Serving the underserved: Challenges to financial inclusion and tech’s role in overcoming them

Digitally assisted financial inclusion is the need of the hour in India. 

Anand Kumar Bajaj Jul 03rd 2019 A-A+

Imagine paying a visit to your relatives at your native village. Suddenly, you face a cash crunch. To add to your woes, the nearest ATM is 70 km away and the nearest bank is in another town altogether. Sounds like a nightmare, right? Unfortunately, it is the reality for many Indians out there.

Since decades, developing nations like India have been facing the issue of accessibility to financial services, with traditional financial institutions struggling to reach out to the rural and remote areas. 

To address this major concern, the G20 leaders committed to improve and facilitate access of financial services to the poor at the 2009 Pittsburgh summit. While several key developments have been made towards it, there is still a long way to go to achieve financial inclusion.

The definition of the term ‘financial inclusion’ and all that it includes varies for different segments of the population. Giving the term a broader sense in December 2009, RBI stated that the facilities under financial inclusion are not only restricted to opening bank accounts but also comprise transactions being carried out. 

 

... In a diverse country like India, financial inclusion needs to be approached in a multimodal manner with a spectrum of different services to cater to different segments of a population, instead of having a one-service-fits-all approach from one bank alone.
Anand Kumar Bajaj
Founder & CEO, PayNearby

Regardless of how it is perceived, it is a well-established fact that digitally assisted financial inclusion is the need of the hour in India. It can help stabilize the income of the poor and enhance financial literacy among the vulnerable and weaker sections of the society, thereby leading to the country’s economic growth.

The barriers to financial inclusion

97 percent of Indians do not have insurance, 87 percent don’t have easy access to loans, 92 percent have not invested in mutual funds. India has been battling with low penetration of financial services since ages. This has been observed majorly in the rural and remote regions of the country, since they are located too far and sparsely for a bank to reach there or set up Branches or ATMs. 

Running a bank branch or any of its facilities at such places can be an expensive affair. For instance, it has been estimated that a bank incurs a cost of around Rs 70-Rs 100 to transact or offer one banking service, whereas an ATM costs around Rs 15-Rs 16. Setting up a branch or an ATM in a remote region will therefore not be economically viable for banks. In contrast, 10 paisa is the cost of a digital transactions. 

A collaboration based co-existence of services from NPCI in partnership with banks harnessing JanDhan, Aadhaar and mobility to reach various digital payment modules to the last mile will yield savings to GDP and speed to commerce.

Moreover, it has been observed that even if banks have reached numerous rural and remote regions across the country, a major section of the population still remains unserved. It is very difficult for these institutions to achieve a substantial level of penetration with little to no income in return. 

While the number of bank branches being set up went up by 9 percent in the time period of 2010-2014, the number of transactions being processed increased only by 7 percent. This is further corroborated by the fact that there were more than 75 million ‘no frill’ accounts in 2016, with hardly any transactions made through them. In contrast to this, 100 million wallets and UPI users did 800 million transactions in May 2019 alone.

These issues indicated how banks had succeeded to reach the rural population geographically, but encouraging them to transact with the accounts made was pretty difficult. 

Barriers like the ones mentioned above need to be duly addressed to achieve financial inclusion. Essentially, in a diverse country like India, financial inclusion needs to be approached in a multimodal manner with a spectrum of different services to cater to different segments of a population, instead of having a one-service-fits-all approach from one bank alone. In contrast, the e-com savvy customer has 6 Payment Gateways and 3 alternate options from multiple banks/payment services providers.

Breaking the barriers with technological aid

With a rapid rise in the ownership of mobile phones and deeper internet penetration, India has observed a massive digital transformation in the past few years. This wave of digitization has also unlocked several new opportunities for the country’s financial space to tap into, with several innovations being made on a broader, all-encompassing scale.

To put things in-perspective, there are 310 million saving bank accounts and 811 million mobile phone users in India. This shows that technology has reached the masses, and banks have an opportunity to leverage this advancement for penetration of their services. In contrast, the digital savvy resource pool of India has multiple bank accounts as a ratio of phones owned.

This shift towards digitization became all the more noticeable post demonetization, as mobile wallet transactions grew exponentially where transactions have catapulted to 277 billion post demonetization in 2016, reaching up to 532 billion in 2017. 

Moreover, payments made through the electronic mode increased to 92.8 percent in 2017-18, as compared to 88.9 percent in the previous year. Whereas, paper-based payments came down to 7.4 percent in 2017-18 from 11.4 percent previously. 

All of this indicated that technological advancements did not just have a wider scope to grow, but also had the capability to penetrate markets the way conventional expansion never could. Interestingly, AePS now transacts 3 percent of the amount that the entire ATM industry does. Early signals for viability challenged ATM industry in wake of 2,000 rupee note introduction leading to a recalibration of ATM and then the subsequent dry supply of 2,000 rupee notes making that investment a waste. 

Technology, thus, has the potential to address the challenges to financial inclusion that India faces. Not just from the perspective of geographical expansion but also when it comes to economic viability. Online banking is estimated to cost only Rs 1 or lesser with RBI waiving its NEFT/RTGS fee, as compared to the cost incurred by bank branches and ATMs. ‘Going cashless’ has been one of the biggest buzzwords across the country in recent times. 

In 2018, a sizable count of 36 percent of adults holding bank accounts are using digital instead of cash, which is directionally a hope for digital financial inclusion. Of course, the 300 million new mobile connections only leaves one to wonder, how many updated it in their bank accounts and the 50 percent of debit cards going into date expiry zone.

The government has been extending focused support towards using technology as a facilitator of financial services, with initiatives like ‘Digital India’, Startup India, and offerings like BHIM, UPI, Aadhaar-enabled payment systems, Aadhaar Pay, BBPS, Bharat QR, and eNACH to name a few. 

These initiatives are further advancing penetration of banking services in the remote areas, with business correspondents carrying out these services complementing the banks. A collaboration based co-existence of services from NPCI in partnership with banks harnessing JanDhan, Aadhaar and mobility to reach various digital payment modules to the last mile will yield savings to GDP and speed to commerce.

In addition to technology advancements, a meaningful policy intervention will help true digitization of India. A commendable set of recommendations by CDDP under the leadership of Nandan Nilekani shows sign of optimism in making Bharat and India as one starting with financial services. 

Anand Kumar Bajaj is Founder & CEO, PayNearby

Disclaimer: This article is published as part of the IDG Contributor Network. The views expressed in this article are solely those of the contributing authors and not of IDG Media and its editor(s).

Serving the underserved: Challenges to financial inclusion and tech’s role in overcoming them

Digitally assisted financial inclusion is the need of the hour in India. 

Anand Kumar Bajaj

Imagine paying a visit to your relatives at your native village. Suddenly, you face a cash crunch. To add to your woes, the nearest ATM is 70 km away and the nearest bank is in another town altogether. Sounds like a nightmare, right? Unfortunately, it is the reality for many Indians out there.

Since decades, developing nations like India have been facing the issue of accessibility to financial services, with traditional financial institutions struggling to reach out to the rural and remote areas. 

To address this major concern, the G20 leaders committed to improve and facilitate access of financial services to the poor at the 2009 Pittsburgh summit. While several key developments have been made towards it, there is still a long way to go to achieve financial inclusion.

The definition of the term ‘financial inclusion’ and all that it includes varies for different segments of the population. Giving the term a broader sense in December 2009, RBI stated that the facilities under financial inclusion are not only restricted to opening bank accounts but also comprise transactions being carried out. 

 

... In a diverse country like India, financial inclusion needs to be approached in a multimodal manner with a spectrum of different services to cater to different segments of a population, instead of having a one-service-fits-all approach from one bank alone.
Anand Kumar Bajaj
Founder & CEO, PayNearby

Regardless of how it is perceived, it is a well-established fact that digitally assisted financial inclusion is the need of the hour in India. It can help stabilize the income of the poor and enhance financial literacy among the vulnerable and weaker sections of the society, thereby leading to the country’s economic growth.

The barriers to financial inclusion

97 percent of Indians do not have insurance, 87 percent don’t have easy access to loans, 92 percent have not invested in mutual funds. India has been battling with low penetration of financial services since ages. This has been observed majorly in the rural and remote regions of the country, since they are located too far and sparsely for a bank to reach there or set up Branches or ATMs. 

Running a bank branch or any of its facilities at such places can be an expensive affair. For instance, it has been estimated that a bank incurs a cost of around Rs 70-Rs 100 to transact or offer one banking service, whereas an ATM costs around Rs 15-Rs 16. Setting up a branch or an ATM in a remote region will therefore not be economically viable for banks. In contrast, 10 paisa is the cost of a digital transactions. 

A collaboration based co-existence of services from NPCI in partnership with banks harnessing JanDhan, Aadhaar and mobility to reach various digital payment modules to the last mile will yield savings to GDP and speed to commerce.

Moreover, it has been observed that even if banks have reached numerous rural and remote regions across the country, a major section of the population still remains unserved. It is very difficult for these institutions to achieve a substantial level of penetration with little to no income in return. 

While the number of bank branches being set up went up by 9 percent in the time period of 2010-2014, the number of transactions being processed increased only by 7 percent. This is further corroborated by the fact that there were more than 75 million ‘no frill’ accounts in 2016, with hardly any transactions made through them. In contrast to this, 100 million wallets and UPI users did 800 million transactions in May 2019 alone.

These issues indicated how banks had succeeded to reach the rural population geographically, but encouraging them to transact with the accounts made was pretty difficult. 

Barriers like the ones mentioned above need to be duly addressed to achieve financial inclusion. Essentially, in a diverse country like India, financial inclusion needs to be approached in a multimodal manner with a spectrum of different services to cater to different segments of a population, instead of having a one-service-fits-all approach from one bank alone. In contrast, the e-com savvy customer has 6 Payment Gateways and 3 alternate options from multiple banks/payment services providers.

Breaking the barriers with technological aid

With a rapid rise in the ownership of mobile phones and deeper internet penetration, India has observed a massive digital transformation in the past few years. This wave of digitization has also unlocked several new opportunities for the country’s financial space to tap into, with several innovations being made on a broader, all-encompassing scale.

To put things in-perspective, there are 310 million saving bank accounts and 811 million mobile phone users in India. This shows that technology has reached the masses, and banks have an opportunity to leverage this advancement for penetration of their services. In contrast, the digital savvy resource pool of India has multiple bank accounts as a ratio of phones owned.

This shift towards digitization became all the more noticeable post demonetization, as mobile wallet transactions grew exponentially where transactions have catapulted to 277 billion post demonetization in 2016, reaching up to 532 billion in 2017. 

Moreover, payments made through the electronic mode increased to 92.8 percent in 2017-18, as compared to 88.9 percent in the previous year. Whereas, paper-based payments came down to 7.4 percent in 2017-18 from 11.4 percent previously. 

All of this indicated that technological advancements did not just have a wider scope to grow, but also had the capability to penetrate markets the way conventional expansion never could. Interestingly, AePS now transacts 3 percent of the amount that the entire ATM industry does. Early signals for viability challenged ATM industry in wake of 2,000 rupee note introduction leading to a recalibration of ATM and then the subsequent dry supply of 2,000 rupee notes making that investment a waste. 

Technology, thus, has the potential to address the challenges to financial inclusion that India faces. Not just from the perspective of geographical expansion but also when it comes to economic viability. Online banking is estimated to cost only Rs 1 or lesser with RBI waiving its NEFT/RTGS fee, as compared to the cost incurred by bank branches and ATMs. ‘Going cashless’ has been one of the biggest buzzwords across the country in recent times. 

In 2018, a sizable count of 36 percent of adults holding bank accounts are using digital instead of cash, which is directionally a hope for digital financial inclusion. Of course, the 300 million new mobile connections only leaves one to wonder, how many updated it in their bank accounts and the 50 percent of debit cards going into date expiry zone.

The government has been extending focused support towards using technology as a facilitator of financial services, with initiatives like ‘Digital India’, Startup India, and offerings like BHIM, UPI, Aadhaar-enabled payment systems, Aadhaar Pay, BBPS, Bharat QR, and eNACH to name a few. 

These initiatives are further advancing penetration of banking services in the remote areas, with business correspondents carrying out these services complementing the banks. A collaboration based co-existence of services from NPCI in partnership with banks harnessing JanDhan, Aadhaar and mobility to reach various digital payment modules to the last mile will yield savings to GDP and speed to commerce.

In addition to technology advancements, a meaningful policy intervention will help true digitization of India. A commendable set of recommendations by CDDP under the leadership of Nandan Nilekani shows sign of optimism in making Bharat and India as one starting with financial services. 

Anand Kumar Bajaj is Founder & CEO, PayNearby

Disclaimer: This article is published as part of the IDG Contributor Network. The views expressed in this article are solely those of the contributing authors and not of IDG Media and its editor(s).