Financial inclusion: Towards a greater positive social impact

Historically, financial inclusion efforts have been hindered by structural issues on both the supply and receiver side. On the supply side, FS companies are limited by infrastructural challenges which cascade into a high cost of acquisition and servicing customers, which in turn leads to below optimal return on investments (RoI). On the receiver side, a lack of awareness of financial concepts results in confusion, apprehension and obstacles that prevent people from availing of many financial products and services. According to a survey by a rating agency, 76% of Indian adults are unable to understand key financial concepts. 6This figure is seven percentile points lower than the worldwide index.

Tackling inclusion through merchant acceptance and consumer awareness

Government and RBI-backed payment technologies provide consumers with a plethora of digital payment options: BHIM-UPI, bank-specific UPI payment options, Bharat QR, UPI QR, Aadhaar Pay, Aadhaar Enabled Payment System (AEPS), cards, wallets, and mobile payments. In an effort to promote the usage of digital channels for payments, the government has sought to incentivise merchant acceptance of such payment modes. Merchant acquirers have found themselves facing challenges like diminishing returns, fraud and security concerns, and commoditisation of business. To boost payment digitisation, over the last few years, the government has brought about several changes to the merchant discount rates (MDRs) to increase acceptance by a wider set of merchants. This includes reimbursing the full amount of MDR applicable on transactions made through debit cards, UPI and AEPS (for transactions less than 2,000 INR) for a period of two years.

Another strategy has been to adapt legacy point-of-sale (PoS) systems to accommodate newer modes of payments. Given the vast array of digital payment options, retail merchants face the task of ensuring acceptance of different payment modes. A few technology players have developed platforms that provide an integrated payment solution to merchants that can interact with the different digital payment channels available. These tech players are focusing on the untapped unorganised retail sector to expand their reach.

P2P remittances as a gateway to larger financial inclusion

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 transfers. One such application facilitates P2P money transfers for customers of banks without using bank account details. A number of big players are already embedding their wallets as a payment solution across key consumer touchpoints, tapping into the large volume of under-serviced segments is an attractive proposition from a business standpoint.

A more niche area that is picking up is that of providing channels for investment access. Some industry leaders in the payments space have started offering their customers the opportunity to invest in mutual funds, trying to democratise such investment practices by simplifying the process of set-up and investment through the same mobile channels. This would be a tremendous opportunity for asset management players to expand their services beyond their existing city reach, apart from being an opportunity for FinTechs and FS players to target the traditionally underbanked segments, especially with the potential of bringing traditional savings and investments into the formal sector.

Financial inclusion through alternative lending

One of the key strategies of alternative lending players is to focus on underserved customer segments without access to formal credit lines due to lack of sufficient credit history. A number of digital-only acquisition platforms are now available that can engage, acquire, approve and disburse loans in a matter of minutes.

The key implication of such a model is the reduction in acquisition costs, which provides greater flexibility in product design and ticket size. These developments are significant from a financial inclusion perspective as traditionally underserved segments tend to have higher acquisition costs and relatively smaller ticket sizes. PoS loans are a prime example: these digital buy-now-pay-later facilities with lower ticket sizes attract new-to-credit and thin-file customers and allow lenders to provide loans based on information available at the POS.

Another segment that has started to grow with the advent of technology is lending to small and medium enterprises (SMEs). Some lenders and FinTechs are looking at providing their SME customers with digital technology-driven facilities that provide ease of doing business and manage finances for the SME customers while providing consent to lenders to access relevant financial information that could aid in better credit underwriting. Goods and Service Tax (GST) solutions that aid SMEs in their necessary regulatory filings are a prime example of models that provide lenders with rich sales cycle information to make credit decisions.

Drone-based technology: Reach the unreached

Access to locations and lack of communication channels are other factors that prevent the spread of FS access to key population demographics. Drone-based technologies can help FS reach out to such users in a more efficient manner. These technologies will impact how users transact with their financial institution (FI) in the future. The use of drones can involve two scenarios—one where a customer has his/her own drone or one where an FI can offer drone services to its customers. Personalised drones can enable individuals to interact with their FI wherever they happen to be by delivering items and transacting on behalf of the user. In addition to delivering paper documents and other physical items, drones would also be able to provide additional services such as taking photos and performing a notary type function.

Further, drones may also be used to streamline and improve the back-office operations of banks by further automating the delivery and handling of physical items. The usage of drones for emergency communication and services would lead to increased resiliency of FIs. For example, drones may be used to quickly deploy the infrastructure of an emergency communications network by both delivering the needed system parts and serving as relays to fill gaps in coverage.

Sources:

6PwC and CII. (2017). Inclusion 2.0: Leveraging technology disruptions to realise India’s digital economy. Retrieved from https://www.pwc.in/assets/pdfs/publications/2017/inclusion-2-0-leveraging-technology-disruptions-to-realise-indias-digital-economy.pdf (last accessed on 9 May 2018)

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Vivek Belgavi

Partner, India FinTech Leader, PwC India

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