As many of you may already know, Small Finance Banks (SFB) have been created with a mandate of furthering financial inclusion to sections of the economy not being served by other banks. Many of these banks have been largely successful as Micro Finance Institutes (MFI). As MFIs, they have been able to adapt to the competitive environment, have embraced different business models and have adopted technology to make them efficient and profitable. The transition to a bank would mean leveraging this knowledge in overcoming the barriers to financial inclusion.
The barriers to financial inclusion
The first barrier, by far the most important one, is that of financial literacy. While Reserve Bank of India has been very active in this space, many SFB’s have incorporated a formal financial literacy program as part of their engagement. These programs enable individuals to understand basic principles and concepts related to budgeting, saving and responsible borrowing.
Keeping technology simple is a critical cog in the wheel for converting these individuals into “banking” customers. With the advent of UIDAI, many banks are using biometric authentication for transactions and as a means to on-board a customer. Customers no longer need to remember complicated PINs. It wouldn’t be wrong to say that biometric is the new pin enabling customers to embrace banking fearlessly.
The Pradhan Mantri Jan Dhan Yojana (PMJDY) has paved the way for many customers to have a bank account, but transacting for the financial literate, would still mean travelling far off distances; many a times at the cost of a day’s pay. This is the second barrier for inclusion - proximity to financial services.
This is where door step banking has come into play. These banks have their feet on street armed with handheld devices. The form factor of the handheld device has changed from a pin-pad micro-ATM into an integrated device (which is essentially a tablet with biometric and a printer). This has now become ubiquitous which allows to provide a wide range of banking services.
The third barrier is a lack of an identity which prevented many banks from lending to new customers. Regulation also does not allow opening of accounts without a KYC (Know Your customer). Aadhaar has changed this radically. Banks have been able to leverage this railroad to on-board customers at their place with the hand-held device through e-kyc. All that is needed is to use Aadhaar and biometric (fingerprint or iris) to authenticate the individual.
While technology has helped in overcoming these barriers to an extent, the overall cost of servicing is still high and this is perhaps the fourth barrier as it translates to a high cost to the end consumer. Digitization of processes, creating a less cash ecosystem and driving customers to self-service are key tenets to overcome this final barrier.
Overcoming the barriers
Digitization of processes has seen an accelerated adoption thanks to the availability of a digital footprint (C-KYC, CIBIL) of the customer. Many banks are embracing RPA for automating the back office processes. Artificial Intelligence (AI) and Machine Learning (ML) have also begun to make inroads into credit functions as well. Machines are beginning to learn how underwriting is being done. Banks are at various stages of making the entire value chain seamless and efficient.
Traditional scoring models continue to be mainstream in banks and in a way limit lending. In collaboration with Fintechs, many have started experimenting with scoring models using alternate data. These models rely on real online data and use AI/ML extensively. Unlike traditional scores that rely on history, these allow the “under-banked” to truly embrace banking.
The United Payments Infrastructure (UPI) has revolutionised the payments and remittances space; it has made a kirana a quasi-bank teller. Salaries that are paid in cash are beginning to enter the banking system through these kiranas. Cash is increasingly travelling digitally to the intended beneficiary. Alternate payment modes like QR codes are finding increasing prominence in these kirana shops that allow additional convenience.
Recent developments in the telecom industry suggest that it’s only a matter of time before smart phone penetration explodes. Cheaper phones and a reliable network would mean a virtual breakdown of barriers for ownership and an accelerated journey towards being “digital”.
Digital world opens up a totally new frontier for the user. We have already seen a proliferation of peer-to-peer lending which is like a marketplace for lenders and borrowers. There are platforms that allow anyone anywhere to fund. Cryptocurrencies haven’t really taken off yet, but there are companies working to allow people to monetise smaller transactions, make payments in cryptocurrencies and lend between themselves.
In summary, technology will enable the traditional banks more efficient. It will spur the emergence of new business models and partnerships. The underserved will slowly embrace digital banking and unknowingly create a footprint. Eventually, a variety of financial service providers would fight tooth and nail for the “new to bank” customers.
Balaji Parthasarathi is Chief Technology Officer, Ujjivan Small Finance Bank.
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).