Initially, Kanhaiya[i] was wary of speaking to us. He was clutching his wallet tightly and declared upfront that he would not be showing us his ATM card. As we spoke more about his journey as an agriculturist in a small village in Madhya Pradesh to a plaster of Paris contractor in Ghaziabad, he started opening up. He told us about the many times he didn’t get paid for his work but this one time, he was so angry that he destroyed his own creation. More recently, his ATM card had broken and when he went to the branch to withdraw cash to pay his workers, he was refused because his signature didn’t match. While he is waiting to be re-KYCed, he has taken a loan to make payments to his workers. He resignedly concluded to us “dhokha bahut hota hai”. Before he left us, he made us write down on a chit of paper “Recurring Deposit”. He wanted to take it to his bank to ask them how he could open one of those things for his 2 year old daughter.
We met Salim in a cramped room in Tughlakabad, Delhi where he was executing an elaborate design on a bridal lehenga. He lives and works in this room with eight others. His family lives in Nawabganj village of Bareilly. He used to work in a company previously but left because he felt disrespected. When we ask him about how he plans his finances, he laughs and says “only rich people can plan their money”. He talks about losing savings balances to minimum balance fees and not being disciplined enough to sign up for chit funds that many of the other workers are a part of.
Dinesh Gowda moved to Bangalore from Mysore three months ago armed with a Bachelors in Mechanical Engineering degree and found a job at a metallurgical unit, earning Rs. 15,000/month. He spoke to us passionately about starting an auto-parts business back in Mysore after a few years of acquiring skills & experience. His brother-in-law is his money manager. He withdraws his entire salary from his bank account every month, hands it over to his brother-in-law every month and receives a fixed allowance for expenses. We met him around Diwali and he was waiting to get his allowance to buy gifts for his parents and sister back in Mysore. When we asked him how he felt about this arrangement, he shrugged and said, “family knows best”.
Our[ii] conversations with Kanhaiya, Salim and Dinesh were part of a series of 100 + interviews across Mumbai, Shimoga, Bangalore, Chikmanglur, Kochi, Thiruvalla, Delhi, Gurgaon and Ghaziabad where we tried to understand the journeys of the “newly banked”. We defined this as a category of people, who by virtue of migration from the village to the city or starting out at a new job, have recently gained access to a bank account and a smart phone. Our hypothesis is that this combination becomes an important on-ramp for the broader suite of financial services (credit including mortgages, investments, insurance) that are relevant to people. What we found on the ground for now is a dogged duality – almost everyone we spoke to had a bank account (this would not have been the case even 3 years ago) that they opened either as a salary account or to facilitate remittances in the case of rural-urban migrants, but relied heavily on the informal sector (friends, family, chits) to manage their broader financial needs.
Should’ve, could’ve, didn’t (invest)
The apparent reasons for this duality are not surprising. We consistently heard that it is difficult to scale the relationship with the bank beyond the savings account. While there is a strong desire to save/invest for long-term goals, there are no good solutions to solve for challenges around income volatility (a few people spoke to us about lapsed LIC policies due to inability to make regular payments) and behavioural aspects (illiquidity preference, mental accounting). Talking about investments evoked considerable feelings of “FOMO” amongst everyone – everyone had a sense that they may be leaving money on the table but were not comfortable approaching banks with their questions. Interestingly, there doesn’t seem to be a clear “action point” or “go-to brand” when it comes to figuring out investments, people talk about the market as a whole or in abstract concepts. A notable exception was a lady tailor in Delhi who asked us how she could get in on the Bitcoin bandwagon! By and large, LIC endowment policies are the way people invest for long-term goals. This is also true of educated, new-to-the-workforce millennials who follow parents’ advice on investments. The LIC ecosystem doesn’t seem very inter-operable for migrants. People routinely spoke about going back to their villages to make payments[iii].
We asked people specifically who they turn to for advice if they received an unexpected bonus or extra income. This always led us in the direction of some member in the extended family who was relatively speaking better-off and seemed in control of his (in all cases, a man) finances. There was blind faith in these trusted advisors. One young respondent who worked in an IT firm in Bangalore had signed up for unit-linked plans with ten year lock-ins on the advice of his uncle in Patna.
Almost everyone we met had a smartphone and was an active user of whatsapp, FB and Youtube. While the educated, urban respondents used the apps of their banks typically for checking balances and Paytm for sending friends money and bill payments; there was no dominant financial app being used in an integrated manner.
Opportunity for a new, customer-centric architecture
One upshot of all the technological innovation in finance in recent times is a significant reduction in fixed costs & entry barriers. In India, we have identity-as-a-service (Aadhaar), KYC as a service (e-KYC) and payments as a service (UPI) that is already catalyzing a remarkable number of start-ups who are specialized and are innovating at the application layer. Experts[iv] in this space have already predicted the “unbundling and re-bundling” that is likely to occur in retail financial services and the emergence of new players and value propositions. Banks are unlikely to be able to serve this newly banked customer base effectively given the continuing challenges with cost-to-serve. This was clear to me when I was at a panel recently with Mr. P.N Vasudevan of Equitas Small Finance Bank. He noted that their liability customers are completely distinct from their credit customers because of the need for minimum balances in the former and this is a bank whose ethos is deeply about frugality and has a ready base of millions of micro-customers.
The early wave of business models among fin-techs, however, continues to be product-driven (digital credit, digital investment platforms) while leveraging the digital infrastructure for efficiencies. However, for the generation of customers who are new to the formal system, the product lens is not intuitive and often, drives them back to familiar arrangements of friends and informal channels.
In our view, what would be transformative is a proliferation of segment-specific (students, free-lancers, migrant) interfaces and solutions that enable the on-ramp from the bank account to the broader universe of financial services. Automated savings apps such as Digit are a good example of this. A deep understanding of the needs of the customer, converting that into a meaningful and trusted solution and getting interface design right will matter a great deal. Building trust is also obviously a big factor when going beyond credit and small-value payments. Despite poor service and experiences, people repeatedly go back to Public Sector Banks and LIC because of the sense that their money will be fundamentally in safe hands[v].
Watch this space for further updates on our own work on this front.
[i] All respondent names have been changed
[iii] One merchant we met told us that LIC APIs are not available for integration with third-party platforms such as remittance service providers.
[v] Separately, the virtue of Public Sector Banks being focused on providing access to savings and term deposits and limiting the asset side of their balance sheet to rated debt securities and government securities (https://www.bloombergquint.com/opinion/2017/10/09/do-indias-weak-banks-need-a-stronger-dose-of-corrective-action) needs to be seriously explored.