Financial Inclusion: Harnessing Technology for All
Financial inclusion is not just about having a bank account for everyone in the society. It is about creating an ecosystem that enables and encourages people to use financial instruments in their everyday life.
ABOUT: Banking is changing like never before, and largely because of the rapid advancement of technology. Automated teller machines, internet banking and other advances have already made dramatic differences to consumer experience. Now, payment wallets, mobile banking and other advancements are going to revolutionise it further. Vijay Shekhar Sharma, founder of One97 and Paytm, is a digital entrepreneur working in the areas of fintech and retail. He is also one of the recent recipients of the payment bank licence. Here he talks about how technology could solve financial inclusion issues.
Financial inclusion is not just about having a bank account for everyone in the society. It is about creating an ecosystem that enables and encourages people to use financial instruments in their everyday life. There are four key instruments of financial inclusion - payment, credit, insurance and investment. Technology has the potential to truly democratise each of these instruments and make a tangible impact on the financial well-being of people.
The ability to pay and receive money is a basic need. Physical currency or cash has been at the core of fulfilling this need for centuries. Cash as the primary medium of payment has led to setting up of an expensive cash management infrastructure. A lot of innovation has happened in streamlining cash management systems and making them more accessible and efficient. Bill collection centres for utilities, network of ATMs and cash deposit machines, cash-in/ cash-out counters in banks are some examples of cash management systems. However, in past few years, people have started questioning the very existence of cash itself. The idea of replacing physical currency with digital payments is not new. There are numerous global examples of cash-less or less-cash societies, but it always looked like a distant dream for India.
Rapid increase in penetration of smartphones and internet, along with emergence of new-age technology companies in the payments space, has made this dream look much more real. Multiple technologies have emerged to replace cash. Plastic money has been around for some time and now we see mobile wallets emerging as a popular alternative. It will be interesting to see which technology takes centre stage in transaction settlement. Cost, convenience and reliability will be the key factors driving adoption of these products. The winning technology will be one that can take on the huge unorganised retail market of the country. In any case, society will benefit from this innovation. 'Money on API (Application Program Interface)' seems to be the future of payments. Accounts of payers and receivers can communicate, and payments will be settled between accounts directly. When this becomes a reality, why do we need an external facilitator of transaction, cash?
Financial inclusion is incomplete till people have access to credit. In India, millions of people are still not able to get credit from formal sources and are dependent on informal sources for their credit needs. The rate of interest of such credit options is exorbitant. This is despite the fact that banks and other financial institutions are looking for new customers to extend credit. The absence of a transaction history for these individuals and enterprises is the root cause of lack of credit to them. A person paying her utilities bill on time should have a good credit history. However, she may not be able to secure a loan from formal financial institutions because she does not have records that can be analysed to assess her creditworthiness. If her transaction data is available to a bank, she can get access to credit. Such data is available, but in disparate systems that are not connected. Additionally, there is lack of a unique identifier that can be used to get all her data in multiple systems for analysis and decision making. Solution is two-partite: First, the transaction history of a customer with various institutions like utilities, revenue department, transport department, etc should be available to him in a digital form when required. Second is the promotion of Aadhar as a unique identifier of an individual and his transactions. We need universal credit platforms where people can push their digital transaction data to improve their creditworthiness. Once we start connecting disparate systems, we will realise that we have much more data than we thought even for traditionally unbanked and under-banked individuals and entities. Low cost of data storage, data transfer and big data analytics can play an important role in taking credit to the last mile in future.
Digital payments can emerge as a way of making traditional unbanked and under-banked sections of society more creditworthy. In China, millions of small traders have got access to loans based on their online trade and digital payments data. In India, this trend has recently started with credit companies partnering with e-commerce companies to disburse loans to small retailers who are selling online. A small retailer accepting payments through digital medium has more reliable data to prove his creditworthiness and companies will have more confidence in extending advance to him in comparison to a retailer doing all his transactions in cash. In future, partnerships between credit and internet companies may become a milestone in increasing reach of credit.
Similarly, insurance and investments will become much more mainstream riding on the digital revolution. The convenience with which we will be able to buy insurance or a mutual fund by using our smartphone is going to increase. It may become as simple as paying your bill from a mobile wallet. API integration of data, fast connectivity and ability of systems to handle millions of transactions per second will transform the way these products will be designed and sold. If convenience and communication can be made right, there is no reason for insurance and capital market investments to remain limited to a small section of society. When the government of India promoted insurance for masses and banks made it convenient for people to buy them over mobile phones, results have been spectacular. Fintech companies have the potential to reach untapped markets and force incumbents to innovate. A measure of the centrality of technology in financial institutions is the percentage of engineers in the total workforce. Many departments such as business development having on-ground sales force, marketing and customer service will witness huge change in their scope of activities. The response to a large number of customer queries may not be enhancing customer service team, but enhancing the product team - this will ensure that the product can be made simple and intuitive to use. In future, it may become a norm to have over half of the work force as engineers in stable financial institutions.
In such a dynamic environment, RBI has granted in-principle licences to 11 entities to set up payments banks. Most of these institutions are expected to have technology as their core competency. The model of these banks needs to be distinctively different from traditional banks. While traditional banks have a business unit to focus on technology products, most payments banks will be organised and operated as technology companies. Cost and revenue centres are expected to be very different for these banks. Capex may be dominated by investment in setting up technology architecture and opex towards product design and updates. Revenue share from interest income and transaction-based fee income may be small compared to value garnered from surrounding activities.
There are five key areas that need to be focused on to achieve tangible success. First, investment in the right technology to ensure cost of transaction is near zero. Whether it is a person-to-person transaction or a person-to-merchant transaction, cost of transferring money from one account to another account should happen at extremely low cost. Revenue stream for a bank will shift from transaction fee income to income from leveraging data to sell more valuable products like credit or insurance.
The second important aspect is innovation in product design. A good example is Yuebao, the money market fund of Alipay in China. It has been designed with no minimum investment requirement and high liquidity. Investing in this money market fund is like investing in a savings product. Additional returns are an advantage. The product has got a great response from all customer segments. Data analytics and technology prowess will help payment banks in innovating traditional products. Scalability of technology-based products is expected to develop a large untapped market. Absence of legacy is expected to be an advantage in questioning current norms of doing business.
Reaching the unreached is going to be the third important parameter. Wide agent network providing last-mile banking services will be a critical component of payment banks. Operating such an agent network can be very costly, as well as risky for an organisation. A truly scalable and cost effective solution cannot be dependent on physical workforce for on-boarding, training and managing agents. It has to be a simple-to-use technology platform that enables prospect agents to manage themselves. Operation risk framework needs to be very robust. Right incentive and penalty mechanism needs to be in place based on performance and customer feedback.
The fourth parameter is the convenience and ease of using service. The utility of product will not be enough and a bank will have to think like a product design company. The revolution in mobile phones is an example. Companies with less focus on user experience could not survive - this despite their high focus on utility and value for money. Trust is the last and most important factor in a banking relationship. Reliability and consistency in service are important to develop trust. Compensation before investigation of a problem has to be the 'mantra'. Such a response is possible only when a bank has a good risk management engine to separate genuine cases from fraudulent ones. The effort has to be on development of risk management products, rather than creating a massive system to oversee transactions.
The timing is right for the payment bank model to be successful in India and achieve the cause of financial inclusion. Government and regulatory bodies have been encouraging use of technology in financial system. The penetration of smartphone with data connectivity is ever increasing. Aadhar is emerging as a unique identifier and authentication system. A vibrant start-up culture is promoting technology-based innovation and new companies are emerging every day to challenge the status quo. ~