According to Global FinDex, India improved financial inclusion from 53% of adults having accounts in 2014 to 80% having accounts in 2017. That is a very impressive achievement. Much of that improvement came about because of PMJDY, which depended a lot on state-owned banks meeting Government targets. At the same time, however, the emergence of the India stack was an important factor with respect to enabling people to open accounts and making those accounts accessible digitally, and thus more useful to people. The India stack is a unique achievement, one that many other countries are interested to emulate. India also has a large and rapidly growing ecosystem of innovative fintech businesses; entrepreneurs who want to and can do new things as well as investors willing to back them.
Usage of accounts is low and there are significant disparities between people: poor / better off, rural / urban, younger / older. Including marginalized people and building the system out to reach the last mile are challenges India still needs to solve.
India has long relied on the Government doing things itself, often using state-owned banks to implement its financial inclusion goals. To take things to the next level, I think the one thing the Government can do that will make the most difference is to shift its approach in ways that enable and incentivize the private sector to advance the cause of financial inclusion. This kind of shift could manifest itself in a number of ways: regulating the payments system in a way that makes non-banks full partners and creates more space for them; passing legislation that restores the use of Aadhar to open accounts and authenticate transactions; passing data privacy legislation that protects peoples’ interests but still allows for innovation; opening up full participation in NPCI to non-banks and innovative financial service providers; and creating an open banking system such as the one Europe now has.
This is a global challenge, not just an Indian challenge. Most countries struggle with this, and cash transactions are predominant in most countries. Among wealthier countries, Sweden has gone the furthest towards reducing the use of cash. China has also made a lot of progress, though more so in cities. The change in China came from adding digital payment capabilities to existing mass market use cases such as Alibaba’s mass market online retail business or WhatsApp’s gaming and chat environment. Like many other countries, India has done things the other way around by first building digital payments services that are now looking for use cases. There are no easy answers or magical solutions for this challenge. Financial service providers will have to chip away at it. Things that could help might include focusing more on what people want and improving their user experience; digitizing bulk payments in the Government as well as private sectors; and banks opening up their APIs to allow access for smaller service providers. And the introduction of GST has already begun to change how small businesses operate.
It is difficult for me to offer advice. I already see a lot of innovative entrepreneurs making things happen in India. This is a good time for entrepreneurs to get involved. And India has a growing number of angel investors and venture capital funds, local and international, that entrepreneurs can tap into. One thing entrepreneurs would do well to keep in mind is that it can take longer than they often think to make a fintech business cash flow positive. They need to be committed to staying the course and they need to have enough funding to do so. They also should think about what success might look like for them. The microfinance model where MFIs own everything from the customer to the balance sheet, and founders want to keep control of ‘their’ institution, requiring them to keep on raising more and more capital, might not be the best way for all fintechs to succeed. Partnerships are important, and many fintechs may succeed by merging into a larger financial service provider.
Like everywhere else, the trend in India is towards disaggregation of financial services provision. Banks have dominated for a long time, but that is changing. Specialized business-to-customer and business-to-business fintechs are growing rapidly. Open banking has been introduced in several Western countries, requiring banks to change and open their platforms to allow fintechs to integrate and offer services. Globally, regulators are recognizing the importance of fintechs and introducing regulations to suit them. Payments infrastructure like that offered by NPCI is being opened up to allow non-banks to be shareholders and primary members, instead of having to create bank partnerships to gain access. While there is evidence that much of this is beginning to happen in India, many of the old ways that favor large banks are still in place. Change is inevitable and is taking place at an ever-accelerating pace, so embracing new ways of doing things has become a necessity.
The numbers look low right now. But keep in mind how much progress India has made in recent years. These same numbers make me optimistic when I consider trends over the past few years and the pace at which change is happening. I think there is a good basis to project that by 2020 account dormancy will be much lower than 50%, the percentage of people with smart phones and data plans will be much higher than 50%, and many more people will have access to the internet. India has already invested in ways that will make this happen, and it continues to invest. And I predict the regulatory environment will make progress in the direction of enabling more space for the private sector and for innovation.
Of course, there is a long way to go. India is a very big country with lots of diversity and big gaps between those who are included and those who are still excluded. Specific efforts must be made to close those gaps, and even then, exclusion will not disappear entirely, at least in the short term. But I think that focusing on suitability of financial services, offering products that fit peoples’ needs and improving user experience in ways that make usage more intuitive and build trust, will lead to more meaningful financial inclusion for most people.