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Why Bharat lags in going digital

Women learning to use a mobile for digital transactions

Why Bharat lags in going digital



India is an interesting place to be living in currently, particularly for people like me, in the eye of the financial maelstrom. This is a fascinating phase. We have today universal banks, small finance banks, payment banks and then, microfinance. Every seminar or conference on financial inclusion must have all these entities on the dais. We debate ad infinitum on where the sector is heading; does one entity coming up mean the doom of another; and what does the other sector need to do to ensure the stability and protection of vulnerable client groups.

The latest conversation is about digitisation of delivery of financial services. The premise being put forth is that this will bring in efficiencies and lower the cost of service delivery. According to a World Bank report on Fintech and Financial Inclusion, global investments in Fintech ventures grew by 75 percent, reaching $22.3 billion in 2015 ($12.7 billion in 2014).

For a vulnerable segment like microfinance, digitisation is a valuable intervention since the largest risk to the business is cash in transit. I have been working with the Reserve Bank of India (RBI)regulated microfinance sector over the past four years. The challenges for this particular segment are two-fold. The price of delivery of digitisation to this segment is quite high and the ability of the borrower to understand fintech solutions and the secure environment it includes is limited. In the interest of financial inclusion, prices need to be lowered for microfinance institutions (MFIs) on the supply side and literacy around digital transactions has to be integrated into the delivery mechanism for the borrower, on the demand side.

I was at a conference last month that dwelt on the impact of digitisation on financial services. As one panelist put it very aptly, the conversation is between India and Bharat. India has the sophistication, the wherewithal and the appetite to consume digitised banking services. The larger body of  people has been brought into the framework in some way or the other but do not really understand the ecosystem they have been co-opted into. When it comes to the provision of fintech services which combine digital and mobile technology with financial services, inclusion drags its feet. There are instances of rural borrowers with bank accounts who have their Rupay card laminated and tucked away in the cupboard since they think it is an award from the government. Even in urban India, in malls and other public spaces, one can see the janitorial staff approaching the security guard with their ATM cards and giving him their PINs while waiting patiently in line as he withdraws money for them, one by one.

Over the past two years, various entities have been getting into relationships with different telcos, wallet companies and fintech companies offering solutions. The impressive rise of fintech companies and entrepreneurs has, to date, been focused on developed markets, with the provision of products and services aimed at customers who understand something about sophisticated banking.

So, while everyone is holding on to different parts of the elephant, the elephant is still not visible to everyone in the room. The larger majority who is either unbanked or under-banked needs to be onboarded on the fintech train from a point where they understand what they are doing and why they are doing it. While the supply side is buzzing with solutions, there is a large information gap on the demand side in the case of vulnerable households accessing these services. Awareness of security of transactions, need for confidentiality in the use of PIN-enabled cards or other access devices is integral especially for vulnerable people.

In one of the innumerable seminars and conferences on the subject of digitisation of the financial inclusion space, an esteemed co-panellist stated that their app had been translated into 30 different languages. The presupposition was that everyone could read. The truth is, while everyone speaks a language, only those with some sort of education can actually read. Most people who will take up fintech services have feature phones and apps are usually designed for an Android or iOS platform. Infrastructure, in terms of internet connectivity and electricity, is an issue in large parts of the country. While infrastructure will take its time, interim solutions need to factor in these vulnerabilities in their design.

The difference between India and other countries which have successfully integrated technology solutions into financial services is size and absolute numbers. The M-Shwari model in Kenya has been a runaway success. M-Pesa has reached over 80 percent of Kenyan households, according to the World Bank 2016 report.  But one of the largest MFIs in India worked with M-Pesa for two years and yet could not upscale successful pilots because the price point for delivery was high.

Today, many MFIs are working on integrating digital solutions into their disbursement and collection models. Considering that the population is spread across urban, peri-urban and rural India, this is posing a challenge. Due to the feet-on-street model of microfinance, the outreach exists. But cost is a major factor. MFIs borrow money at commercial rates from banks and other institutions. The RBI allows them a margin of cost of funds plus 10 percent or 2.75 times the base rate of the five largest commercial banks by asset size (which is notified on a quarterly basis), whichever is lower. This hovers around the 26 percent range and the 10 percent needs to factor in the opex (operating expenses) and other expenses. This leaves MFIs with a very slim margin as profit, usually between one and two percent.

MFIs are permitted by regulation to levy a processing fee of one percent of the loan size on borrowers which is an all-inclusive fee. Any expense arising in the delivery of service has to be absorbed within this construct. This makes it very difficult for MFIs since they are already working with low margins. As a result, price becomes a major stumbling block for digitisation. The solution, in part, lies within the volume that microfinance generates. Today, there are about three million women borrowers across the country. A vendor who is willing to absorb a part of the cost of delivery in the initial stages and can demonstrate viability will be able to onboard many MFIs who are constricted due to price considerations. This could generate the necessary volume to ultimately bring down the price.