CS_Rishabh
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Technology plays a crucial role in driving financial inclusion in India. Several disruptive technologies like big data analytics, APIs, and cloud computing have emerged that are synergistic with financial services. Mobile phones have also been hugely impactful, with over 65% of Indians under 35 being tech-savvy and comfortable using mobile payments. The government has also made large pushes for financial inclusion through programs like Jan Dhan Yojana, Aadhaar, and the JAM trinity, as well as initiatives like IndiaStack and the Unified Payments Interface. Finally, hundreds of fintech startups are leveraging these technologies and government programs to help plug gaps in financial inclusion and provide innovative solutions.
CS_Rishabh
- 1. 24 IndiaNowBusinessandEconomynCOVERSTORY DECEMBER 2016-JANUARY 2017 www.ibef.org Technology plays the most crucial role in driving financial inclusion in India. Technology, the Enabler Rishabh Parakh, Senior Consultant, Intellecap Advisory.
- 2. 25 COVERSTORYnIndiaNowBusinessandEconomy DECEMBER 2016-JANUARY 2017 www.ibef.org oi baat nahi bhaiya, Paytm kar do (no worries, just do Paytm),” smiled Govardhan, the local vegetable vendor, as I struggled to tender exact change amidst the present cash crunch. Like him, millions of Indians are fast transitioning to the digital economy to pay, remit, and borrow. THEDIGITALROADTOFINANCIALINCLUSION Universal availability of payments, savings, and credit hasfar-reachingsocio-economicbenefits.Forexample, it reduces vulnerability of the low-income sections from credit shocks, leads to higher capital formation (due to free flow of money into productive uses), and avoids leakages in public subsidies and welfare programmes. Financial inclusion has a significant domino effect on the economy. Inclusive access to financial services must be ‘EAST-bound’—it should be easy, affordable, secure, and timely. The traditional bank branch-led model of financial inclusion in India has had little success in providing last-mile reach under this EAST framework. We are now witnessing an inflection point in the financial inclusion landscape thanks to digital technology. Of late, several disruptive technological innovations that find extremely synergistic applicability with financial services have emerged: Big data analytics: High processing power, compact storage devices, and new data analysis tools have given rise to big data analytics that can input unstructured data to extract deep insights into customer behaviour, useful to design tailored financial products. Alternative data points that can be analysed by harnessing predictive algorithms include social media data, bill payments, receivables, cash flow, customer ratings and reviews, industry trends and demographics. Application Programming Interfaces (APIs): APIs enable applications to be built on top of pre-existing products, thereby capitalising on the existing customer base. Open APIs allow for various data streams to ‘talk’ to one another, thus holding the potential to create ‘networks of network’ and improving scalability of financial services. Cloud computing/Software-as-a-service: Data storage, processing capability, and service delivery in the cloud allow for scalability, compatibility, and flexibility. These factors are beneficial in a financial services setting and help connect the front-end and back-end IT systems of financial companies in a unified manner. Cloud infrastructure also brings in cost reduction that is lowering barriers for innovative startups to identify novel digital channels for serving financially excluded people. ‘‘ K Photo:Shutterstock
- 3. 26 DECEMBER 2016-JANUARY 2017 www.ibef.org IndiaNowBusinessandEconomynCOVERSTORY MOBILE PHONES— THE ULTIMATE LEVELLER Arguably, the most impactful technological invention to expand financial inclusion has been the mobile phone. It is an efficient and cost-effective tool to reach far-flung semi-urban and rural populations. More than 65% of India’s population is under the age of 35. These millennials are tech-savvy and comfortable switching to mobiles for P2P transactions, bill payments, etc., leading to a paradigm shift in the uptake of digital access points such as m-banking and m-wallets. Figure 1 and 2 reveal this exponential growth over the last few years. In the last two years, as more users adopted smartphones, the number of 3G and 4G subscribers has more than tripled to 12 crore—40% of the existing mobile internet user base of 30 crore. With aggressive 4G roll-outs by operators such as Airtel and Reliance Jio, around 21 crore subscribers are expected to switch to 4G by March 2018. This high-speed connectivity, combined with increasing affordability 250 700 250 200 150 100 50 600 500 400 300 200 100 0 0 1800 1600 1400 1200 1000 800 600 400 200 2012-13 2012-132013-14 2013-142014-15 2014-152015-16 2015-16 Volume Value Value(inINRbn) Value(inINRbn) 0 200 150 100 50 0 Volume Value of mobile phones, is catalysing mobile payments. Rural India is lapping up mobile connectivity at a blitzkrieg pace too. As much as 27% of the mobile internet users are from rural areas, a proportion that is increasing every year. In fact, Boston Consulting Group predicts that the number of rural consumers with mobile connectivity is expected to increase to 31+ crore by 2020, constituting about half of all internet users in India. Smartphone features offer a rich source of data that can be applied to different use cases. For example, FICO, a global rating agency, has partnered with Lenddo, to develop a credit score for Indians with limited credit history using cell phone usage patterns including call records, location, SMS, internet usage, social media data, etc. Mobile phones are also being used to enable merchant payments (m-POS) and make remote payments. In the next few years, more innovative mechanisms will be built and mobile phones will emerge as the centrepiece of financial inclusion. The concept of ‘no-frills’ was intro- duced for low-income people to have saving accounts Banking services were extended by using the services of Business Correspondent (BC) Guidelines for Prepaid Payment Instruments (PPIs), including mobile wallets, were laid down by RBI Aadhaar-Enabled Payment System was launched Pradhan Mantri Jan Dhan Yo- jana (PMJDY) was launched to include more Indians in the banking fold NACH and NFS were launched by NPCI to make retail payments seamless IMPS was introduced by NPCI to enable 24 x 7 electronic funds transfer RuPay cards were introduced by NPCI as a domestic payment network Licences for Payments Bank and Small Finance Bank were rolled out to enable last-mile reach of financial services Unified Payments Interface was launched by NPCI to allow easy, fast and inter- operable P2P payment Figure 1: Immediate Payment Service (IMPS) Trend Figure 2: m-Wallet usage trend Source: Payment System Indicators, RBI Landmark policy measures in India’s path to achieving financial inclusion
- 4. 27 DECEMBER 2016-JANUARY 2017 www.ibef.org THE FISCAL PUSH FOR A ‘DIGITAL’ FINANCIAL INCLUSION Nandan Nilekani, Infosys co-founder and former Aadhaar architect, was bang on when he remarked that India is witnessing a ‘WhatsApp’ moment in finance. The Government and RBI have implemented several financial inclusion initiatives to foster an environment that gives rise to an ecosystem for players to leverage technology, allowing crores of under-banked individuals to leapfrog into digital modes of financial transactions. The JAM trinity (Jan Dhan–Aadhaar–Mobile) has created the building blocks for a digital financial infrastructure: • Jan-Dhan Yojana, the largest financial inclusion drive in the world, has opened 25+ crore bank accounts, ensuring that almost all households in India have at least one member with a bank account. • 109 crore Indians can now be digitally authenticated through Aadhaar, thus addressing the first but most cumbersome step to financial access—eKYC. • India has 103 crore mobile users, out of which 25+ crore people own a smartphone (likely to grow to 40 crore by 2018), making India the world’s second-biggest smartphone market. The JAM trinity forms the pillars that will help streamline the G2P disbursal process for schemes such as MNREGA and PDS. It will also allow low-income individuals to come under the fold of the formal economy, thus enhancing the success of other Government schemes such as MUDRA. IndiaStack, probably the largest set of APIs in the world, is being rolled out by the Government in consultation with iSpirit to bridge the digital divide in the country. The incorporation of IndiaStack APIs into an increasing number of mobile-based applications could lay the foundations for greater innovation in the space of digital payments. Implemented under the open-API policy of Digital India, it contains four distinct layers: • Presence-less layer: Biometric digital identity for e-KYC (Aadhaar) • Paperless layer: Digital records of an individual (e-Sign and DigiLocker) • Cashless layer: Interoperability of payments across bank accounts/wallets (UPI, IMPS, AEPS) • Consent layer: Security and control of user data based on OpenPDS developed by MIT In an experiment called CATALYST conducted last year by IFMR LEAD in partnership with GoI and USAID, merchants who carried out remittance through the Eko wallet received small ticket-size loans within five minutes of applying on a mobile-based app created by Capital Float. The project used IndiaStack for verification (eKYC), loan agreement (eSign) and authentication (Aadhaar). Remittance-based transaction data was used as a proxy for credit appraisal. BCG estimates the country’s digital payment ecosystem to be worth US$ 500 billion by 2020. Frictionalinefficienciesresultingfromcashtransactions can be curbed to a great extent by introducing digital payments. Consequently, there have been a number of policy initiatives that are set to benefit the masses. The recently launched Unified Payment Interface (UPI) is an excellent case in point of an EAST- bound payment service. UPI will make micropayments and P2P transfers as convenient as sending a text message, without the ‘Add as Beneficiary’ hassles. The expected onboarding of payments banks and mobile wallets into the platform will drastically boost interoperability (W2W, B2B, W2B, B2W) and reduce commission structures, breaking the cost barrier of digital transactions for the low-income consumers. NPCI is also in the process of launching ‘Bharat Bill Payment System’, an integrated one-stop shop for all online utility payments. The concept of payments banks introduced by RBI is a huge step towards tech-driven financial inclusion. The new payments banks licensed by RBI will soon convert mobile phones into a pocket-size bank branch and complement the existing branchless banking infrastructure. Payments banks will leverage thousands of mom-and-pop shops as payments banks’ agents for digital-to-cash conversion and vice versa. They will also act as business correspondents for commercial banks, reducing the latter’s operational costs and increasing penetrability. The government is also coming up with an ‘Aadhaar Payment app’ that will help digitise payments for offline brick-and-mortar merchants. Till now, there are less than 15 lakh POS terminals in India, covering only 6% of all merchant outlets, as intermediaryfeesandinfrastructuralcostspreventedsmall merchants from adopting POS terminals. However, with the proposed Aadhaar system, merchants would just need to download the app on their smartphone and connect it to a R2,000 biometric reader to enable easy digital check-outs of customers. Almost 40 crore Aadhaar numbers are already linked to bank accounts and the remaining 70 crore are expected to be linked by next year. This will also make way for underbanked merchants to raise quick short-term working PAYMENTS BANKS WILL LEVERAGE thousands of mom-and-pop shops as pay- ments banks’ agents for digital-to-cash conversion and vice versa. Photo:Shutterstock COVERSTORYnIndiaNowBusinessandEconomy
- 5. IndiaNowBusinessandEconomynCOVERSTORY 28 IndiaNowBusinessandEconomynCOVERSTORY capital from companies such as NeoGrowth and IntelleCash that provide cash advance based on POS history and receive a certain percentage of POS payments towards repayments. FINTECH–PLUGGING THE GAPS This digital revolution has led to the emergence of hundreds of FinTech startups in India over the last few years, with a whopping investment of an estimated US$ 1.25 billion in 2015 alone. These companies are disaggregating the banking value chain by offering proprietary digital platforms and innovative tools in different sub-sectors of BFSI. The gamut encompasses payments, credit, insurance, investment and other financial niches. Perhaps, the inclusion impact of startups has been best witnessed in lending. India has about 4.9 crore MSMEs, but only about 6% get finance from organised lenders. FinTech startups such as Lendingkart, Instakash and ZoukLoans are tapping the digital trails of individuals and businesses to glean actionable information and thus assess credit-worthiness. This methodology allows credit to be disbursed to those proprietors and MSMEs that require working capital but may not have the collateral or financial history to avail themselves of bank loans. Some startups such as NamasteCredit, SME Corner and Dhanax are acting as marketplaces to facilitate loans by lenders in a fast and paperless manner. These innovative startups are leveraging technology to gradually bridge the enormous R2.93 trillion addressable debt financing gap in the MSME sector in India. The R2 lakh crore e-commerce market in India has more than half a million online sellers. Startups such as Capital Float are using the seller’s digital footprint to provide them working capital. With almost 40,000 sellers onboarded to e-commerce platforms every month, there is a huge scope to solve the problem of the ‘missing middle’. Incumbent banks, not to be left behind, are collaborating with FinTech startups to minimise the operational costs of rural banking and thus reaching the untapped population. For example, Novopay, through its cloud-based wallet, is converting kirana stores to microATMs where the local population can open accounts in banks such as RBL, Axis, IDFC, etc. and perform basic banking activities such as bill payment, savings, and remittance. Yes Bank and IDBI Bank have partnered with Vaya Finserv, a business correspondent that does real-time tablet banking to interface seamlessly with core banking systems and ensure daily cash settlement with partner banks. Similarly, Bengaluru-based Egalite has developed an Android-based app that uses Oracles’s FlexCube to sync directly with the core banking solution of partner banks such as ING Vyasa. Yes Bank has also tied up with ToneTag, a startup that has developed a technology that uses sound waves for offline proximity payments through even basic-feature phones. Such technology could be immensely useful at shops located in hinterlands with poor internet connectivity. GAZING INTO THE CRYSTAL BALL Emerging technologies have huge latent potential to bring about financial inclusion. Artificial learning or machinelearning,forexample,canexpeditethelending processes of financial institutions by interpreting repayment patterns and discovering complex linkages of credit-worthiness with non-financial data such as education, age and geography, and psychometric data such as self-confidence, cognitive biases, emotional stability, etc. Technology also promises compelling opportunities to transform financial services in India. Blockchain provides security and speed, two essential ingredients of financial inclusion. For example, BanQu enables refugees in Africa to create a personal digital profile through various pieces of information and thus access formal financial services. Nigerian startups Stellar and Oradian are able to bring instant and cheap remittance using blockchain. The emerging Internet of Things may make it possible to create pay-as-you-go instruments that can drastically amplify markets and funding for various services in remote areas. With the convergence of evolving technology, government push and launch of new financial products, newer digital innovations are fast getting translated to market-based solutions. Technology is unleashing its power to democratise access to financial services for millions of marginalised and underbanked Indians. India is accelerating on the road to financial inclusion and technology is in the driver’s seat. FINTECH COMPANIES ARE DISAGGREGATING the banking value chain by offering proprietary digital plat- forms and innovative tools in different sub-sectors of BFSI. Photo:Shutterstock