Embrace digital platforms to include the excluded

It is well established that the financial well-being of the economically challenged section is directly proportional to the improvement in the access to high quality, affordable financial services. One of the most effective channels to deliver these financial services to the poor in a sustainable way is by leveraging digital platforms.

Several macroeconomic factors indicate that the basic ingredients for successful creation of a digital ecosystem are rapidly falling in place, far exceeding the supply-side capabilities that support the Indian government's agenda of financial inclusion. Digital banking offers numerous advantages that work towards improving the same, largely riding on the fact that Indian consumers have shown tremendous preference for digital technologies, with growth rates for e-commerce as well as mobile phone adoption far outstripping rates in developed economies.

Digital platforms are likely to deliver financial services to both the unbanked and the under-banked population, especially in rural/remote regions, at a low cost, and subsequently increase digital financial access to provide high quality, affordable financial services. By using digital channels, transaction costs could be lower than those incurred through traditional channels by as much as 90 per cent, thereby bringing down break-even costs.

As banking becomes much less reliant on physical distribution, particularly as cash needs decline and video-based advice becomes more common; the time has come for digital banking players to gear up the launch of digital products and services for their customers. This is expected to lead to future benefits from lower operating costs, along with increased business volumes, while also driving financial inclusion.

Banks should target previously under-banked and financially-excluded segments with the help of technology; this could provide the necessary traction on new demand, as urban markets are crowded with a large number of players. It could also give banks an opportunity to spread the costs or investments in technology over a much larger base and increase the utilisation of existing technology. Further, government initiatives, regulatory support and active participation of public as well as private participants could be key levers for enabling a successful transition to a financially inclusive economy.

This approach has been particularly successful in African markets. In Kenya, nearly two-thirds of all adults are active customers of a mobile based money transfer and payments service and nearly 50 per cent of mobile phone owners in Tanzania actively use mobile money systems. In comparison, India, with its unbanked/bank-inactive population of over 45 per cent and 900 million mobile subscriber base, sees only 1 to 1.5 per cent of mobile subscribers using mobile money actively. However, demand side drivers and the emerging digital ecosystem hold the key to promote financial inclusion, using digital channels. New digital channels including mobileswill provide a cost-effective model for the last mile access by leveraging new digital interfaces, e-KYC and Aadhar enabled Payment infrastructure for cost effective delivery of banking services.

Payments Banks- Digital at the Core The eleven new Payments Banks are likely to harness digital technologies to drive their business as well as financial inclusion. Payments Banks have to be designed with a philosophy of 'digital at core' through which not only the front offices (customer touch points) facilitate digital interactions but the complete banking value chain including back-office, transaction processing, customer service, management reporting, employee engagement etc. are also digitally enabled.

With lower financial spreads, Payments Banks will not be able to cross-subsidize transactions to an extent as universal banks can do. However, by migrating transactions to platforms with lower operating costs, it can reduce the marginal cost per transaction quite significantly and thus obviate the need for cross-subsidization. Mobile based transactions are the most cost effective as compared to other electronic and physical modes.

Increasing penetration of smartphones in India are expected to remove some of the bottlenecks that have constrained adoption till now. With more intuitive interfaces and less complex payer procedures, mobile based transaction platform will be a key differentiator for Payments Bank. By having the right use-cases, Payments Banks will replicate the adoption curve of M-wallets where transactions have grown more than 10 times in the past four years and doubled last year.

Payments Banks will also leverage some of existing platforms and utilities and then integrate their business models to be more effective in driving financial inclusion. It is expected that in the immediate to short-term, most of the industry efforts are going to focus on getting the unbanked within the banking fold. However, players who adopt digital technologies to deepen customer experience, stickiness and adoption are more likely to be successful in the medium to long term.

The authors are Partners, Financial Services, KPMG India