Next stops in India’s excellent financial inclusion journey

What a great financial inclusion journey India is on. Banks, government, NGOs, civil soviety and private sector businesses are jumping onboard as the train accelerates.

At the regulatory level, the Reserve Bank of India created a special category of reduced Know Your Customer (KYC) accounts five years ago that made it easier for any Indian to get a savings account near where they live and work. The RBI has also been providing increasingly business-friendly guidelines on Business Correspondents (BCs) and mobile transactions.

Some infrastructure pieces are now falling into place. The Unique Identity Authority of India (UIDAI) is building a biometric online authentication mechanism that can further drive mass account opening. It also offers an alternative secure transaction authentication mechanism which bypasses the mobile operator’s SIM card. The National Payments Corporation of India (NPCI) has created a mobile-enabled micro-transaction switch (the Interbank Mobile Payment Service [IMPS]) which potentially might allow any bank account holder to send money instantly to any of the other 45% of Indians who currently have access to a bank account, right from their mobile phone.

Pressure is also being applied to broaden banking services for the poor at the policy and budgetary level. The government’s Mahatma Gandhi National Rural Employment Guarantee Act (NREGA) and other social welfare payment schemes have been key agents helping their recipients to open accounts, and have put substantial transaction volumes on the table. In the national budget there is a substantial sum set aside to encourage more people to open their own bank accounts. The Ministry of Finance and the RBI have set  financial inclusion targets for banks in rural environments, and have plans to monitor them closely.

Larger banks have been busy putting their extensive branch networks online in order to allow for real-time transactions between branches, which should allow them to offer innovative services much more easily. They have also been experimenting with a variety of new technology-enabled delivery models that extend beyond branches. The mobile operators, and even a leading handset manufacturer, have also been raring to go. They are now negotiating partnerships with banks to take the Business Correspondent model to scale.

The pieces are starting to come together. So what more can be done to stimulate the market? Three important things immediately come to mind, starting with account opening. No-frills accounts reduced the pain of opening bank accounts on the client side. Now there is a need to ease the burden on banks. Eliminate the need to transport account opening forms and paper copies of documents back to the branch.  This would significantly reduce account opening costs and create the possibility of immediate, all-electronic account opening through Business Correspondents. This will be necessary for the next few years, until national ID cards are widely available and taken up.

On electronic payments, the IMPS promises to add substantial value to people’s savings accounts by permitting secure, convenient and affordable money transfers to any other account. Accounts that combine store-of-value and means-of-payment attributes are much more likely to displace informal savings options and drive account usage. But that extra value of a savings account will be there only if banks promote mobile payments among their lower-value customers and agree to low interchange fees.

Cash in/cash out networks will be more ubiquitous and sustainable if retail outlets are able to serve the cash needs of any bank customer. As long as Business Correspondents operate on a prepaid, real-time transaction authorization basis, there is minimal financial risk involved with cash in/out transactions at BCs. A potentially huge side-effect of IMPS is that it might allow any retailer with a bank account to service the liquidity needs of any customer of any bank – with interbank settlement at the back end. BCs’ retail outlets should not be exclusive. More to the point: Business Correspondent networks could in fact be de-linked from individual banks and made to serve any bank customer.

There is a lot of energy and a palpable sense of possibility around financial inclusion in India. Let’s hope all these efforts do not fall short of the great hopes vested in them. An unsatisfactory outcome would be lots of new accounts and little usage – we’ve been there. We need to ensure there is convenience, value and liquidity on those accounts.