The traditional banking system is undergoing a much-needed digital transformation with changing customer requirements, the need to include the ‘financially excluded’ segment and simultaneous competition from incubators. As an emerging market, the huge untapped financially excluded market in India has space for all—legacy players and incubators—to grow, compete, collaborate and provide wider access to financial services.
With the aim of increasing financial access and opening up the market, RBI has issued guidelines on Aadhaar OTP service and eKYC, thus facilitating the account opening procedure. It has also created niche entities such as payments and small banks which will focus on offering basic financial services to the unbanked. The regulatory thrust and existing inefficiencies have created a conducive environment for even the nimbler and innovative FinTech companies. Their solutions have seen an increased uptake in the last few years owing to millennial customers’ extraordinary willingness to adopt technology.
Given the advantages that each of these technologies and companies have to offer, the industry is witnessing more collaborations than ever. As per PwC’s Global FinTech Survey,14 82% of FIs expect to increase partnerships with FinTechs in the next 3–5 years. These partnerships are leading to innovative business models that enable the financial inclusion of specific segments like small and medium-sized enterprises (SMEs). Nevertheless, there are a few areas which, in our opinion, will have the maximum impact on accelerating financial inclusion:
• Enabling access to credit:
With appropriate access to credit, personal and small businesses can drive stronger and more inclusive growth. Currently, there is a huge gap in the credit industry owing majorly to geographical inaccessibility and/or scarce or no credit history. Traditional lending and credit scoring models are highly regulated and require a strong existing credit history; therefore, retail customers and SMEs without proper documentation, KYC and forecasted repayment capability do not have access to formal credit. Banks are thus partnering with FinTech companies and leveraging their alternative credit decision-making frameworks to lend to this section of society. Technology sits at the forefront of these digital lending initiatives which use Internet-mediated platforms to connect customers with the suppliers of credit.
• Digital remittances:
Remittance to people in rural areas is slow and expensive. Villagers often have to travel long distances to collect remittances due to them.15 Technology-based models adopted by many banks (at times backed by FinTech partnerships) are helping people solve this problem by enabling them to send money around the world using a mobile phone for a fraction of what traditional vendors charge.
• Cashless payments:
With approximately 90% of retail transactions still in cash,16 simplification of digital payments is driving financial inclusion. Some of the solutions which are gaining high traction include Unified Payment Interface (UPI), e-wallets, mobile-based POS (mPOS), online payments, and mobile and Internet banking. The licensing and eventual roll-out of payments banks is also minimising the high upfront investments traditionally required in the banking infrastructure.
The attractiveness of these new technology-based models is increasing, especially among customers who are not used to a traditional bank account. These customers now have access to simplified basic services such as remittance, credit, insurance and customer servicing. As customers’ needs mature towards greater usability, affordability, reliability, mobility and continuity, technology will become more relevant.
1. Digital transformation enabling financial inclusion for the masses
Payments and financial technology is one of the areas experiencing maximum enablement and hence transformation in the Indian market. A major breakthrough in digital transformation, which offers the potential of wider financial inclusion, has resulted from the support of regulators in laying down the foundation for extensive technology innovation in this field. The introduction of UPI by the National Payments Corporation of India (NPCI), the draft guidelines on peer-to-peer (P2P) and alternative lending platforms and the plan to come up with guidelines governing the use of virtual currency are just a few such examples.
Multiple use cases leveraging these technologies have emerged and they are driving financial inclusion for the masses as well as the other neglected segments of society.
2. Driving financial inclusion by simplifying P2P remittances
Given the current state in India, the smaller the remittance size, the higher is the transaction cost percentage, which makes access to remittance channels extremely difficult for rural and remote masses. Technology is being leveraged to solve this problem.
Many start-ups have entered the space and have simplified mobile money transfer. One such application facilitates P2P money transfer for customers of banks without using bank account details. Likewise, several leading banks are leveraging NPCI’s Immediate Payment Service (IMPS) platform to launch their own mobile wallets. In some cases, digital wallets are integrated with social media features for payment solutions enabling money transfer, P2P transfer, etc.
The UPI platform collectively uses Aadhaar, mobile and account numbers to achieve the goal of simplifying digital payments and collections. With a seamless user interface and payments through a virtual payment address (VPA), UPI can enable customer-centric business and technology models for the mass market. For instance, wallet players can create sponsor bank entities, with the banks participating in UPI, thus enhancing the overall customer experience for targeted customers of the bank.
3. Financial inclusion of SMEs through alternative lending
The SME sector in India contributes around 8% of the GDP, constitutes 40% of the country’s exports and provides employment to around 60 million people (making it the second largest employment provider).17 However, a majority of the SMEs do not have access to formal credit due to issues like small ticket size of loans, high underwriting, transaction and acquisition cost, lack of collaterals, lack of formal credit rating leading to perception of high risk, which in turn results in high turnaround time for loan processing.
A majority of the challenges are being overcome through the application of technology. Banks are partnering with FinTech firms and are taking the entire process online to reduce the transaction cost and turnaround time. They are looking for alternative sources of data to measure the creditworthiness of SMEs. This has led to the emergence of a new sector known as alternative lending, which is essentially an online platform for lenders (retail or institutional) to lend directly to borrowers (individual or corporate).
4. Financial inclusion by simplifying government payments
Many banks are driving financial inclusion by acting as sponsor banks for disbursing government to payment (G2P) payments. Many FinTech companies are leveraging the IMPS platform and offering solutions to banks to simplify government payments. They are also working on suitable acceptance channels for banks. Low-cost POS devices are helping villagers in remote areas deposit and withdraw funds.
Another noteworthy example is that of a tie-up between a digital payment solution company’s tie-up and milk dairies and cooperative societies to digitise the payments of supplying farmers. The tie-up enables direct payments in farmers’ prepaid cards, thus ensuring transparency and regularity in payments and reducing farmer dissatisfaction.
5. Low-cost technology to improve acceptance infrastructure and widen reach
In India, the reach of financial services is restricted by infrastructural issues and traditional ATM and POS terminals are only able to do so much. To counter these problems and to capitalise on the opportunity, banks and technology firms are looking to leverage the growing smartphone penetration. As a result, the adoption of mobile devices for POS transactions or mobile POS is expanding.
SMEs in emerging markets like India do not have a high investment capital and are hence restricted in the ways they can accept payments from customers (most accept ‘cash-only’ payments). Mobile POS platforms represent an affordable channel for them to accept non-cash payment from cards and mobile phones. These systems require less upfront investment; moreover, their maintenance is more economical than that of conventional POS systems. Many merchants are also seeking to replace the traditional fixed payment terminals and cash registers with tablets linked to mobile POS devices or smart POS. This is expanding the reach of ‘integrated payments’ to a large volume of SMEs. These players have offerings that provide low-cost, fast and bankagnostic mobile POS terminals across India. Several payment banks and enablers have started tying up with kirana stores in semi-urban and rural areas as they seek to grow in regions underserved by banks.
Source: CII Banking Tech Summit Report 2017