The financial industry’s efforts to serve lower-income customers have gone through four distinct phases — from social banking to microfinance to financial inclusion and now to technology-driven financial services or digital financial inclusion
Digital technologies have now become the most powerful lever for financial inclusion and are considered the smartest way to rapidly unlock economic opportunity and accelerate social development with economic empowerment. Digital tools have fostered speedier and more inclusive growth by dramatically reducing financial service providers’ costs and making services more convenient and accessible for users, especially low-income subscribers in remote locations. Money sits in a virtual account on a server where it can be transferred with the click of a button.
According to the latest RBI report, between financial years 2017 and 2019, the number of digital transactions in India shot up by 139 per cent to 23,373 million transactions. The corresponding value of these transactions has soared to Rs 1,638,495 billion over the same period. They grew by 19.5 per cent during 2018-19, compared to the growth of 22.2 per cent during 2017-18. The central bank report says that, over the years, the digital finance landscape has witnessed unprecedented waves of innovation. It has accordingly set an ambitious target to push up the volumes of digital transactions by four times by 2021.
Digital finance payments and financial services delivered via mobile phones and the internet are greasing the wheels of the economic system and transforming the lives and economic prospects of individuals, businesses and governments across the developing world, thus boosting GDP and making the goal of financial inclusion a reality.
In contrast to digital financial systems, physical channels are prohibitive for even low-income populations. First, physical banking is relatively costlier and riskier for consumers to perform even while engaging in basic financial activities — payments, savings, investments and remittances. Second, it is very costly for utility firms, banks, insurance companies and other institutions to transact with them as it makes their operations infeasible and unsustainable. Digital channels offer a robust fix for the problems encountered by both consumers and financial institutions in traditional systems of finance.
The popular term for the digital financial revolution is “fintech”, which has fundamentally changed people’s lives and transformed the business landscape. In many markets, cash is fast becoming obsolete and transactions are mostly via digital tools. Banking is also moving into a presence-less, paperless and real-time era: While there will always be bank branches, banks will become more “invisible” in how they deliver their services — many of which will primarily be accessed online.
The fintech revolution is led by a host of players, including commercial banks, telecommunication firms, payment banks, small finance banks and financial technology companies. It is harnessing technology to reinvent traditional business models, creating opportunities to connect India’s hitherto unbanked communities to affordable and reliable financial tools at an unprecedented speed and scale. It offers a preview of what the global banking model may look like a generation from now.
Fintech has freed bank staff from counters and relieved customers of the inconvenience of transacting solely during banking hours. Most of the financial work can now be done via the smartphone, improving payment systems, eliminating paper receipts and reducing a number of frictions thus not only saving customers’ time and money, but improving their quality of life. Meanwhile, the phenomenal data footprint provided by smartphones and data-connected mobile phones is providing an unprecedented opportunity to bring people with limited credit-history into the formal mainstream through alternate credit profiles. In conjunction with this digital data, artificial intelligence and machine learning algorithms can assess the credit worthiness of the user, making it possible to provide loans to them even in the absence of a traditional credit history.
Digital finance also offers major technological and infrastructure challenges. Sparse populations, inconsistent network coverage, insufficient capital for building new business models and customers’ lack of trust and comfort with technology can stand in the way of success, particularly in remote or undeserved communities. And the risks of implementing digital financial services are not just operational and technical: There are also concerns about the security, affordability and safety of these new financial channels. To take just one example, loss of customer privacy is all but inevitable, despite efforts to create safeguards. For India’s financial inclusion industry to capitalise fully on the benefits of digital finance, the accompanying risks must be understood and adequately addressed.
In several cases pure reliance on computers has many a time proved to be deceptive. What we know is that debt burden and repayment capacity must be adequately scrutinised. If this is not the case, it can lead to over-lending and customer over-indebtedness, or rejection of a loan based on opaque reasoning, including arbitrary profiling based on factors such as location. In microfinance individual traits can best be captured by personal interface. Someone might pay off your loan well, but computer modelling tells them that anyone from a particular area is likely to default. Evidence shows that the best clients have been those who got an entry not on the strength of credit scores but on the basis of their transparent and unvarnished honesty shining through their financial dealings. However, digital finance can have negative effects for financial inclusion. Providers of digital finance services can be profit-seeking corporations that use digital finance to maximise their profitability or to maximise the profitable opportunities of businesses affiliated with digital finance providers, namely banks, financial and non-financial institutions. Corporate providers of digital finance services can discriminately use a more aggressive marketing tactic to persuade high- and middle-income customers to use a new or existing digital finance platform or infrastructure. They must use a less-aggressive marketing tactic to persuade low-income and poor customers to use new or existing digital platforms or infrastructure if they believe the latter cannot afford the associated fees.
This is a challenge that goes unrecognised with the changing dynamics of digital financial inclusion. Governments around the world will have to step up and take control of the regulatory provisions of digital financial inclusion to deal with discrete challenges, like above that have emerged with the rampant use of technology and multiple stakeholders in the arena. Adequate knowledge of challenges in the path of digital financial inclusion, is a priority, for it to be addressed with precision. India has to contend with a geographical and cultural divide of a great magnitude. The aversion of the “other India” to digital finance has more to do with their aversion to everything that has to do with technology. This stems from their lack of trust in it. It is also partly on account of low technical literacy of consumers. Women often face additional barriers: Less access to mobile phone, lower literacy and numeracy levels, less confidence in using technology and restrictions on travel or social interaction. Furtherm
ore, villagers’ value personal relationships — particularly when it comes to money. They will not trust technology that they do not understand for anything except very basic payments
India culturally believes in cash and a paradigm shift in thinking will need time and resources. It will actually involve a migration to new social and cultural patterns and habits. There are marked demographic and class issues built into India’s cashless transition. Although it would be impossible for India to become a cashless economy in the immediate future, this is definitely something the country can look forward to. Making India cashless is like treating multiple chronic societal diseases with one injection. However, there are several challenges peculiar to India that may constrain a full-scale digital transition in the foreseeable future.
During this transition, it’s in everyone’s interest to pay heed to the words of UN Secretary General Kofi Annan in 2004, when the world was in the midst of an earlier phase of digital upheaval: “In managing, promoting and protecting the Internet’s presence in our lives, we need to be no less creative than those who invented it. Clearly, there is a need for governance, but that does not necessarily mean that it has to be done in the traditional way, for something that is so very different.”
The writer is a member of the Niti Aayog's National Committee on Financial Literacy and Inclusion for Women