The coronavirus pandemic will accelerate growth of digital financial services, benefiting State Bank of India (SBI) and large private sector banks, according to Moody’s Investors Service.
The coronavirus outbreak and restrictions on physical contact will further boost demand for online financial services, making it more imperative for banks to accelerate digitalisation, the global credit rating agency said in a report.
“Yet only SBI and a small number of large private sector banks have the resources to effectively capitalise on the growing preferences for digital services among consumers and businesses.
“Except for SBI, public sector banks generally have limited financial capacity to invest in technology because of weak asset quality and profitability. Small private sector banks lack resources to invest heavily in digitalisation,” Moody’s said in the report.
This means that digitalisation will help SBI maintain its leadership and large private sector banks gain market share on the other state-owned peers, which will increasingly face challenges in acquiring and retaining customers, particularly individuals and MSMEs, as they become accustomed to digital services, said the agency.
“While public sector banks have larger shares in loans and deposits than private sector lenders, HDFC Bank, ICICI and Axis along with SBI, dominate digital payments.
“This segment is at the core of banks’ retail banking strategies because digital payments not only help banks retain brand recognition but also increase customer engagement and create cross-selling opportunities, which can lead to growth in revenue per customer,” the report said.
Digital financial services: Rapid growth
Moody’s said digital financial services are rapidly growing in India. It observed that the Government’s efforts to boost financial inclusion and make the economy less dependent on cash have driven growth in the use of digital financial services, particularly electronic payments.
The Reserve Bank of India’s (RBI) Digital Payments Index (DPI), which was constructed with March 2018 as the base period — DPI score for March 2018 is set at 100 — DPI for March 2019 and March 2020 stood at 153.47 and 207.84 respectively, indicating appreciable growth.
“Further, the regulator estimates that the number of digital transactions will jump to 87 billion in 2021 from about 40 billion in 2020. Already, the number of digital payments increased by more than seven times from 2015 to 2020, according to data from the RBI,” the report said.
India has a number of factors favourable for the further development of digital financial services, including a large and growing middle class population and a well-established digital identification system, via the Aadhaar, an increasing penetration of smartphones and high-speed internet.
MSME lending
The agency underscored that one segment with abundant growth potential is digital lending to small businesses, many of which have difficulty borrowing from banks because they have limited financial records and lack proper documentation.
Given that micro, small and medium enterprises (MSMEs) have relied on informal lenders at interest rates as high as 30 per cent-35 per cent, almost twice as high as rates charged by banks, Moody’s said this has created an opportunity for digital lenders to target the unmet demand for financing among MSMEs.
Alternative lending is the second-most funded and one of the fastest-growing segments of fintechs in India. The country now has more than 300 lending start-ups, it added.
Moody’s observed that for MSMEs, digital lenders can be attractive because they can process loan applications faster than banks. Digital lenders can use identification information gathered via Aadhar and bank accounts.
Also, they use artificial intelligence, machine learning and big data to assess MSMEs’ earnings and cash flow, and build models for credit scoring that do not solely depend on formal records.
However, a focus on riskier customer segments, nascent underwriting models and a lack of customer histories can lead to larger loan losses for digital lenders than incumbent banks in the initial stages.
At the same time, fintech firms are increasingly collaborating with traditional non-banking financial companies (NBFCs) in lending to MSMEs to benefit from the latter’s loan collection channels.
Fintech sector: attracting foreign interest
Reflecting the growth potential of India’s fintech sector, it is attracting capital from global venture capital companies. In the past six years, fintech start-ups have raised about $10 billion in capital funding, the report said.
In 2019 alone, more than 200 companies raised about $3.2 billion. In addition to venture capital firms, Amazon.com Inc. and Facebook have invested in the sector, while Singapore’s DBS Bank Ltd has created a digital bank in India, says the report.
In addition, global incubators and accelerators, Startupbootcamp, Barclays Rise and Swiss Re InsurTech, have rolled out programs in India.
Markets regulator Sebi on Wednesday said it has put in place the revised graded entry norms for innovation sandbox, to promote innovation in new products and services.
The new framework is also aimed at increasing participation in the innovation sandbox.
This would be achieved by giving access to both test data and test environment to financial institutions, financial technology (fintech) firms, start-ups and entities not regulated by Sebi including individuals, the regulator said in a statement.
Innovation sandbox facilitates access to an environment (testing facilities and test data) provided by enabling organisations like stock exchanges, depositories and qualified registrar and share transfer agents (QRTAs), wherein innovators (sandbox applicants) would test their innovations in isolation from the live market.
According to Sebi, capital market participants in India have been early adopters of technology. It believes that encouraging adoption and usage of fintech would have a profound impact on the development of the securities market.
Fintech can act as a catalyst to further develop and maintain an efficient, fair and transparent securities market ecosystem.
To create an ecosystem that promotes innovation in the securities market, Sebi is of the opinion that fintech firms should have access to market-related data which is otherwise not readily available to them. They should also have a test environment to enable them to test their innovations effectively before the introduction of such innovations in a live environment, it said.
Accordingly, the regulator had issued a framework for innovation sandbox in May 2019 with the intent to promote innovation in the securities market.
“Based on learnings since then and to make it even more convenient for participation in the innovation sandbox, revised graded entry norms have been designed with the objective of promoting innovation both in terms of new products and services as well as new ways of delivering existing products and services,” as per the statement issued on Wednesday.
In addition, it is aimed at creating new opportunities in the securities market and to make existing services more efficient and investor friendly.
With regard to stages of innovation sandbox, Sebi said that during the first stage, limited access to the test environment would be provided and there would be a cap on the utilisation of resources in terms of processing power, memory, and storage, among others.
During the second stage, the cap on the utilisation of resources would be removed, subject to availability of resources at that point of time.
Further, the regulator has also put in place eligibility criteria for both the stages.
In addition, a steering committee comprising representatives from Sebi and the enabling organisations has been formed to drive the innovation sandbox. The committee would supervise the operations of the innovation sandbox.
Also, it would process the applications submitted by sandbox applicants and approve or reject applications and assign lead enabling organisations.
Such lead enabling organisations would be responsible for onboarding the applicant post approval of the application and monitoring the applicant throughout the lifecycle of the sandboxing.
“They require policies to implement loan restructuring for consumers based on certain criteria — encouraging consumers to at least partially repay their debts,” the report said.
With a huge spike in delinquent accounts after the pandemic, fin-techs have seen a sharp deterioration in their portfolios. At 43%, fin-techs had eight times more delinquent accounts than private banks for whom the comparable figure was 5% for August 2020, TransUnion Cibil said in a joint report with the Digital Lenders’ Association of India (DLAI).
There is a need for fin-techs to place greater focus on collections in the light of heightened delinquencies and a riskier customer base, the report said. “Compared to peer members, the huge volumes sourced by fin-techs were largely small-ticket loans and from riskier segments,” the report said.
It added that in contrast, banks have generally been lending to consumers in prime and above risk tiers and those with a relatively stable flow of income, while also leveraging their liability base to acquire personal loans. “At the same time, fin-techs have onboarded consumers with low credit scores and leveraged more alternative data.”
The rise in delinquent accounts calls for a closer look at portfolios and emphasises the need for better collection strategies, the report said. It also observed that the upsurge in delinquent accounts after February 2020 is attributable to accounts flowing to a higher delinquency bucket each month — bloating the 90+ days past due (DPD) bucket. To avoid high non-performing assets (NPAs), fin-techs need to manage delinquent accounts in early collections buckets, the report said.
In the current situation, as the moratorium has ended, more consumers will enter delinquency buckets and make the collection process even more challenging, the report said. Traditional collection strategies work well for banks due to their superior physical reach, larger team sizes, and multitude and size of loans. Fin-tech lenders need a different approach.
“They require policies to implement loan restructuring for consumers based on certain criteria — encouraging consumers to at least partially repay their debts,” the report said.
With credit for demand expected to climb during and after the festive season, partial repayments will help lenders manage their balance sheets. There is a pressing need for a robust and cost-effective collection mechanism to maintain overall profitability, according to the report.
Q. How do you view the digital transformation journey of banks in India? Neal: If you see most digital transformations around the world, probably 99.99% of them won’t deliver on their promise, I’m not being contentious, it’s just that I have been long in this industry to see not a single software project being on time and on budget feature and that’s just the reality.
Digital transformation is not about software, 99.99% of it might not fail but might not live up to the expectation or the promises delivered by the consultancies who work in this space.
In many companies and banks over the years great IT capabilities have been built and CTO wanted to transform the architecture to make it more agile and open but got delayed due to budgets or prioritizing new products so it gets delayed and delayed and pushed back in creating agile architecture. The same story is with data, banks are brilliant in collecting data and lucky around data monetization. But historically, they’re bad at data and arrived towards the data monetization party too late. We’ve seen wonderful things with Big Techs and E-commerce giants partying on this free data they’ve got and how they’ve monetized.
Banks, by the time they realized and turned up for the party of data monetization, the police (referring to data privacy issues and scandals happened in the past) arrived and everyone is fearful and positioned as “we take care of your data”. While data is safe in banks but it’s lying and lost in disparate systems and nobody knows who owns the data. Banks should use and move the data within the systems and within the regulatory ambit to enrich the life of consumers and then the whole cycle of budget for the exercise repeats and the transformation exercises takes a back seat.
The biggest challenge with digital transformation is not the technology but the culture and people. Having worked across different organizations and industries, I know what good tech culture feels like. I never wanted to work with a bank, because I had been selling to banks for 20 odd years and I know the culture, the big difference between a tech company and a bank is the approach. Bank’s think from an ownership mindset over systems and its people but tech company’s entire model is partnerships. The second thing I noticed is banks are very hierarchical, micro-management, process based roles and I have never seen in any other organizations.
Thirdly, it’s around risk appetite. Banks are very funny, almost schizophrenic because their entire business model is monetizing risk but are skeptical of taking risks due to regulatory or compliance issues or culture. Capital Markets strive on risk, banks’ business is around pricing risk and Insurance companies model is avoiding risk, if you look at these three level it directly correlates to their innovation capabilities.
Banks need to experiment a lot, while it’s a regulated environment but it can start at small things, rigid processes won’t take it anywhere. Technology, Data & Culture is what will drive digital transformation and by the time banks realise it’s too late.
Digital Transformation should start at “Why are we doing this?” “What outcome do we want?” You don’t have to boil the ocean, just fix the bits and pieces which are going to make money. You don’t have to digitise everything, just digitise which is going to make money.
Do simple cultural transformation, you don’t need to get rid of your staff or hire Google employees. Get people the inspiration to try new things and give them the freedom to enjoy their work life.
On the Indian Banks: Banks in India are huge banks with huge staff bases, you can forgive them as compared to the banks in the West, because in India the smartphone churn came later but banks in western didn’t catch-up with the digital transformation even when they got smartphones quiet before India. The population in India is catching up quickly and banks in India have done a fairly good job.
I wouldn’t put India as the most innovative finance market from the bank perspective on what we are doing! I won’t put it in tier 1 innovation, but overall the ecosystem is doing well.
But I would put India on number one around putting up the national infrastructure Aadhar platform and UPI, etc. Regulators, FinTech & e-commerce have been doing a good job.
Q. How do you view Bank-FinTech collaborations? Neal: FinTechs started with competing banks but then eventually realised it’s too hard to go alone and in most of the cases customer acquisition cost and regulatory compliance is too high. Banks have distribution and FinTechs have tech and speed.
In any megatrend if you see, for e.g. e-commerce, The race between Amazon and Walmart, has merged in between from starting at extreme ends. That’s exactly what we are seeing between Banks and FinTechs. Banks are fintech-y and Fintechs are bank-y- more towards building hybrid models. (Neal explained this in a lighter tone)
FinTechs are agile, quick, focus on the client, think differently and don’t have historical roles and technology and quite a lot of it is not directly regulated. Banks are good at security, trust, products but slow, culture issues and expensive.
I know a lot of banks these days say they are FinTech companies that they magically transformed in such a short period of time but when I meet them they are “bankers”.
Questioning banks, Neal asks, do you want to be a bank or tech company? You’re not good at building softwares but as a bank you’re great at being resilient, safe, secured and reliant system and that’s the sweet spot for bank’s technology team and they’re really good at that and they should focus more on that and stuff which they own like digital banking platforms but if you want to do something new and interesting, in all fairness banks should partner with FinTechs and keep their capability with themselves.
That’s where the world is moving towards where you’ve many partners, for e.g. Neo-banking platforms in India. Banks should partner where it makes sense, usually around the UX, RegTech, SupTech, compliance. It takes an average 9-10 months to sell a technology solution to a bank, if you’re a small FinTech and you’ve got a small sales team, you’ve got to understand, is this going to be successful and qualify quickly, you’ve to understand why the bank is concerned if you don’t do pen testing. It’s changed quite a lot in recent times, banks do have a point. In fairness, banks don’t get hacked, I can’t recall any recent incident where someone hacked into and took all money, it doesn’t often happen because of bank’s control and FinTechs have to learn a lot in that.
Banks and FinTechs can build a nice symbiotic relationship and do things at which they’re good at.
Q. What are your views on neobanking entities? Neal: There are different models in this particular space, a bank rolling out a neobank like DigiBank by DBS Bank, even if it fails the bank can roll it back into its fold like how recently BBVA did it with Simple. The other model is building a digital bank from scratch like Standard Chartered did with Mox in Hong Kong, that’s quite an undertaking and there they’re looking at better operational metrics and it’s to be seen how it performs.
For banks doing this the DBS Bank way could be the right way to go which is a hybrid way essentially cutting your tech stack in half and keeping the backend stuff, put a bus or microservices layer and build net new code on top of that. All the front end stuff is new and over a period of time you can replace the stuff below as customers won’t know about it and at the same time bring changes in the culture.
At DigiBank, the bank staff were in a separate building, they had different reporting lines and slightly different roles but stationed more in an innovation lab kind of space.
The second model is getting a license from a regulator and building a bank from scratch like Xinja, Starling, etc. It’s a start-up; these things cost $50mn just for initial build for a full service bank. It’s funny how people tell me how successful these banks are and I’m like can you come back and tell me how successful they’re when they’ve lent some money or got some deposits. They’re essentially a prepaid card with a mobile application and that’s not a bank.
In fairness, I would not like to do that, it’s an expensive affair. The Xinja team was amazing but got blindsided by Covid-19, set high interest rates, the only way I have seen to succeed in a banking venture is to buy your clients, either buy them through free ATMs, free transactions, like In India, banks offer 7% deposit rates. Some way you’ve got to spend a lot of money to get people on your platform. These models kind of make money, Starling has turned profitable because they’ve a business model which works.
The third type are payment apps like Revolut, Monzo, etc. They do transactions, give flashy cards and everyone’s incredibly proud of their cards. We did one with Razer FinTech where if you tap a card the NFC is enough to light the Razer logo and these apps look to scale up on these transactions and hope they grow. Not all of them have been successful in terms of being profitable.
The fourth type, like neobanking platforms we’ve seen in India and in my mind that’s a brilliant play. You don’t need a license as you’re not storing the data. It goes directly to your partners core platform you’re managing the operations and I think that’s kind of great.
The final type which could be worrisome for traditional financial institutions is the neobanks created by e-commerce and tech companies giants because they’re good at technology and they’ve massive scale.
The top three banks according to me are WeBank (China), MYbank (China) and Kakao Bank (South Korea), because they’ve free distribution and tens of millions of clients, so the cost of customer acquisition is low and they’ve data for scoring.
I like the India model which is putting a wrapper on the bank and it’s a smashing idea. Building a digital bank from scratch is only for the brave but there’s money there as you’re doing the traditional bank model better. These ones like payment models we’re going to see lots of failures because the only way they work is by continuously pumping money.
India has taken the right path, some regulators have jumped on this too quickly in terms of Hong Kong and we might see how it will pan out. Singapore, it’s a tiny market but regulators are pushing as banks are refusing to innovate and taking it slow.
Essentially solving customer’s problems is the main idea, banks have been doing it the monolithic way and that’s what digital disruption is about. It’s not about technology, it’s about someone else solving your customer’s problem better than you and that’s digital disruption. Q. Any advice to the regulators? Neal: My advice to regulators is to read science fiction, what is playing out has already been defined, the future is defined. A lot of it is inevitable, regulators should read science fiction, understand tech megatrends because the way it rolls out affects how people operate in a society and how people will purchase products in future and they’ve a difficult job here.
Even if regulators have a team which thinks about future regulation based on future tech and societal trends you’ll be way ahead of the curve, things like blockchain, cloud-computing, we already have hands on it and we are still waiting for it.
While I did get blindsided by how crypto evolved but generally everything else is talked about and is inevitable. My guidance is around tech and societal trends, think about how regulations need to change in the future with fewer regulations.
The cost of regulatory burden for banks goes up and up every year and in fairness if you’re a regulator your job is to write regulation, if you don’t do that you don’t have a job while I do acknowledge Regulators do a fantastic job.
My point is, you keep adding layers on and on and if you write new stuff can’t you just take some other stuff away or simplify what you’ve done. Secondly, be clearer, it’s a challenge and you can’t be wrong as a regulator and they cannot be specific, and that leads to interpretation problems.
Regulators should use technology to enforce regulations, give out clarity and simplify things. In the last five years they’ve changed a lot and are doing a stellar job.
Digital banks including Chime, Varo and Current have won over more U.S. customers during the coronavirus pandemic by processing stimulus payments quickly, setting them apart from traditional banks and generating valuable word-of-mouth referrals.
In some cases, the companies pre-funded deposits they expected their customers to receive from the Treasury Department. In others, they received funds quickly and sent them through faster than traditional banks. That generated praise from individuals who celebrated their early deposits online and encouraged others to join their digital banks.
“I LOVE YOU @Chime,” a user with the handle @jayy702 Tweeted after getting some early stimulus funds on Dec. 28. “Reason number 1000 why I’ve been with them for years now. #ChimeCares.”
Also known as challenger banks or neobanks, firms like Chime operate primarily through smartphone apps and attract depositors with perks like no fees or minimum balance requirements.
Reactions were not all positive. Big banks and startups alike got complaints about delays that stemmed from the Internal Revenue Service misrouting millions of payments, as well as problems like not having direct deposits set up.
Yet overall, digital banks appeared to do more to transmit funds quickly, analysts said. That helped them carve a stronger toehold in the United States, where they have struggled to gain traction.
“Getting stimulus money into the hands of customers faster than incumbent banks is a big publicity win for the neo-banks,” said Sarah Kocianski, head of research at fintech consultancy 11:FS.
She predicted further customer gains: “The appeal of getting paid early will remain beyond the stimulus packages.”
Varo more than doubled customers in 2020 compared with much slower growth in prior years, Chief Operating Officer Wesley Wright told Reuters. It now handles nearly 2 million accounts.
“The pandemic brought huge growth to us and to other digital banks,” he said.
Current’s customer figures rose similarly, from 1 million users in June to more than 2 million in November. Its revenue quintupled last year.
“It’s clear Americans desperately needed this,” said Current CEO Stuart Sopp, who urged the incoming Biden administration to offer more support.
Chime also grew significantly over the past year, a spokeswoman said, declining to share specifics. Chime gave 700,000 customers early access to nearly $700 million in stimulus funds.
Though they are gaining ground, experts put neobanks’ total deposit market share somewhere in the low single-digits. For comparison, JPMorgan Chase & Co, Bank of America Corp and Wells Fargo & Co each account for at least 10% of U.S. deposits, according to government data.
Those three banks said they have processed all of the electronic stimulus payments they received to date.
Millions of Chase customers could access funds as of Jan. 1 and all valid transactions were complete by Jan. 4, the bank said. More than three-quarters of Bank of America customers who qualify for stimulus payments have received them, it said. Wells also said it has processed all stimulus payments that arrived through direct deposit.
The industry has attributed delays to problems beyond a bank’s control, including the IRS error, as well as payments sent to closed accounts or to tax preparers instead of individuals.
Those who have not yet received stimulus funds may get paper checks or debit cards in the mail.
ACCOUNT PERKS
In addition to perks like no-fee accounts, some digital banks also offer early access to recurring deposits, as well as referral bonuses or free cash advances.
When coronavirus lockdowns thrust millions of Americans into unemployment, quick, easy access to money via smartphone app became even more attractive.
Importantly, they also got more people into “primary” accounts with direct deposits, which was required to get electronic stimulus funds. Those accounts are considered the holy grail of consumer banking, because depositors tend to stick with their primary bank and seek other services over time.
About 15% of U.S. millennials held primary accounts at digital banks in December, up from 5% at the start of 2020, according to a Cornerstone Advisors survey. The consultancy defines millennials as those born between 1982 and 1994.
Drew Kolar, a 35-year-old bartender in New York, is one of them.
After losing his job in the spring, Kolar was glad to see stimulus funds appear swiftly in his Varo account. He switched from Chase in late 2019 after his account turned negative and the bank assessed fees due to student-loan payments gone awry.
“I started looking for online banks that would take me with my bad credit and without connections to Chase, and found Varo,” said Kolar. “So far, I’ve had no problems.”
The year 2021 promises to be “the year of the value chain” for the fintech sector.
By Rachit Chawla
The fintech sector is a combination of finance and technology. Since technology keeps evolving at an exponential rate, the fintech sector follows close behind. So far, the claims of technological disruption have been centered on changes at the customer interaction level, i.e., digital account applications, digital user interface, etc. The year 2021 promises to be “the year of the value chain” for the fintech sector.
Let us take a look at some of the trends that will shape the fintech sector in 2021.
Robotic Process Automation (RPA) The RPA is a process that utilises robots and advanced technology to perform the tasks which were otherwise carried out by humans. In 2021, we will witness more organisations adopting RPA to handle different backend tasks like security checks, customer on-boarding, account maintenance & closing, trial balancing, credit card and mortgage processing, among others. RPA allows fintech organisations to manage mundane yet necessary tasks efficiently, freeing up the human resources for other important tasks like customer service.
Blockchain Blockchain technology has brought a level of transparency in financial transactions that once was unimaginable. Transactions have become much more secure since blockchain technology came into the picture and this has allowed the customers to trust the fintech companies that have this technology in place. Blockchain technology will play a key role in transforming the banking sector in 2021.
AI and ML Artificial Intelligence (AI) and Machine Learning (ML) blitzkrieg is unstoppable. According to expert estimates, AI technology will reduce fintech organisations’ operational expenses by 22% by the year 2030.
AI can also play a huge role in getting cybercrime under control by identifying financial frauds and threats. It can also improve customer experience as it can easily record all the interactions between the customers and the organisation and call upon the stored data to offer just the right deals to individual customers.
Traditional banks have remained relatively rigid in their approach and have not molded themselves according to customers’ needs, can influence more people to migrate towards fintech organizations. Fintech companies will improve financial inclusion in the year 2021 by offering banking facilities to the weaker section of the society and by making banking efficient, fast, and convenient.
Biometric security systems Fintech has made banking easier as people can now perform all their banking-related tasks remotely from any device that has an internet connection. However, this has also created a wealth of opportunities for cybercriminals – who are always looking to exploit a weakness in the system.
This means that the fintech organisations will have to rely more on biometric security systems as they are reliable and foolproof. However, biometrics industry itself is at a transformative stage, and contactless biometric solutions are going to become popular soon.
Technological evolution is a never-ending process that makes our systems and our world a better, much easier place to live. These trends will shape the fintech industry in 2021 and will make it much more efficient, robust, and customer-friendly.
While the world is grappling with its set of challenges, India has continued to face headwinds due to subdued private consumption and liquidity crisis which has gotten severe with the continued economic slowdown and the COVID-19 outbreak. The lockdown has had a profound impact on the lives of millions of vulnerable people. Yet, India has demonstrated how it rises to challenges and uncovers opportunities therein. Instead of succumbing to these unprecedented times, India aims to resurge the economy by becoming a self-reliant, Aatmanirbhar Bharat. The idea is not to cut off from the rest of the world, but instead to adopt an integrated approach to empower its citizens who are at the receiving end of this crisis, who have a dream but do not have the means to turn their aspiration into reality. This kind of self-reliance is only possible if we can reach out to every single individual in every section of the society.
An idea is only as good as its execution. The ability to get on and do it, is what sets changemakers apart from the rest. Over the years, the government has made several strides, the Pradhan Mantri Jan Dhan Yojana (PMJDY), is said to be one of the biggest financial inclusion initiatives in the world. The scheme ensures access to a range of financial services like availability of basic savings bank account, access to need based credit, remittances facility, insurance, and pension. Sukanya SamriddhiYojna, Rashtriya SwasthyaBima Yojana (RSBY), Prashan Mantri Mudra Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), Atal Pension Yojana, Stand Up India scheme are few of the initiatives that have given an impetus to this vision. With technology at the helm of these initiatives, the government made sure it provided the necessary digital infrastructure to drive this change in the form of Aadhar enabled payment scheme (AePS), PAYGOV India, Bharat Interface for Money (BHIM), Bharat Bills Payment Interface (BBPS), Immediate Payment Service (IMPS), BHIM Aadhaar to name a few.
The government has taken several measures in the context of COVID- 19 to ease the stress of the financial sector by injecting funds into the system. These measures have ensured unhindered credit outflow from financial institutions. But to set the vision in motion, financial institutions need to be driven by the cardinal purpose of delivering financial inclusion that ignites transformative changes and improves the situation for the financially excluded households at the bottom of the pyramid who are often beyond the reach of the ambit of mainstream financial providers.
By moving the needle beyond traditional methods of consumer finance and microcredit, banks and NBFCs can provide solutions to the vast underserved populations across the length and breadth of India and help societies towards attainable financial inclusion. Companies are now harnessing technology to reinvent traditional business models and offer faster, cheaper, and convenient financial products and services. The combination of IT and mobile technology combined with IT enabled services has emerged as a viable solution for financial inclusion with the lack of physical presence of these institutions and stringent social distancing norms in place.
Here are few initiatives undertaken by institutions, that will go a long way in spearheading financial inclusion in the post COVID-19 world and in making the country an Aatmanirbhar Bharat
Digital Lending
Earlier most of the loan disbursement and collections of microfinance loans was done on a cash basis at the branches. With the fear of contraction and stringent lockdown measures, branch operations were severely impacted. With mobile banking platforms and real-time data, some established digital lenders quickly responded to the liquidity needs of individuals as well as SMEs affected by COVID-19 related lockdowns and containment measures. The user friendly and scalable platforms have helped in ensuring continued access to financial services, by maintaining credit flows to households and businesses while keeping people safe. Digitization of loan application processes has enabled borrowers to apply for loans remotely, which is going to prove to be a key driver in the post pandemic world.
Every coin has two sides to it. While there are numerous benefits of digitalization, there also lies a risk associated with the same. Unauthorized dubious online platforms often get away by charging unaware customers an exorbitant rate of interest, later using unfair tactics to recover the loan amount. One should avoid sharing KYC documents to predatory lenders and refuse to sign any agreement of loan with an entity who is not registered with the RBI. The onus lies on the financial community to encourage financial literacy to help the end consumer make informed choices. An Aatmanirbhar Bharat can only be built with a well informed and responsible approach.
Adoption of New Age Technologies
With the growing economic impact of COVID-19, there will be an increase in the need for affordable and personalized financial assistance as well as an upward spiral of bad loans. The nature of risk is no longer estimated by just the credit history. While tradition risk profiling predicts the likelihood of repayment on the loan based on past track record, the financials of the borrower combined with the nature of the industry that the borrower operates in is very important in the present scenario. Psychometric personality test can shed light on hidden personality and behavioral traits including value and belief system of the borrower. Artificial intelligence (AI), machine learning (ML), and big data analytics has made it possible for fintech lenders to collect and analyze the data to carry out a more comprehensive and accurate credit risk profiling. With the introduction of initiatives like video KYC, Aadhar-based KYC, account aggregators, lenders can easily access customer data, with their consent, and ensure better due diligence. It helps to understand potential credit risks and make faster credit decisions, even in the absence of traditional credit history. Data can also be used to offer more customized credit solutions best suited to the borrower’s needs.
Digital payment is the most common instrument of financial inclusion and has witnessed a rise in the past few months due to COVID-19 with UPI growing by leaps and bounds. UPI – a real-time unified payment interface developed by the National Payments Corporation of India (NPCI) that facilitates inter-bank transactions has made digital transactions easy and instantaneous. It helps users to transfer, receive, and save money on payments bank platforms, which are simplified banks designed to reach customers via mobile phones using a virtual ID. With fear of contraction plaguing the minds of citizens, India has embraced the digital wave exponentially. Google Pay, BHIM, Paytm, PhonePe has been ruling the market with their on the go fast and reliable services.
Digital Financial Literacy Workshop
With technology evolving by leaps and bounds, it is imperative for financial institution to not just make it available, but also hand hold individuals and SMEs by training them to use the platform effectively to their advantage. The government’s DigiDhan Mela’s across the country aims to handhold users in downloading, installing and using various digital payment systems for carrying out digital transactions.
With digital platforms and applications taking precedence now more than ever, even financial institutions across India are organizing financial literacy workshops which are further fueling the widespread adoption. IT enabled kiosks, village screenings, financial counselling sessions, skill development workshops are few means of empowering and enhancing the lives of India’s hinterland.
Thus, with technology and connectivity taking centerstage, the robust digital finance ecosystem is transforming India into an Aatmanirbhar Bharat by being drivers and enablers of financial inclusion.
The blog has been authored by HP Singh, Chairman & MD, Satin Creditcare Network Limited
DISCLAIMER: The views expressed are solely of the author and ETBFSI.com does not necessarily subscribe to it. ETBFSI.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.
Cashaa, a blockchain-based fintech, has joined hands with United Multistate Cooperative Society, a credit cooperative society, to launch crypto bank joint venture UNICAS that allows users to transact in cryptocurrency and fiat from one account.
While the online services of UNICAS has already gone live, as many as 14 physical branches will be rolled out by January 2021 across the NCR, Rajasthan and Gujarat.
UNICAS plans to rapidly expand to 100 branches by the end of 2022. “This will allow us to build, scale and offer customised financial and crypto products for the Indian market,” said Dinesh Kukreja, CEO of UNICAS, in a statement.
The JV will enable Cashaa to access United’s regulatory licences, its physical branches and overall banking infrastructure. United Multistate Cooperative is registered in Delhi under the Multi-state Cooperative Society Act 2002 and is serving in Gujarat, Rajasthan and Delhi with a network of 43 branches.
Being a multi-State credit cooperative society working under Registrar of Societies and providing services only to members, United Multistate Cooperative Society does not need the RBI permission, Kukreja said.
Users will be able to deposit and withdraw through a savings account, the way they operate with traditional banks in India. This is the first time in the world a financial institution has enabled cryptocurrency trade through physical branches.
“If we are planning to move ahead with the aim of digital India, then we cannot hesitate in adopting new technologies and finding innovative ways to bring it to Tier 1 and Tier 2 cities in India. In addition to banking, UNICASwill also provide information and guidance on the level of convenience and security that blockchain technology offers.” said Kumar Gaurav, CEO and Founder of Cashaa.
In India, currently cryptocurrency is not regulated. It may be recalled that in March this year, a three-judge bench of the Supreme Court revoked a Reserve Bank of India (RBI) ruling that banned any entity from dealing in or getting involved with cryptocurrency transactions.
UNICAS will be providing banking services for both fiat and crypto assets. Services include savings accounts, crypto exchange, crypto loan and debit cards to spend crypto. Users may receive an instant loan digitally by depositing crypto assets in the UNICAS wallet and requesting the equivalent value of rupee on their card or bank account.
The joint venture is merging United’s decade of experience in Indian traditional finance with Cashaa’s international banking and cryptocurrency experience to transform both the Indian fintech space and the crypto industry.
With the rollout of the initial 14 branches, UNICAS aims to onboard 25,000 customers within the first quarter of 2021. Cashaa, launched in October 2018, has already been providing its services to more than 200 crypto exchanges, wallets and start-ups dealing in crypto.
Despite much-debated demonetisation and the massive stigma associated with cash circulation, currency usage in the Indian economy is poised to hit an all-time high. Currency in the hands of the public is now crossing $26 trillion and given the economic contraction is likely to be around 15% of GDP this year – a record high. ATM withdrawals are back up in October / November this year after suffering a decline in the first half of the year. This is happening at the same time as digital payments are taking off. The number of users of Unified Payment Interface or UPI has nearly doubled in a year, with the number of UPI transactions on apps such as Google Pay or Phone Pe nearing 2.2 billion in November 2020, with a total value exceeding Rs 3.3 trillion.
The case for digital payments It is a case of two extremes. Despite the astonishing growth of digital payments – cash still accounts for around 70% of all consumer transactions in the country. This is despite all the gains made by UPI and digital payment methods. It’s important to understand that the number of people using UPI in India is still around 150 million, while the number of unique credit card holders is only approximately 35 million. This gap looks even starker if you compare to it the total number of debit cardholders which is around 850 million – clearly highlighting that even though many people can use UPI to transact, they do not. Understanding why requires a view into who still spends in cash in India and what are the barriers to digital payment adoption.
Three barriers to going cashless The very first being the income barrier. Once you get paid your salary in cash, it becomes exceedingly challenging to digitise that cash and transact digitally. Over 75% of the Indian labour force is employed in the informal sector, and more than 100 million micro-loan accounts are serviced in cash every week. For this stratum of society, if they get paid in cash–they will transact in currency. Once the informal sector workers who are migrants start receiving their salaries in their bank accounts, it will change the face of digital India. Digitising payments would also make it much simpler for individuals to calculate and file their income taxes and for governments to make sure they are being paid. Building on the momentum, fintech companies in India need to develop a digital ecosystem to facilitate greater access to finance to informal and new-to-bank segments. It is time fintech’s launch new apps digitising the informal sector. Many such apps have already been launched which allows people to share access to their cards or UPI, with their tribe members in a secure, digital and controlled manner is such a game-changer. The first time someone uses UPI is likely to be handheld by a friend or family member and likely transacting on their UPI id or card – rather than creating an account of their own. The app will facilitate activities in the digital market for those who rely heavily on cash, individuals who do not get paid into a bank account and even families of international migrants that receive their remittances in cash and hence spend in cash. The second they were the infrastructure barrier. Another large section of society either lives in low connectivity areas or transacts mainly with merchants who are not comfortable accepting digital payments. This goes back to the point of informal labourer. Suppose your local thela guy or your domestic helper is a migrant who is not necessarily licensed to do this job. In that case, he/ she is unlikely to set up a merchant account to receive UPI payments and will continue to rely on cash payments as a way to transact – both upstream (buying his goods) and downstream (accepting from his customers). Apart from the various government policies, factors that enable going cashless will be the penetration of technology, such as smartphones, e-commerce, and internet access adding to the penetration of banking services, such as online banking, mobile banking, cards, and POS devices.
The last barrier in the motivation barrier and includes both consumers and merchants who have no obstacles to use digital tools, but decide not to for reasons associated either with the comfort of using digital tools or other reasons (like tax avoidance). This is where regulatory efforts like requiring PAN for large cash transactions will drive the adoption of digital tools. However, this is also, where for a section of society – especially elders – where community support and training can play a significant role.
The right environment The real questions are, how do you circumvent these barriers? By making both top-down supply-side efforts, including regulatory push and bottom-up community-driven push to adopt digital payments. Apart from promising regulatory environment, factors that enable going cashless are the penetration of technology in rural India, such as smartphones, e-commerce, and internet access plus the penetration of banking services, such as online banking, mobile banking, cards, and POS devices. This group demands flexibility in terms of price, mobility, and a low entry threshold. The pandemic has given the slow rise of digital currency a gigantic boost. The shift will be disruptive but is a leap in the right direction. To conclude, we believe that the longer the pandemic will last, the more cashless-friendly the societies will become. COVID-19 has changed people’s behaviour, and this change is likely to be permanent.
DISCLAIMER: The views expressed are solely of the author and ETBFSI.com does not necessarily subscribe to it. ETBFSI.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.
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