Digital Finance Inclusion
By Moin Qazi
The financial industry’s efforts to serve lower-income customers have gone through four distinct phases: from social banking to micro-finance to financial inclusion and now technology-driven financial services or digital financial inclusion
Undeniably, digital technologies have become the most powerful lever for financial inclusion and are considered the smartest way to rapidly unlock economic opportunity and accelerate social development with economic empowerment. Digital tools have fostered speedier and more inclusive growth by dramatically reducing financial service providers’ costs and making services more convenient and accessible for users, especially low-income subscribers in remote locations. Money sits in a virtual account on a server where it can be transferred with the click of a button.
According to the latest RBI report, total digital transactions in volume terms recorded a growth rate of 58.8% during 2018-19 against 50.4% in 2017-18. The RBI says digital transactions in value terms grew by 19.5% during 2018-19, compared to 22.2% in 2017-18.The Central Bank report states the digital finance landscape has witnessed unprecedented waves of innovation. It has accordingly ambitious target to push volumes of digital transactions four times by 2021.
Digital finance payments and financial services delivered via mobile phones and internet are greasing the wheels of the economic system and transforming lives and economic prospects of individuals, businesses and Governments across the developing world, thus boosting GDP and financial inclusion a reality.
In contrast to digital financial systems, physical channels are prohibitive for low income populations. One, physical banking is relatively costlier and riskier for consumers to perform even while engaging in basic financial activities, payments, savings, investments and remittances. Two, it is very costly for utility firms, banks, insurance companies and other institutions to transact as it makes their operations infeasible and unsustainable. Digital channels offer a robust fix for problems encountered by consumers and financial institutions in traditional systems of finance.
Digital financial revolution or “fintech,” has fundamentally changed people’s lives and transformed the business landscape. In many markets, cash is fast becoming obsolete and transactions are mostly via digital tools. Banking is also moving into a presence-less, paperless and real-time era: While there will always be bank branches, banks will become more “invisible” in how they deliver their services, many of which will primarily be accessed online.
The fintech revolution is led by many players, including commercial, small finance and payment banks, telecommunication firms and financial technology companies. It harnesses technology to reinvent traditional business models, creating opportunities to connect India’s unbanked communities to affordable and reliable financial tools at unprecedented speed and scale. It offers a preview of what the global banking model may look like a generation from now.
Fintech has freed bank staff from counters and relieved customers of the inconvenience of transacting during banking hours. Most financial work can be done via smartphone, improving payment systems, eliminating paper receipts and reducing frictions consequently, not only saving customers’ time and money but improving their quality of life.
Meanwhile, data footprint provided by smartphones and data-connected mobile phones is providing an opportunity to bring people with limited credit-history into the mainstream through alternate credit profiles. Alongside, Artificial Intelligence and machine learning algorithms can assess the user’s credit worthiness making it possible to provide loans to them even in the absence of traditional credit history.
Digital finance also offers major technological and infrastructure challenges. Sparse populations, inconsistent network coverage, insufficient capital for building new business models and customers’ lack of trust and comfort with technology can stand in the way of success, particularly in remote or undeserved communities.
The risks of implementing digital financial services are not just operational and technical there are security, affordability and safety concerns. An example: customer privacy loss is inevitable, despite efforts to create safeguards. For India’s financial inclusion industry to capitalise fully on the benefits of digital finance, the accompanying risks must be understood and addressed.
In several cases reliance on computers has proved to be deceptive whereby debt burden and repayment capacity must be scrutinized, else it can lead to over-lending and customer over-indebtedness, rejection of a loan based on opaque reasoning, including arbitrary profiling based on factors like location.
In microfinance individual traits can best be captured by personal interface. Someone might pay off your loan, but computer modelling tells one that anyone from a particular area is likely to default. Evidence shows the best clients are those who got entry on their transparent and unvarnished honesty shining through their financial dealings and not on credit scores.
However, digital finance can have negative effects for financial inclusion. Providers of digital finance services can be profit-seeking corporations that use digital finance to maximise their profitability or profitable opportunities of businesses affiliated with digital finance providers, namely banks, financial and non-financial institutions.
Corporate providers of digital finance services use an aggressive marketing tactic to persuade high and middle income customers to utilize a new or existing digital finance platform or infrastructure. They must use a less-aggressive marketing tactic to persuade low-income and poor customers to employ new or existing digital platforms or infrastructure if they believe the latter cannot afford the associated fees.
This is a challenge which goes unrecognized with the changing dynamics of digital financial inclusion. Governments globally will have to step up and take control of its regulatory provisions to deal with discrete challenges, which have emerged with the rampant use of technology and multiple stakeholders. Adequate knowledge of challenges in digital financial inclusion, is a priority which must be addressed with precision.
India has to contend with its geographical and cultural divide. The aversion of ‘other India’ to digital finance has more to do with their aversion to everything that has to do with technology. This stems from their lack of trust in it. It is also partly on account of consumers low technical literacy.
Women often face additional barriers: Less access to mobile phone, lower literacy and numeracy levels, less confidence in using technology and restrictions on travel or social interaction. Furthermore, villagers’ value personal relationships particularly when it comes to money. They will not trust technology which they do not understand for anything except very basic payments.
India culturally believes in cash and a paradigm shift in thinking will need time and resources. It involves migration to new social, cultural patterns and habits given marked demographic and class issues built into India’s cashless transition. Although it would be impossible for it to become a cashless economy in the immediate future as making India cashless is like treating multiple chronic societal diseases with one injection. Also, there are several challenges which may constrain full-scale digital transition in the foreseeable future.
It’s in everyone’s interest to pay heed to ex-UN Secretary General Kofi Annan words: “In managing, promoting and protecting the Internet’s presence in our lives, we need to be no less creative than those who invented it.” Clearly, there is a need for governance, but that does not necessarily mean that it has to be done in the traditional way, for something that is so very different. —— INFA