Role of Technology In Financial Inclusion Melbourne, Australia

October 18, 2012

Sanjay Saxena

‘Regulatory Environments To Promote Financial Inclusion In Developing

APEC And Other Regional Economies’

Challenges in Empowering Underserviced Groups in Accessing Financial Services

Indian Population

Extent of Financial Inclusion

India Rural Agri-economy - 50% of GDP Yet

• 59% of rural households do not have a deposit account

• 58% of rural commercial establishments do not have a deposit account

• 70% of farmers do not have a deposit account

World Population: 7 billion people

30% Bank Accounts (2.1 billion)

75% Mobile Phones (5.2 billion)

32% Internet Users (2.3 billion)

Financial vs Technology Inclusion

India: 1.2 billion people

17% Bank Accounts (200 million)

75% Mobile Phones (900 million)

10% Internet Users (1.2 million)

Growth of mobile and internet users

Growth of mobile traffic and internet and willingness to pay

Link between Annual Income and Bank Accounts by Occupation Group

Source: IISS, 2007

True Cost of Lending for Banks for Small Ticket Loans

Source: ICICI Bank Staff Estimates (for cost of funds) and Boston Consulting Group (2007), The Next Billion Consumers: A Road Map for Expanding Financial Inclusion in India

Household Access to Financial Services Retirement Savings

Buffer Savings

Insurable Contingencies

Business Livelihood

Emergency Loans

Housing Loans

Consumption Loans

Saving & Investments based on household’s level of financial literacy and risk perception

Contingency Planning

Credit

Wealth Creation

Access

Source: IISS, 2007

Popular Solutions in India to Address FI

• Branchless banking or community banking

• Agent Banking / Facilitator Models / Business Correspondents

• Satellite Offices, Postal Banking, Mobile Banking

• No Frills Accounts - About 50 million established no-frill accounts across the country

(although only 11% are active)

Technology Option

Smart Card Issue Addressed

Distance /Accessibility

Impact

Cost effective outreach

Technology Option

Portable ATMs Issue Addressed

Distance /Accessibility

Impact

Reach

Technology Option

Mobile Phone Technology Issue Addressed

Distance /Reach /Accessibility

Impact

Cost-effective outreach

New products such as insurance

remittances, Pensions, Capital market,

Savings

Real time transactions

Technology Option

KYC and Unique Identification Issue Addressed

Information asymmetry

Impact

Verification of customers

and greater reach

Technology Option

Multi-media Kiosks / E-Learning Websites Issue Addressed

Financial literacy among

Poor / Rural customers

Impact

Greater

information

accessibility

Technology Option

Satellite Branches Issue Addressed

Distance / Reach

Impact

Cost effective / Limited infrastructure required

Technology Option

Citizen Centers / Customer Service Centers Issue Addressed

Distance / Reach

Financial literacy programmes

Impact

Greater accessibility to the

underserviced population

Technology Option

Electronic Clearing Systems / Cheque Truncation System Issue Addressed

Business Efficiency

Impact

Real time payment and settlement

Technology Option

Internet Banking Issue Addressed

Business Efficiency

Impact

Access, Speed,

Real time

transactions

Technology Option

Online Reporting Systems / MIS Issue Addressed

Transparency and accountability

Impact

Greater supervision / Improved bookkeeping

especially in remote areas / agent banking

Technology Option

Credit Information Systems – CIB / STR / CAR Issue Addressed

Information asymmetry

Impact

Reliable credit information / borrower

data / better management

of risks

What Technology can do for Bankers Technology can help to :

Meet Social Business Objectives

Enhance Cost Effectiveness - thereby increase outreach, coverage and scale

Enhance Efficiency and Business Productivity (reliable / uninterrupted delivery, economies of scale, lower transaction costs)

Improve Management of Risks – improved control and oversight

Facilitate provision of Value- Added Services (insurance, remittances, pensions, savings, credit rating, financial literacy)

Improved KYC and Identification Authentication mechanisms

The transaction costs in serving the poor is high but so are the rewards for those who do it right.

What Technology can do for the Financially Excluded

Banking at doorstep – last mile connectivity

Financial literacy and access to information

Expanding outreach despite low Population density and geographical accessibility

Provide credit history information leading to better access to credit

Choice in selecting credit providers

Provision of Value- Added services (insurance, remittances, pensions, savings, credit rating, financial literacy)

Enhance savings and remittances and Capital Formation

Making (health and education fees / charges) and receiving payments (social benefit schemes, pensions, etc.)

Speed

and eventually ….. improve income.

Challenges in Technology Integration

• High volume, low ticket data storage and processing

• Technology averse target group and low literacy levels

• Third party / technology vendor intervention / dependency

• Regulation (financial and technology regulators)

• End to End Security and reliability

• Speed and quality of performance

• Transferability and flexibility in

adoption of technology solutions

Regulatory Environment Financial Regulators • Reserve Bank Of India RBI • Securities and Exchange Board of India (SEBI) • Forward Markets Commission FMC • Pension Fund Regulatory and Development Authority

Technology Regulators • Telecom Regulatory Authority of India (TRAI) • Telecom Disputes and Settlements Appellate Tribunal (TDSAT) • Office of Controller of Certifying Authorities M/o Communications &

Information Technology Other Regulators The Competition Commission of India M/o Company Affairs

• Too many regulators

• Heavy regulation - difficult supervision

• Lack of a harmonized approach to regulation - technology vs financial regulators

• The need for a ‘Common Supervisor’

• Eg Central Bank Issues Licenses for Telecom Operators to operate mobile banking in some countries

• Need to balance the tension between allowing space for innovation – light touch regulation and attendant risks

• Need to balance the tension between ‘innovators must be rewarded’ and ‘monopolistic tendencies must not be allowed to distort market conditions’

Regulatory Challenges

Common / Uniform technology policy –

standards & guidelines (for ICT

interoperability, Smart Cards, ATMs

etc.), unified structures (such as for

KYC, centralized hub/switches for CBS)

and modalities

Some Solutions … Scaling Up Technology Based Interventions

Roadmap for investments in

technology that can be leveraged by

multiple banks – economies of scale

and reduction in operating costs

Some Solutions … Scaling Up Technology Based Interventions

Incentives to financial sector for

viability gap funding for technology

investments and operational risks

Some Solutions … Scaling Up Technology Based Interventions

FI Technology Fund for financing the creation of common technology platforms or back office services for small financial services providers who are serving the poorest clients

Develop an investment framework for

banks , IT institutions & civil society

organizations to partner and promote

collaboration in technology adoption

Some Solutions … Scaling Up Technology Based Interventions

Banking Correspondents (BC) with

Internet Kiosks & Mobile at the villages

with back-end interface to CBS

Some Solutions … Scaling Up Technology Based Interventions

A unique ID for each citizen

would help accelerate FI

Some Solutions … Scaling Up Technology Based Interventions

Common KYC norms for Banking,

Telecom and Insurance

Some Solutions … Scaling Up Technology Based Interventions

Invest in Development of new products

and services to meet the emerging

needs of customers

E.g. Kiosks are becoming outdated due to

mobile phones or digital pens instead of

smart cards

Some Solutions … Scaling Up Technology Based Interventions

Handholding through networks with

NGOs, government and other

extension agencies, CBOs etc

Some Solutions … Scaling Up Technology Based Interventions

Promote knowledge exchange and

experience sharing on technology use

Some Solutions … Scaling Up Technology Based Interventions

“Technology must go beyond handling transactions & reporting”

Total Synergy Consulting Private Limited S-85, Second Floor, Greater Kailash II, New Delhi – 110048, India

Tel. +91.11.29219397 | +91.11.41435754 www.tscpl.com | sanjay@tscpl.com

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