Economic crisis: an unusual catalyst for financial inclusion

The United Nations’ Sustainable Development Goals (SDGs) identifies financial inclusion as a key driver of a country’s economic growth. Add to this, the World Bank’s confirmation that financial inclusion helps sustain stable economies because it ensures individuals and businesses access to useful and affordable financial products and services. These offerings could be in the form of transactions, payments, savings, credit and insurance that are delivered in a responsible and sustainable way.

In fact, seven of the UN’s 17 SDGs for 2030 hinge on financial inclusion enabling their achievement. They are listed below - 

Source: Sustainable Development Goals

In January 2020, the Reserve Bank of India (RBI) released a draft of the National Strategy for Financial Inclusion to expand financial services' coverage in the country. Expanding India’s digital infrastructure and encouraging digital payments were among the draft’s key recommendations. 

We see 'locked-down India’ embrace financial inclusion thanks to these three factors - demonetization that already introduced merchants and customers to digital wallets, COVID-19 and the ensuing social distancing norms, and accesibility through nation-wide mobile connections. Today, the subcontinent is looking at a market of more than 500 million users who can access digital financial channels. 

Financial inclusion in a digital economy

The number of Indians with a bank account has nearly doubled between 2011 and 2017 to reach 80%. Yet, according to the Reserve Bank of India (RBI) there has been little improvement in account usage, financial literacy, savings and institutional borrowing.

The situation calls for improving financial literacy among the population that's new to banking, to achieve true financial inclusion. The new users will need to be educated not only on the benefits of going cashless i.e. reduced transaction costs, less risk of theft or loss and increased transparency but, will also need to understand the various financial tools at their disposal. This is especially significant in developing countries where the ‘payments evolution’  went directly from cash to digital, skipping the card cycle that took place in developed countries. Today, we are witness to the M-Pesa revolution in Africa and the WeChat and AliPay revolution in China.

Let's look at a few examples of how the world is adopting digital channels for better finacial inclusion; the Indian Government is providing basic income support to its citizens via Direct Benefits Transfer (DBT) that the latter can access using contactless channels. China and South Korea are sanitizing their own currency notes in fear of adding to the virus spread. Additionally, China, to avoid risks surrounding paper money; counterfeiting, money laundering and illegal financing, has come up with its own National Digital Currency - Digital Currency Electronic Payment (DCEP) which will be built with blockchain and cryptographic technology.

Accelerating financial inclusion with technology

Technology has helped overcome banking-related-barriers of geography, aligning with varying regulatory restrictions, product mismatch, the lack of trust and lack of incentive to maintain high usage rates. As a result,­ it’s the opportune moment for citizens without bank accounts to become a part of the world’s formal economy.

Fintech, Big Tech and incumbents are leveraging successful tech-led approaches to build financial solutions designed for a broader customer base. The focus is to also ensure that engagement continues beyond the onboarding stage for respective products and services.

A few characteristics of this tech-led approach are:

1. Design thinking and human psychology: Financial literacy will improve the engagement with and retention of digital payment channels. Such financial literacy should seek learnings from behavioral science to ‘nudge towards’ both new habits and repeat usage of digital finance.
 Also, including elements of design thinking could help observe and develop empathy with the target user - aiming for better adoption of financial products. 
2. Digital-native products: Digital micro products (across savings, credit, insurance and more) focus on nurturing good financial habits over seeking larger sums of investment. They see better adoption when equipped for voice or gesture interaction, lower bandwidth, local language etc. Such products remove dependency on bank’s physical establishments, giving customers access to ‘anytime, anywhere banking.’ 
3. Adopt Open Source (OS) solutions:
 OS solutions like MIFOS, a microfinance software solution can reduce the cost of products. Additionally, financial companies can create customized and locally relevant solutions by partnering with the developer community. An example is BHIM, a payment app that supports local or regional languages to ensure non-English speaking people can comfortably use the app.
4. Leverage robust platforms: Platforms support rapid prototyping, help carry out focus group testing and build contextual solutions. And quite often, such platforms are already built to handle issues of accessibility, compliance, data security, user base etc. Financial institutions would benefit from a cost and time-to-market perspectivce if they invest in collaborating with existing digital infrastructure solutions like India Stack rather than building their own.
5. Lower distribution cost: Fintechs benefit from using self-services offerings or the agency/agent based model of banking. Given the proliferation of popular third party mobile apps such as GooglePay and Whatsapp that already command a user base of millions, it also makes sense for financiers to piggyback on these platforms.

What are the risks?

At present, every financial institution is warning its customers against fraud, especially as the COVID-19 crisis is forcing a majority of first time users to adopt digital channels. The migration has created room for fraudsters to carry out identity theft and account takeovers. 

As the country goes cashless, the risks that financial institutions need to pay attention to and alleviate are:

1. Newness risk: Customers are dealing with a lack of familiarity with digital-first products, services and  providers. They fear exploitation and data-abuse by relatively lesser known tech companies. They are also contemplating behavioural changes such as acclimatizing oneself to tech-first (or mobile based) touch points when switching from cash to cashless.  
2. Provider risk: Business correspondents and other agent-related risks arise as new providers offer services that may not have the required regulatory cover or consumer protection. 
3. Technology and privacy risks: Concerns include service disruptions, automated responses, the lack of human connection and a fear of transmitted and stored data being hacked. However, India’s smartphone usage is projected to hit 84% by 2022 which adds to the expectation that a signinicant portion of the population will adopt a mobile-first approach to financial services.

A recent Mckinsey Global Institute’s report states digital finance could boost growth in emerging economies by up to $3.7 trillion. We forsee governments, incumbents and fintechs collaborating to build affordable, transparent and innovative financial products, and services that will serve the conventionally unbanked; rural communities and be guided by data-mindful policies and regulations. This intentional creation of equitable technology will ensure easy access, break down complicated fineprint and protect the customer’s interests. Delivering these milestones will be key to  achieving the UN's SDGs.

I believe that a combination of technology adoption by incumbent banks, innovative products offered by fintech companies and Big Tech’s push to serve the rural population - when combined with policies that promote digital goods and services will uplift a wider segment of our population to achieve financial inclusion as well as overall economic growth.