Spotlight
New Delhi, 13 July
2019
Digital Finance Inclusion
PARADIGM SHIFT IN
THINKING VITAL
By Moin Qazi
The financial industry’s efforts to serve
lower-income customers have gone through four distinct phases: from social
banking to micro-finance to financial inclusion and now technology-driven
financial services or digital financial inclusion.
Undeniably, digital
technologies have become the most powerful lever for financial inclusion and
are considered the smartest way to rapidly unlock economic opportunity and
accelerate social development with economic empowerment. Digital tools have
fostered speedier and more inclusive growth by dramatically reducing financial
service providers’ costs and making services more convenient and accessible for
users, especially low-income subscribers in remote locations. Money sits in a
virtual account on a server where it can be transferred with the click of a
button.
According to the latest RBI
report, total digital transactions in volume terms recorded a growth rate of
58.8% during 2018-19 against 50.4% in 2017-18. The RBI says digital transactions in
value terms grew by 19.5% during 2018-19, compared to 22.2% in 2017-18.The Central Bank report states the digital finance
landscape has witnessed unprecedented waves of innovation. It has
accordingly ambitious target to push volumes of digital transactions four times
by 2021.
Digital finance payments and financial
services delivered via mobile phones and internet are greasing the wheels of
the economic system and transforming lives and economic prospects of
individuals, businesses and Governments across the developing world, thus
boosting GDP and financial inclusion a reality.
In
contrast to digital financial systems, physical channels are prohibitive for
low income populations. One, physical banking is relatively costlier and
riskier for consumers to perform even while engaging in basic financial
activities, payments, savings, investments and remittances. Two, it is very
costly for utility firms, banks, insurance companies and other institutions to
transact as it makes their operations infeasible and unsustainable. Digital
channels offer a robust fix for problems encountered by consumers and financial
institutions in traditional systems of finance.
Digital
financial revolution or “fintech,” has fundamentally changed people’s lives and
transformed the business landscape. In many markets, cash is fast becoming
obsolete and transactions are mostly via digital tools. Banking is also moving
into a presence-less, paperless and real-time era: While there will always be
bank branches, banks will become more “invisible” in how they deliver their
services, many of which will primarily be accessed online.
The
fintech revolution is led by many players, including commercial, small finance and
payment banks, telecommunication firms and financial technology companies. It
harnesses technology to reinvent traditional business models, creating
opportunities to connect India’s unbanked communities to affordable and
reliable financial tools at unprecedented speed and scale. It offers a preview
of what the global banking model may look like a generation from now.
Fintech
has freed bank staff from counters and relieved customers of the inconvenience
of transacting during banking hours. Most financial work can be done via smartphone,
improving payment systems, eliminating paper receipts and reducing frictions consequently,
not only saving customers’ time and money but improving their quality of life.
Meanwhile,
data footprint provided by smartphones and data-connected mobile phones is
providing an opportunity to bring people with limited credit-history into the
mainstream through alternate credit profiles. Alongside, Artificial
Intelligence and machine learning algorithms can assess the user’s credit worthiness
making it possible to provide loans to them even in the absence of traditional
credit history.
Digital
finance also offers major technological and infrastructure challenges. Sparse
populations, inconsistent network coverage, insufficient capital for building
new business models and customers’ lack of trust and comfort with technology
can stand in the way of success, particularly in remote or undeserved
communities.
The
risks of implementing digital financial services are not just operational and
technical there are security, affordability and safety concerns. An example: customer
privacy loss is inevitable, despite efforts to create safeguards. For India’s
financial inclusion industry to capitalise fully on the benefits of digital
finance, the accompanying risks must be understood and addressed.
In several cases
reliance on computers has proved to be deceptive whereby debt burden and
repayment capacity must be scrutinized, else it can lead to over-lending and
customer over-indebtedness, rejection of a loan based on opaque reasoning,
including arbitrary profiling based on factors like location.
In microfinance
individual traits can best be captured by personal interface. Someone might pay
off your loan, but computer modelling tells one that anyone from a particular
area is likely to default. Evidence shows the best clients are those who got
entry on their transparent and unvarnished honesty shining through their
financial dealings and not on credit scores.
However,
digital finance can have negative effects for financial inclusion. Providers of
digital finance services can be profit-seeking corporations that use digital
finance to maximise their profitability or profitable opportunities of
businesses affiliated with digital finance providers, namely banks, financial
and non-financial institutions.
Corporate
providers of digital finance services use an aggressive marketing tactic to
persuade high and middle income customers to utilize a new or existing digital
finance platform or infrastructure. They must use a less-aggressive marketing
tactic to persuade low-income and poor customers to employ new or existing
digital platforms or infrastructure if they believe the latter cannot afford
the associated fees.
This is a
challenge which goes unrecognized with the changing dynamics of digital
financial inclusion. Governments globally will have to step up and take control
of its regulatory provisions to deal with discrete challenges, which have
emerged with the rampant use of technology and multiple stakeholders. Adequate
knowledge of challenges in digital financial inclusion, is a priority which
must be addressed with precision.
India has to contend
with its geographical and cultural divide. The aversion of ‘other India’ to
digital finance has more to do with their aversion to everything that has to do
with technology. This stems from their lack of trust in it. It is also partly
on account of consumers low technical literacy.
Women often face
additional barriers: Less access to mobile phone, lower literacy and numeracy
levels, less confidence in using technology and restrictions on travel or
social interaction. Furthermore, villagers’ value personal relationships
particularly when it comes to money. They will not trust technology which they
do not understand for anything except very basic payments.
India culturally
believes in cash and a paradigm shift in thinking will need time and resources.
It involves migration to new social, cultural patterns and habits given marked
demographic and class issues built into India's cashless transition. Although
it would be impossible for it to become a cashless economy in the immediate
future as making India cashless is like treating multiple chronic societal
diseases with one injection. Also, there are several challenges which may
constrain full-scale digital transition in the foreseeable future.
It’s in everyone’s
interest to pay heed to ex-UN Secretary General Kofi Annan words: “In managing,
promoting and protecting the Internet’s presence in our lives, we need to be no
less creative than those who invented it.” Clearly, there is a need for
governance, but that does not necessarily mean that it has to be done in the
traditional way, for something that is so very different. ---- INFA
(Copyright, India
News & Feature Alliance)
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