Financial Inclusion- Evolution And The Digital Push Across India

By Arun Vasan Executive Director at Capco, Alexandre Bueno Head of Innovation Lab at Capco and Aline Lemos Consultant at Capco 

1. Introduction: Emerging economies, such as Brazil and India, have been the growth drivers for the world economy. The fintech sector is emerging strongly in both countries, and the successful combination of technology and entrepreneurship has been fundamental to address the increasing demand for financial inclusion and the modernization of the respective economies. 

FINANCIAL INCLUSION OVERVIEW- 

Financial inclusion aims to make financial services accessible to all individuals in a responsible and sustainable way. Financial inclusion is considered a key driver of economic growth and poverty alleviation the world over. Several countries across the globe now look at financial inclusion as the means to more comprehensive growth. 

2.1. What is Financial Inclusion? The World Bank defines financial inclusion as “individuals and businesses having access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.”  

This definition can be broken down into the following components:  

• Universal access to financial services – digital and physical  

• Easy to use and affordable – easy user interface, usage and set up costs  

• Providing a basic bouquet of financial services – accounts, payments, lending, insurance  

• Consumer protection, regulatory support 

2.2. Why is it important? Financial inclusion is a key engine for economic growth. It contributes to social welfare and business growth. It has significant effects in the overall development of underprivileged populations across the world. 

2.3. Status of Financial Inclusion in the World- While major strides have been made in financial inclusion globally, close to one-third of adults worldwide – 1.7 billion people – are still unbanked according to the latest Global Findex data. Millions of women and low-income communities around the world remain financially excluded.  

• About half of the world’s unbanked adults reside in Asia.  

• Account ownership is nearly universal in high-income economies; virtually all the unbanked adults live in the developing world.  

• By percent of population, Africa and Latin America are the most unbanked.  

• Amongst the total global unbanked adults, 46% are males while 54% are females, with some countries facing a large gender gap 

2.4. Key Challenges- Various factors inhibit the access of individuals and firms to financial services. While some unbanked people and firms exhibit no demand for accounts, most are excluded because of physical, economic, administrative, and psychological barriers, such as cost, distance, amount of documentation, and lack of trust. 

3. Role of Technology and Digital in improving financial inclusion 

With the ability to reach financially excluded and underserved populations at a lower cost-to-serve compared to physical branches, digital financial services play a pivotal role in meeting the goals of financial inclusion. Essential components of digital financial services are digital platforms for payments and transactions, devices connectivity, and technology support. 

3.1. Mobile Adoption. Mobile phone ownership is widespread among the unbanked. As per the Word Bank 2017 report, more than 50% of unbanked people in India and Mexico have a mobile phone; in China 82% of the unbanked population have a mobile phone 

3.2. Instant Payments. Instant payment is a method of immediate money transfer between bank accounts processed 24 hours and 365 days a year. Real-time payment services are transforming the global financial landscape. 

3.3. National Digital Identity Systems. The World Bank estimates that roughly 1 billion people lack an official foundational identification. These 1 billion people are unable to prove their identity (ID), and millions more have forms of identification that cannot be reliably verified or authenticated, resulting in exclusion from economic opportunities 

3.4. Digital Currency. Digital currencies can lower transaction costs and drive financial inclusion. Retail Central Bank Digital Currencies (CBDCs) can help remake the financial system into one that is more accessible to the unbanked and underbanked. Retail CBDCs are issued by a central bank directly to people without going through traditional bank accounts. In this system, individuals have CBDC accounts directly on the central bank core ledger. 

4. Policy and Regulatory support 

Policy and regulatory support are key enablers for financial inclusion in any country. As per the World Bank study, countries that have progressed forward toward financial inclusion have policies delivered at scale, infrastructure for digital financial services, welcomed new business models, have a national strategy for financial inclusion, and laws for consumer protection. 

4.1. Regulatory Initiatives. Tedious regulations can be a barrier to financial inclusion. Many governments have moved to ease rules for opening bank accounts. Brazil, Peru, Colombia, and Mexico reduced KYC documentation for small balance accounts. One of the key regulations in India to bank the unbanked occurred in 2014 when the Indian government enabled the opening of no minimum balance bank accounts under the Pradhan Mantri Jan Dhan Yojana (PMJDY). As of Jan. 27, 2021, as many as 417.5 million accounts have been opened under PMJDY 

4.2. Building Technology Infrastructure and Last Mile Connectivity. Infrastructure readiness and technical systems are key to growing digital financial services. Regulation should promote interoperability of platforms or even shared infrastructure to reduce operational costs and increase networks and financial access. Interoperability allows for a collaborative financial system, enabling users on multiple digital networks to transact across platforms. 

4.3. Financial Literacy. Financial literacy is the ability of a person to understand the basics of managing money and use of financial products to meet their own financial goals. Creating a financially literate population is key for the economic development of a country. Providing financial education and targeted financial information to a poor and unbanked population can help them increase savings and income in the future. 

5. Future of Financial Inclusion- There are different models of financial inclusion emerging in countries around the world. Each country context varies, including in terms of availability of data and diagnostics, institutional capacity to implement reforms, financial market structure, level of financial infrastructure, and political priorities. While financial inclusion has seen significant growth in all economies, many emerging economies still have some distance to cover to convert their unbanked population to banked. We have highlighted below some key areas which need attention and action from governments and financial institutions to meet their financial inclusion agenda. 

6. Spotlight on Indian Market:  

Key Financial Inclusion Initiatives – India. Extending financial services to the underbanked has been a goal of successive governments and private institutions in India. With a population of more than 1.3 billion, India has many people who are still out of the formal financial system.  

India has a great opportunity for adoption and growth of digital payment systems in a historically underbanked market with heavy reliance on cash payments. According to a recent study by ACI Worldwide on Digital Payments across 48 global markets, India retained the top spot with 25.5 billion real-time payments transactions, followed by China with 15.7 billion transactions.  

In 2013, the government launched a program DBT (Direct Benefit Transfer - Benefits of Automatic Transfer). Through it, millions of Indian citizens began to receive state benefits more quickly. 

Another step to deepen financial inclusion in the country has been the launching of India Post Payments Bank (IPPB) in September 2018. IPPB is leveraging the vast network of Department of Posts to further scale up financial inclusion initiatives in the country .