Finance minister Nirmala Sitharaman wants to take financial services to every nook of the country using digital technologies. In her budget speech, she proposed the setting up of 75 digital banking units in 75 districts by scheduled commercial banks. This is a sound framework for improving financial inclusion (FI), which in the Reserve Bank of India’s (RBI) first and most recent FI Index was at 53.9. The budget proposal also ties in nicely with 75 years of India’s independence.
However, the finance minister could have embraced the Olympics motto and set targets that are faster, higher, and stronger. The whole idea of using digital technologies to promote financial services, as well as most other services, is that physicality is no hindrance at all; in fact, it is hardly relevant. Digital financial services have no specified service area. The entire world is a serviceable area for them. Uday Kotak, the head of Kotak Mahindra Bank, succinctly describes the impact of the technological revolution as: “Geography is history."
When it comes to touchpoints, digital financial services, which bring products and services to users’ mobile phones, are like instant messaging. For potential, look no further than WhatsApp’s 2 billion active users worldwide, of which nearly half a billion are in India. The country has 600 million smartphones—adding 25 million more every quarter—and the highest monthly mobile data consumption rate in the world at 12 gigabytes per user per month.
So, when we think about taking digital financial services to every corner of India, we can easily think of taking it to 75 million people, or 750 million, instead of 75 districts. In fact, we can stop thinking of absolute numbers and set a target of giving 100% of the eligible population access to formal financial channels. It is possible if everyone in the ecosystem—policymakers, regulators, and the new-age digital players—appreciates one another’s role and works towards a common goal.
The start-up way: Financial inclusion is a priority on the agenda of governments around the world. If individuals and businesses have access to useful and affordable financial services and products, they provide a boost to economic activity and growth. It also improves the quality of everyday life by helping people plan for long-term well-being as well as short-term exigencies. That is why financial inclusion has been identified as an enabler for seven of the United Nations’ 17 Sustainable Development Goals, which provide a blueprint for a better and more sustainable future for all.
The first step to increasing financial inclusion is to provide people with access to banking. That is why the Government of India has pushed ahead with the Pradhan Mantri Jan Dhan Yojana, which has so far banked 445.8 million beneficiaries. The logical next step is to move the focus from access to usage, which is where digital technologies become crucial.
India has been widely hailed for the development and adoption of financial technologies, or fintech. This year’s budget seeks to leverage this further, as it lists promotion of digital economy and fintech as one of the goals for Amrit Kaal, which the finance minister termed as futuristic and inclusive. Her task would be easier and faster if we start to think like digital start-ups in trying to provide more and more people with access to fruitful financial services.
Branching out of branches: Several steps have been taken in that direction. More than six years ago, RBI modified the service area rules to give banks more leeway. Niti Aayog, the government’s think tank, has presented a roadmap for introduction of full-stack digital banks.
However, physical branches remain the centerpiece of regulatory approach. That is driven by sound logic: when it comes to trusting someone with their money, consumers prefer those who have a wide network of physical establishments and people. But the benefits of innovative products and services enabled by digital technologies might soon match the assurance of physical infrastructure. This has been proven worldwide in the aftermath of the financial crisis that led to the emergence of technology-driven “challenger banks".
Neo banks, in particular, take the front-end of financial services to a much higher level by increasing the speed of services and reducing friction. They improve returns and transparency for customers while lowering the customer acquisition cost for their partner banks.
As the Niti Aayog paper notes, neo banks can serve demographics that are “under-catered to by main street banks". This would include small businesses, paycheck-to-paycheck retail consumers, gig economy workers, and millennials. Migrant working population is another segment that will benefit from neo banks. As the recent past has shown, geography for them is already history.
Vibhore Goyal
Source: Mintepaper, 7/02/22
