Impact of Financial Inclusion Initiatives by Indian Fintechs
Universal access to financial services has been a long sought after goal of policy makers, mostly managed by incentivizing people through direct benefits to open bank accounts. However, the vital challenge that still remains in India is how to grant and provide access to these financial services and products by the population that comes under the lower strata of per capita income in the country. Which is the bottom of the income pyramid: rural population, MSMEs, and women.
According to data issued by the World Bank, over 80 percent of Indians have access to banking accounts. This number might look like a decent chunk for other countries, but in the Indian setting, it indicates nearly 191 million people who over 15 years of age still don’t have a bank account.
Financial inclusion involves facilitating access to financial services and products to the entire population irrespective of economic and geographic conditions. Between 2014 & 2018, bank account penetration grew from 53 percent to 80 percent, the question is “is this our ceiling, or is there room to grow?”
Fintechs are Riding the Waves
In 2016, in its policy paper on financial inclusion, the Reserve Bank of India emphasized access to an overdraft facility, banking facilities, RuPay Debit card to households, credit guarantee fund, initiatives for financial literacy, pension schemes, and microinsurance. The numbers of no-frill bank accounts opened under the Pradhan Mantri Jan Dhan Yojana (PMJDY) worked as a booster, which stood at 356 million, as of 1sy May 2019, which is 66 percent of all the no-frills accounts present in the country.
As per the India FinTech Report 2019, the MSME financing gap stands at $240 billion, and the consumer lending gap stands at $300 billion. These numbers indicate a substantial demand-and-supply gap in India. With the current situation of structural limitations of the formal financial services sector and the troubled lending market in the country, it appears that the current distributed financial services ecosystem in the country may not be able to mark this gap at the speed the country requires. So, what can be the solution? In such a scenario, FinTechs can be real problem solvers.
Focus on the Rural Market
According to the Provisional Population Totals of Census 2011, 89 million people in India are rural dwellers, and a large extent of this population is employed in the agricultural sector. This section has long been underserved when it comes to access to financial literacy, products, and services. Therefore, they mostly deal in cash and have clear fault lines when looking at digital payments, credit demand & supply, and savings products.
Since mobile proliferation is bringing about a new era, giving the underbanked and unbanked access to financial products while driving service and technological innovation among financial institutions. India has 1.2 billion mobile phone subscribers, with more than 50 percent of these living in rural areas. Reliance Jio dominated growth by adding over 93 lakh new mobile customers. With this opportunity, Fintechs were able to bring innovative financial services to the banked and, in India’s case, a large unbanked population.
One such example is RuPie, a for-profit socially conscious FinTech company that offers microcredits entirely from a mobile phone without using paper and making lending decisions based on machine-learning techniques. This uses technology to dramatically reduce the cost of delivering financial services. It has secured an initiative with RBL Bank and Digambar Microfinance as of June 2017 to create customized micro-credit products for the large rural unbanked population.
The Road Ahead
FinTech players are working to connect the underbanked and unbanked population to India's mainstream financial system; however, it's easier said than done. If we look at the potential customers at the bottom of the pyramid, financial literacy turns out to be the biggest roadblock. Some startups focus on the underserved/unserved users with basic financial needs and lack of awareness about various financial know-how such as loans, digital payments, credit scores, chit funds, and security.
As the industry starts sweating its investments and expenses in a post-COVID world, Fintechs are poised to serve as catalysts to faster digitization and financial inclusion. As a payment technology leader, Visa has also committed to partnering with emerging fintech to expand digital payments by creating and uplifting those platforms. The set-up of programs such as the Visa Everywhere Initiative (VEI) and Fintech Fastrack Program has created an ecosystem for fintech to enhance their product proposition.
The finTech industry is becoming the face of financial inclusion possibilities globally, especially in economically developing and diverse countries such as India. The growth story of the FinTech industry in India shows a tremendous financial services market opportunity that has been untapped. With the rising number of startups, a growing ecosystem, and promising government stance, it is hard not to argue that FinTechs are here to stay and progress further. What we can tackle in another blog post is how we nudge the FinTech industry towards a direction where it should make a difference beyond an efficiently accessible market solely for the digital-savvy urban consumer base.