[From liveMint, 19 February 2014, with Abhishek Sinha]
The Nachiket Mor committee on financial inclusion’s recommended objective of banking for all by 2016 is a tall order. There is no doubt about the need for that goal, but India’s record on achievement of such objectives has been dismal. Education for all and health for all are two striking examples where the goal post kept shifting by 10 years, till eventually the field was changed. Moreover, often government mandated services are converted into achieving hard parameters—how many new accounts, new branches, new agents, etc. Soft parameters such as the quality and usability of services are overlooked. The recommendation to introduce payment banks to enable ubiquitous access and creation of universal electronic bank accounts is an opportunity for banks to genuinely transform financial inclusion and recognize the high aspirations of persons with small wallets. The new banks should aim to service all Indians and channel their aspirations: reduce risk and stress, help stretch budgets, and support a better future. There are some things that need to be done to achieve all this.
For starters, consumers need to be given all options. Instead of differentiating customers into different categories, all those who want to be banked, should be given all options. Low income shouldn’t mean no-frills.
Product miniaturization is another area that needs to be addressed. In India, remittances are small, but volumes are large. India Post alone handled 96 million money orders having a total value of about Rs75 billion in 2009 but the average size of remittances is about Rs780. Why limit accounts to either zero balance or a minimum of Rs5,000-10,000? Slabs for Rs100, Rs150, etc., should be introduced. Similarly, credit needs differ across income groups. Introducing credit facilities offering Rs500 or Rs1,000 for seven days make more sense than those that offer Rs50,000 for 20 days.
The new banks also need to carefully design the pricing of products. Quality, reassurance and flexibility are universally appreciated. People willingly pay for useful services that address their concerns. Disrupt pricing; take hints from prepaid packs offered by mobile network operators and so-called freemium models of Internet companies. Don’t obsess about offering lowest prices, and certainly don’t hammer low-income customers with this message.
Technology can be another aid for levelling and inclusion. The new banks need to go mobile, go online and take advantage of the sense of immediacy that mobile phones deliver while ensuring reduced credit risk of real-time payments. Take the case of ING Direct—a branchless retail bank that successfully provided a range of banking products only through call centres and Web access. The advantage of having a branchless bank is that it leads to a higher return on investment and low capital expenditure. The immediate payment service for online transaction saw close to two million transactions in December 2013 through 55 million mobile money IDs.
Digitized financial services won’t make cash go away. With 600,000 villages to cover and banking to be brought within 15 minutes of walking distance of all Indians, there is enough of a pie to be shared. The independent white-label business correspondent network envisaged by the Reserve Bank of India (RBI) will make an effective medium especially for first-generation banking customers to get acclimatized. But banking correspondent networks are hungry beasts: economics will make sense only at substantial transaction volumes. Sharing such representatives between banks makes sense if one has to achieve scale; banks can differentiate in more interesting ways than mere availability of cash points. Rather than fighting cash, it is important to make persons comfortable crossing the physical-digital divide.
Profitability comes from credit and payments. Banks have to capture the savings of customers. Observing how individuals manage their money is the first step in that direction. For instance, persons who make payments electronically also hold their money electronically. Savings is the engine that turns other financial products into cogs. Bottom line: banks won’t make money on empty accounts, no matter what.
Finally, it is important to emphasize the scale of operations. It has been estimated that in India the value of domestic remittances is about $13 billion, with 80% being directed to rural areas. Embracing scale is imperative for success on a mobile-led strategy: digital payment services are premised on network effects, and banking correspondent networks are premised on economies of density. Systems need to perform robustly at scale, and processes need to be streamlined to avoid bottlenecks). There are many technically and commercially smart ways of doing all of this. The developing world needs to draw inspiration from successful mass-market banks.