe the larger players in the group are always favoured. That’s why SROs have not worked anywhere in the world,” he added.
Meanwhile, for account aggregators, the wait is particularly excruciating as the business opportunity is passing it by.
“The AA ecosystem is nascent,” said Rajagopalan of Perfios. “In a perfect world, we would have all the time to achieve consensus in standards, regulations etc. However, in times of crisis, the bias is towards disagreeing, committing, and moving quickly as an ecosystem; perfection can wait. What UPI took five years and demonetisation to achieve, we will need to get done in one year or less.”
*Sumanth Raghavendra, one of The Ken’s co-founders, is a former iSpirt volunteer.
Conceptualised and promoted by iSpirt, the powerful behind-the-scenes organisation run by volunteers, Sahay would enable hundreds of thousands of Indian MSMEs to access loans in as few as five minutes. The story of how it was built is more important than why its 21 May launch was canned
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