Author: Nilofar Haja
Summary: Adoption of digital financial services by urban and rural consumers received a boost in the course of the pandemic, however, significant digital literacy barriers continue to hinder uptake for the majority of low-income unbanked and underbanked in rural India.
A Way Forward: Implementing a hybrid physical and digital financial services delivery mechanism that leverages multi-channel services such as Aadhar-linked payment, India Post payments bank, quick banking service kiosks, and SMS-based banking can accelerate social transformation for rural consumers.
Phygital Service Models
On January 5 last year, the RBI announced the creation of a ₹345-crore Payments Infrastructure Development Fund (PIDF) to boost digital payments in Tier III to VI centres and the seven North Eastern states. The move was aimed at encouraging Points of Sale (PoS) infrastructure in a phygital model, a hybrid physical and digital financial services delivery mechanism that would allow people in small towns and villages access to expanded payments, transactions, and a bouquet of banking services that urban consumers already had access to on their smartphones.
A few days later, to underline this ambitious commitment, the RBI released the National Strategy for Financial Inclusion 2019-2024 as an overarching framework to accelerate financial inclusion and sustainable development.
The timing couldn’t have been more opportune. The arrival of Covid-19 and the series of lockdowns and country-wide restrictions on movement and businesses further reinforced the move to a cashless economy for consumers in urban, peri urban and tier II cities and towns.
The ensuing rules of social distancing and zero contact provided the right impetus for a transition that was already underway since November 2016 with the announcement of demonetization.
This shift in adoption, however, hasn’t been uniform across the country. Where does the rural segment, constituting 65% of this country’s population, find themselves in this technological disruption?
Spotlight on Rural Markets
Over the last decade, financial inclusion programmes such as the Pradhan Mantri Jan Dhan Yojana (PMJDY), Direct Benefit Transfer (DBT), Atal Pension Yojana, launched by the incumbent government – have accelerated accessibility of traditional banking and financial services and helped bring more rural citizens under the diversified umbrella of digital financial services.
As per a 2020 RBI report, of the 400 million bank accounts opened through the PMJDY program, 64% of accounts were held by rural Indians as of August last year. Furthermore, about 43.7 crore restrained bank accounts were opened with a deposit of ₹1.46 lakh crore as of October this year. Nearly two-thirds of these accounts are active in rural and semi-urban areas. Additionally, the number of banking outlets in villages/ banking correspondents (BCs) has increased from 34,174 in March 2010 to 12.4 lakh in December 2020.
At present, access to financial services for the rural last mile largely translates to opening a bank account, sending money back home, or applying for a loan.
Services such as wealth assessment, agricultural inventory management, or updates on DBT schemes are still not easily accessible. What are the barriers? Conventional banking requires an elaborate onboarding process, including procurement of documents, KYC and verification, and multiple visits to the bank. What this translates to for the daily wage earners, agricultural workers, and low income groups is loss of wages as well as additional money spent on transportation and food to get to the banks.
What’s At Stake
Adoption of digital financial services in urban and tier II regions have grown largely on the back of sizeable smartphone penetration numbers in India (748 million users as of 2020).
The number of internet users is expected to increase by 45% in the next five years to 900 million in 2025 from around 622 million in 2020, according to the IAMAI-Kantar ICUBE 2020 report.
However, smartphone penetration in rural India is still at 28%, as per a 2019 Kantar report. A majority of the 300 million mobile users in rural households neither own nor have access to a smartphone, making critical financial, medical, and emergency services out of their reach.
Financial inclusion is increasingly being recognized as a key driver of economic growth and poverty alleviation the world over. The United Nations Sustainable Development Goals (SDGs) of 2030 views financial inclusion as a key enabler for achieving sustainable development worldwide by improving the quality of lives of poor and marginalized sections of the society.
RBI’s National Strategy for Financial Inclusion report outlines how steady access to financial programs and transactions lends impetus to job creation, protects the vulnerable from economic shocks, and increases investments in human capital. Greater financial inclusion can support sustainable and inclusive socio-economic growth for all, ushering in far reaching social transformation across vast swathes of the underserved population.
Fintech Start-Ups Leading the Way
Small finance banks, fintech companies and non-bank financial institutions are deploying low-tech, phygital models of financial services delivery by providing banking services using Aadhar-enabled payments, kiosks, and e-KYC via regular mobile phones.
Chennai-based non-banking financial institution, Dvara KGFS, founded in 2008, helps build the financial health of low-income populations in remote rural India through a combination of traditional physical branches and digital banking. Their omnichannel strategy enables customers with varying levels of digital skills to transact and interact seamlessly through multiple channels such as agent networks, call centers, and apps. With 294 branches across 51 districts in six Indian states, Dvara has served more than 1.16 million customers.
The most impactful journey has come from BHIM, a UPI-enabled payments solutions app that has collaborated with 102 banks across India. Unlike other payment wallets, UPI payments do not require a digital wallet to store cash and also functions offline.
Specifically addressing lack of accessibility for rural customers, all transactions on BHIM can be carried out through SMS, eliminating the need for a smartphone or internet connection. Users can also send money via IFSC and MMID (Mobile Money Identifier) code to other customers who don’t have a UPI-based bank account. BHIM currently serves 10 million rural customers.
Broaden the Resource Base
An inclusive financial services framework encourages a culture of savings, enables customised access to a spectrum of services, and helps lay the foundation for sound decision making pertaining to savings, wealth generation, asset management, and portfolio assessment. When low income groups have access to financial services, it also reduces their dependence on exploitative money lenders.
In its accessible financial inclusion framework guide, the World Bank highlights that gender gap in (bank) account ownership remains stuck at 9 percentage points in developing countries. What this translates to is poor or zero access for women towards experiencing financial security or achieving economic well-being for her family. Countries with high mobile money account ownership have less gender inequality.
It is high time that the government and private sector players work in tandem to create impactful ways of building financial self-reliance for India’s last mile.