Why we can't hurry into Digital India, leaving the poor behind
Building inclusive digital economies requires the collective action of governments, industry, financiers and civil society.
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Finance can be glue that holds all pieces of our life together. It enables money to be in the right place at the right time for the right situation. To borrow and save is to move money from the future to the present or from the present to the future.
To insure is to move money from a “good” situation to a “bad” one. Ideal financial societies are those which provide safe and convenient ways of managing these simple monetary affairs.
A growing body of evidence suggests that access to the right financial tools at critical moments can determine whether a poor household is able to capture an opportunity to move out of poverty or absorb a shock without being pushed deeper into debt.
However, the existing “bricks and mortar” banking system doesn’t work for poor people, in part because most of their transactions are conducted in cash. Handling cash transactions is costly for banks, utility companies, and other institutions, which pass along the costs associated with storing, transporting, and processing cash to their customers.
In wealthier countries, people conduct most of their financial activities in digital form, storing value virtually and transferring it instantaneously. The global revolution in mobile communications, along with rapid advances in digital payment systems, is creating opportunities to connect poor households to affordable and reliable financial tools through mobile phones, and other digital interfaces
India is currently in the midst of a large effort to modernise its financial services and move individuals into the electronic financial space. The year 2017 is an important milestone and will mark the epochal transition from a cash economy to a less cash and a digital economy.
The government has demonstrated its keenness through a slew of revolutionary initiatives. The latest is the launch of Bharat QR, or quick response platform, to simplify digital transactions, which comes close on the initial success of the major big digital payment solution Bharat Interface for Money, or BHIM, an app developed to further its cashless push.
Bharat QR, where all leading card networks such as Rupay, Visa, Mastercard and American Express have collaborated, is the world’s first inter-operable payment acceptance solution and will ease electronic transactions without card-swiping machines.
It is seen as a better alternative to physical point-of-sale (PoS) machines which involves capital costs. The seamless transactions which the new solution is expected to provide will change the way retail payments are conducted digitally.
However there are several challenges peculiar to India that may constrain a full-scale digital transition in the foreseeable future. On the surface, this transition may not appear to be profoundly deep. But as it pans and plays out, this tectonic shift will have much wider implications and the policy executioners will have to contend with a diversity of exponential societal changes.India culturally believes in cash and a paradigm shift in thinking will need time and resources. (Photo: India Today)
The race to go digital cannot be turned into a marathon sprint. India culturally believes in cash and a paradigm shift in thinking will need time and resources. It will actually involve a migration to new social and cultural patterns and habits. In a way it is more of a cultural-economic revolution.
There are marked class issues which are built into India’s cashless transition. The tech class has poor exposure to critical social theory and will have to get a better grasp of the impact on the ground. The new revolution will have better chances of success if it is driven less by financial punditry and more by empathetic governance.
People take to new technologies when they see clear benefits, have greater confidence in the markets and services, find it convenient and can afford it. The painful reality is that providers too often focus on short-term incentives at the expense of long-term consumer trust and loyalty.
Migrating from a cash economy to a digital economy will demand a recast of the entire mindset for consumers. In fact, the last mile of the digital highway is not infrastructure but the skills of users. Equally critical is the smooth functioning of the last mile touch point.
Making gadgets available will not help unless we bring about a change in the overall outlook of people. It will require thinking very hard about the motivators that will pull the consumers into this new space. The issue is a lot more nuanced than what we are seeing today.
Nuances change from culture to culture and consumer segment to consumer segment. Consumers will come into the digital platform and embrace the new opportunities believing that if they change their behaviour and exert the effort to get into the new world then certain specific pains will disappear.
We have thus to address real pains, not just offer benefits. “You have to look really hard and ask, 'What problems are being solved?'," says Nick Hughes, who shepherded the team that turned M-PESA into a revolutionary financial tool. “Unless problems aren’t being solved, it becomes a bit of hype.”
Mobile money is one medium which has had spectacular success in several developing countries. Mobile-phone use has skyrocketed in emerging markets in recent years.
According to the World Bank, mobile signals now cover some 90 per cent of the world’s poor. That presents an extraordinary opportunity: mobile-based financial tools have the potential to dramatically lower the cost of delivering banking services to the poor.
As a platform mobile has a unique set of capabilities that can overcome the challenges posed by the Indian payments landscape. Mobiles offer a low-cost means to create financial access and payments. It can extend the last-mile reach of banking services either through business correspondents (BCs) or directly to the end consumer.
A mobile platform uniquely combines digital identity, digital value and digital authentication to create low-cost access to financial services - for instance, OTP-based authentication for Aadhaar-linked accounts and biometric authentication for processing transactions.
In addition to cost-savings, digital financial services offer a wide array of benefits:
- Providers can use financial histories to develop automatic reminders, positive default options, and other choices offered via mobile phone menus.
- Mobile-finance clients keep their money in digital form, and so they can send and receive money often, even with distant counterparties, without creating significant transaction costs for their banks or mobile service providers.
- Financial flows can be accurately tracked, resulting in safer and speedier transactions as well as less corruption and theft.
- Provider get useful insights form transaction patterns about the behaviour of certain segments of the client population, demonstrating how variations in income levels, employment status, social connectedness, marital status, creditworthiness, or other attributes shape outcomes. It helps them design products that are better suited to customers’ needs, cash flow, and risk profiles, including fee-for-service offerings and smaller-unit transactions.
- Direct deposits (including wages and government assistance) allow money to “bypass” the home, helping users save rather than spend - which often gives women more financial authority within the family.
- Digital modes like mobile platforms link banks to clients in real time. This means that banks can instantly relay account information or send reminders and clients can sign up for services quickly on their own.
More than a billion people in emerging and developing markets have cell phones but no bank accounts, credit cards or debit cards. Many low-income people store and transfer money using informal networks, but these have high transaction costs and are prone to theft. Mobile money is beginning to fill this gap by offering financial services over mobile phones, from simple person-to-person transfers to more complex banking services at much lower costs.
In an informal economy, most funds travel in cash via networks of relatives and friends or courier services. Such conduits can be slow, unreliable and expensive. Over wireless networks, money can move instantly, at any hour, and sending costs less than a penny.
As a result, the poor not only have a bit more to spend but also enjoy better health because wage earners can respond more quickly to financial emergencies, such as illness. For customers, access to immobile money lowers the transaction cost of sending and receiving remittances, improves the safety and security of cash, and makes payments more convenient.
In India, an early and quick transition may not seem plausible because of the magnitude of the geographical and cultural divide. The aversion of the other India to digital finance has more to do with their aversion to everything that has to do with technology. And this stems from their lack of trust in it and also partly on account of lack of comfort with technology and literacy needed to fully use these services. Women often face additional barriers: less access to mobile phone, lower literacy levels, less confidence in using technology, restrictions on travel or social interaction.In an attempt to leapfrog the cash generation to digital payment solutions, India should not take a highway that leaves millions by the wayside. (Photo: India Today)
Increasing financial and digital literacy alone will not be enough. Some things are better addressed through regulation. If there are things that are clearly negative for consumers, then they don’t need to exist. But changing the financial framework is also not enough. Consumers will have to walk that extra mile if they want to reap the harvest of these new financial tools.
Although we must continue to make the case that responsible digital finance is good business, we know that isn’t enough. Independent and well-resourced regulators, consumer groups, and other organisations are critical to ensuring the consumer protections afforded by law and regulation are actually followed and enforced.
The Helix Institute of Digital Finance’s latest survey of agent networks in Uganda highlighted just how commonplace fraud and robbery is for agents, not just in Uganda, but worldwide. Customers continue to experience trust-eroding problems in their dealings.
In India, the RBI has been instrumental in enabling the development of the fintech sector and espousing a cautious approach in addressing concerns around consumer protection and law enforcement. The key objective of the regulator has been around creating an environment for unhindered innovations by fintech, expanding the reach of banking services for the unbanked population, regulating efficient electronic payment and providing alternative options to consumers.
Talk of “cashless societies” might be overblown, but societies in which digital transactions can be made seamlessly by all are by no means fiction. The biggest success story is Kenya. The Kenyans discovered that with the right technology, exchanging money between physical and electronic forms can be done securely, and as naturally as exchanging notes for coins.
The famous mobile network Safaricom developed M-Pesa (M for mobile; pesa is payment in Swahili), a transformative mobile phone-based platform for money transfer and financial services which is the driver of Kenya’s digital financial revolution.
Launched in 2007, it quickly dominated the cash-transfer market, and grew at an astounding rate, capturing more than two-thirds of Kenya's adult population as customers. It now stands as the most developed mobile payment system in the world, and has heralded a development revolution impacting millions of low-income Kenyan households.
However, a deeper slicing reveals that the granular and higher resolution picture is not necessarily so tinted. Few mobile money accounts are actively used. While money flows through these networks, most of the volume comes from users merely topping up prepaid mobile accounts in transactions averaging less than a dollar.
And, when people do make remittances, those receiving the money tend to cash it in, taking the money out of the system and limiting the potential for mobile money to become a medium of exchange - a mobile wallet for buying things or to provide banking services over mobile networks.
A survey of accounts opened under Pradhan Mantri Jan-Dhan Yojana (PMJDY), India’s flagship financial inclusion programme, found that only 33 per cent of all beneficiaries were ready to use their Rupay cards. The others were bewildered by the complicated PIN and activation procedures.
Inconsistent electricity and sporadic internet access further eroded customers’ trust in ATMs and POS machines, with one failed transaction enough to make an entire village swear off formal financial institutions.
India should avoid the usual overstep and haste, the way it pushed millions of new users on to the digital economic grid via demonetisation - triggering large-sale social and economic disruption - and make sure that the pace of this journey is determined by the ability of people to cope with it.
In an attempt to leapfrog the cash generation to digital payment solutions, it should not take a highway that leaves millions by the wayside.
There will be challenges in shifting consumer behaviour. In Kenya, agents were incredibly important to educating customers and assisting them with their first transactions, building awareness and a comfort level with the technology that eventually led to habitual usage.
India’s business correspondent (BC) model - equivalent to the agent network in Kenya -remains relatively underdeveloped. The sticking point is that the commissions of banking correspondents who are an important piece in this ecosystem and a key touchpoint are low and the government is not willing to consider this issue.
Recent research by the Helix Institute of Digital Finance revealed that in the BC model, Indian agents earn a median income of $52 per month compared to agents in Kenya who earn $192 per month.
Managing the agent network is the most critical post launch success factor. Agents conduct the cash-in and cash-out functions, enabling customers to convert cash into electronic money and back again in convenient locations. In the eyes of the customer, the agent is the face of the company.
This means the agent can either build or destroy trust and credibility. Many providers focus on building their agent networks as fast as possible, without careful attention to the agents’ business case and profitability.
Experts suggest three key tenets in managing an agent network (1) grow the customer base and network in tandem (2) understand agent economics and risk - the business case for agents is not that simple and (3) only enroll agents who have the right skills and dedication, and be prepared to train and retrain.
The right way to drive a revolution of this type is through empathy - not a form of empathy that comes from superiority, but one born from a profound humility. It is an offering of respect, a moment of listening to stand in the shoes of another. The most successful leaders were those who recognised it and invoked it in the developmental interventions they shepherded.
Building inclusive digital economies requires the collective action of governments, industry, financiers, and civil society. Before speeding ahead, we need to build infrastructure, align policies, and create the tools that will enable the poor to comfortably board the digital train.
When we design solutions that recognise all as equal partners, we have a real chance to of making to the goalpost. Each society is at different stages of digital financial inclusion and the necessary solutions and interventions must be appropriate for the cultural and economic context.