August 20, 2019
According to data from the World Bank, over 80% of Indians have access to banking accounts. In other countries, this percentage might look like a decent coverage, but in the Indian context, it means nearly 191 million people (over 15 years of age) still don’t have a bank account. The question is – is it enough to say that India’s financial inclusion growth is heading in the right direction? Are there effective ways to cover that last mile of financial services?
Financial inclusion refers to facilitating access to financial products and services to the entire population irrespective of geographic and economic conditions. By 2018, the penetration level of bank accounts had grown from 53% in 2014 to 80% by 2018. In 2016, the Reserve Bank of India in its policy paper on financial inclusion emphasized on access to banking facilities, an overdraft facility, RuPay Debit card to households, initiatives for financial literacy, credit guarantee fund, microinsurance, and pension schemes. The numbers of no-frill bank accounts opened under Pradhan Mantri Jan Dhan Yojana (PMJDY) were a booster, which stood at 356 million (as of May 1, 2019), which is 66% of all the no-frills accounts in the country.
The reach (or access) to financial services has been a historical constraint, which is mostly being managed by incentivizing people (through direct benefits) to open bank accounts. However, the vital challenge that remains is the formal use of these financial products and services by the population that falls under the lowest strata of per capita income in the country – the base of the income pyramid: rural population, women, and MSMEs. In India, 50% of total bank accounts are dormant, nearly 23.3% of Jan Dhan are dormant accounts. Only 18% of MSMEs are financed by the formal sector. According to the India FinTech Report 2019, the MSME financing gap stands at $240 billion, and consumer lending gap stands at $300 billion. These numbers indicate a huge demand-and-supply gap in the country. With the current situation of the troubled lending market in the country and structural limitations of the formal financial services sector, it appears that the troubled financial services ecosystem in the country may not be able to address this gap at the pace the country needs. So, what is the solution? FinTechs – we believe that they can be real problem solvers here.
FinTech is becoming the face of financial inclusion possibilities across the globe, especially in economically diverse and developing countries like India. The FinTech industry’s growth story in India indicates an enormous financial services market opportunity that has been untapped. With an increasing number of startups, maturing ecosystem, and favorable government stance, it is needless to say that FinTech is here to stay and grow further. The consideration is about nudging the FinTech industry towards a direction where it should make a difference – beyond an easily accessible market of the digital-savvy urban customer base.
If you have been following FinTech industry so far, you would have observed that India’s FinTech growth has followed the usual pattern – growing from urban to urban-rural and finally trying to reach rural markets and low-income base population, where a startup touches the label of ‘impact startups,’ focusing on financial inclusion possibilities in the large underserved population of India. This transition of focus towards the underserved market is slow but eventual.
Earlier, in our India FinTech Report 2019, we emphasized that the FinTech revolution in the country has to also become a financial inclusion revolution – and that is a much more difficult task. Small wins won't make much of a difference to improve the quality of life for underbanked communities and people. To understand this, we need to look at India 1, India 2, and especially India 3 (more than a billion people with lower than $1.3K per capita). While FinTech has had an impact on India 1 and to some extent on India 2, financial inclusions need to cater to India 3 as well. So far, we haven’t seen much impact of FinTech in India 3 except a few companies like Kaleidofin, Jai Kisan, Gramcover, Credible India, and informal economy players such as Bon.pe and One Wallet (Paper King) – not many startups operate in this segment.
Reaching the customers in India 3 is a costly affair, which becomes a challenge for small FinTech ventures. However, there are ways to achieve this: for example, increasing financial literacy and nurturing relationships rather than focusing on transactional business to harness the benefits of lifetime value of customers; innovative ways of marketing such as using local influencers; piggybacking on existing digital platforms such as hospitality, mobile penetration, and cooperative societies; creating smaller products customized for specific needs of a particular group, such as small-ticket insurance products, can be of help.
We connected with Credible, Bon.pe, Jai-Kisan, One Wallet, and Kaleidofin to understand their perspective of this segment and how they are trying to make a difference in rural, agriculture and other underserved informal sectors of the economy.
Approximately 83 million people live in rural India, and a large extent of this population is engaged in agriculture-related businesses. Historically, this section has been underserved when it comes to access to financial products and financial literacy. This section deals mostly in cash and has clear fault lines when we look at the digital payments, credit demand & supply, and savings products. Vikram Sarbajna, Founder of Credible India, a FinTech startup focused on crop insurance and rural insurance products, says, “In the rural context, currently the discussion on financial inclusion is heavily tilted towards credit products. We believe more needs to be done in the space of financial education (such as awareness on how to save) and products that help manage risks.” Credible India is based out of Mumbai, and it focuses on agricultural entrepreneurs by identifying financing gaps. It has also created AI-driven crop monitoring and local market demand forecasting tools.
Another startup Jai Kisan, a Mumbai-based FinTech platform, aims to support the growth of rural Indians, especially farmers. It offers flexible, low-cost financing for agricultural equipment, dairy equipment, and other rural yield generational assets. The startup has a presence in Maharashtra and Karnataka and plans to expand in other states as well.
According to the International Labour Organization (ILO), despite high levels of economic growth during the past two decades, the informal economy in India still accounts for more than 80% of non-agricultural employment. Informality is found in both the traditional informal economy and – increasingly – through the growth of informality in the formal sector. With the formal economy failing to create jobs at scale, this size of the informal economy is bound to increase.
For example, Bengaluru-based Bonfleet Solutions (BON) focuses on the gig economy or the informal sector in the country. The startup points towards the growing market, where out of the 2.11 million total new job opportunities (in India) forecasted for the year (2019-2020), 1.4 million would be in the gig economy. Bonfleet’s Bon Credit addresses the working capital needs of this growing gig economy. It provides weekly credit limit to its customers to manage work-related expenses.
Another player, One Wallet, is solving merchant problems such as cash collection, customer management, and billing systems. The startup has reached out to 2000+ merchants for generating bills, sending SMS’ to the customer, and collecting payments online. It has specific apps for the newspaper (Paper King), milk, and hotel industries.
Kaleidofin, a Chennai-based FinTech platform focuses on underbanked customers to help them in a child’s education, better homes, or owning a shop. It offers credit, investment, insurance, and savings products through agents, cooperatives, self-help groups, temp agencies, and MFIs.
Along with these companies, a handful of other FinTech players are trying to connect the unbanked and underbanked population to the mainstream financial system of India – however, it's easier said than done. If we look at the potential customers at the bottom of the pyramid, financial literacy turns out to be the biggest roadblock. Some startups are focusing on the underserved/unserved users with basic financial needs and lack of awareness about various financial know-how such as loans, digital payments, credit scores, chit funds, and security.
According to Vikram, Credible India is running pilots with government and established insurance companies, but there is a need of actual policy intervention/change that enables the adoption of technology by companies that provide (financial) services in the rural context.
One wallet’s Paper King business is targeting the financial inclusion of 1 million newspaper vendors of India who move close to $2 billion cash every year. One Wallet’s founder Neeraj Tiwari says, “Over 5000 newspaper vendors are already on our platform, and we are processing close to INR 4 crores of bill generation every month. But the challenge remains in their habit of dealing in cash and not knowing the importance of what will happen if the money comes in a bank account.” Neeraj points out the need to promote financial literacy/awareness and suggests that the government and other industry partners should make an effort to create awareness of digital payments among them and also how it can benefit them and their family in the long run.
The gig economy-focused BON suggests that in less than two years, it has reached over 25,000 customers and has enabled 300,000 loans. Three-fourth of its customers have never had access to credit before BON. The fear of the debt trap has been a major concern for BON’s prospective customers. “In the last two years, the team has spent significant time and marketing efforts on educating the customers about the right way to use the BON card. Many customers had preconceived notions about the debt trap that a credit card can cause and hesitated from using any card. BON’s team is aware of the roadblock and uses multiple marketing collaterals to educate, inform, and encourage its customers,” says Bhasker Kode, Founder of BON.
He adds, “We believe, in the current scenario where there are multiple FinTech companies providing affordable financial services for the masses, efforts towards increasing the awareness about formal financial services will be useful in faster uptake of the products. For e.g., an industry roadshow, with participation from multiple FinTech players will be useful in opening up the markets for all.”
These challenges and suggestions are well-acknowledged. To tackle these roadblocks, the government, the RBI, and FinTech-focused government bodies such as the Mumbai FinTech Hub (MFH) are also working on various initiatives. These initiatives aim to boost financial inclusion and to ease the growth path of financial inclusion focused startups. For example, the Financial Literacy Week initiative by the RBI aims to promote awareness on key topics every year through a focused campaign. This year, the focus was on the financial literacy of farmers. The MFH has provided grants to some of the financial inclusion-focused FinTech players. These grants aim to help new FinTech businesses, increase financial access for startups, run accelerator programs, innovation testing through APIs, and manage financial inclusion labs. The MFH’s plan for financial inclusion lab focuses on three core elements:
To understand the rationale and obtain more details about these initiatives, we reached out to Suniti Nanda, FinTech Officer at the Government of Maharashtra:
MEDICI: What do you think would be some of the key areas where FinTech contribute to the larger agenda of financial inclusion?
Suniti: Financial inclusion is a broad term, and there are many stakeholders for the same. Government and financial institutes have been playing a key role in this so far. Many times, it has been a mandate-driven activity which has not fetched adequate results. Hence, it is indeed clear to make room for FinTechs to create products/solutions which will disrupt the area. And collaboration between the three – government, FIs, and FinTechs – can actually solve unique problems and also give the right coverage for results.
A large section of the population in our country is still excluded from formal banking, and there is a need to bring them into banking fold for equitable growth.
The broader implementation of financial inclusion beyond providing for basic infrastructure would involve further steps to ensure the continuance of these newly included families in the financial system by way of extending various financial services like overdraft facility, issuance of GCC/KCC, microinsurance, and more, for inclusive growth.
These services can be better distributed using FinTechs at a lower cost and with higher customer-led product specifications.
MEDICI: What are some of the MFH’s plans for contributing to the financial inclusion agenda?
Suniti: We are planning to create a financial inclusion lab alongside a financial inclusion incubation/accelerator. The financial inclusion lab will focus on research and taking it to a pre-product stage. The government will bring in problem statements/on-ground use cases. These problem statements can be either taken up by academic institute/design thinking experts as research projects. A research output clubbed with an ecosystem of SFBs, NABARD, MFIs, NGOs, etc., will seed the solution, which can be created by a new FinTech or any existing player. The financial inclusion incubation/accelerator will work with existing players and enable market access by deploying ecosystem partners or by backing through government departments.
MEDICI: How can Maharashtra benefit from the larger financial inclusion agenda?
Suniti: Out of the ~7500 villages with 2000+ population in Maharashtra, about 4800 villages are still unbanked as per the last SLBC report. Maharashtra also has one of the largest networks of SHGs in the country, which requires formalization and better access to formal credit. Also, farmers across Maharashtra, along with the informal economy, are looking for better financial products to overcome their challenges.
All these challenges will present a large playing field for new-age FinTechs to create a solution specific to Maharashtra’s problems together with the government (MFH).
MEDICI: What was the rationale and thought process behind selecting startups like Jai Kisan, Credible, and Paper King for your various programs?
Suniti: All these startups have solutions to create an impact on the ground. These are the real movers/flag bearers from the financial inclusion standpoint. For example, Jai Kisan can enable credit for a farmer; Paper King can bring a small newspaper vendor into the digital footprint which in turn will fetch him access to finance; Credible can help in price prediction which might in turn help with crop insurance or crop loan. From the standpoint of the MFH and the Government of Maharashtra, there is a clear alignment to support such solutions, which in turn enables broader benefit/financial inclusion mandates.
To sum it up, the Indian FinTech industry holds significant potential. Under the right supervision, FinTech can improve financial inclusion, reduce associated costs, as well as help to diversify financial products for different customer segments. FinTech adoption can pave a path for the entry of new players that offer tailored financial products for unbanked and underserved customers. Alternative credit eligibility assessment mechanisms can facilitate lower borrowing costs that would greatly benefit SMEs. The use of APIs can provide efficient and user-friendly services, which in turn can help develop business models to address underserved markets. But to achieve all this and more, the FinTech industry players, government, policymakers, and industry bodies need a collaborative push.