Demonetisation brings to focus digital financial inclusion

Mobile finance offers at least three major advantages over traditional financial models.

 |  4-minute read |   25-11-2016
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Even as rural India continues to come to terms with the torrid trail of demonetisation, digital financial inclusion has come centrestage. Amazingly, even the laity has started tapping in to the buzz of digital finance.

Specialist phrases like “cashless economy" and "plastic money" are now being freely tossed into everyday discussions. Account usage and savings behaviour has significantly improved after the demonetisation move. There are behavioural changes among accountholders and those who have cheque books have started making active use of them.

According to the latest report of Inter Media’s Financial Inclusion Insights (FII), Pradhan Mantri Jan Dhan Yojana (PMJDY) programme has brought more individuals into the formal financial fold than any other inclusion-related intervention attempted to date. The level of financial inclusion among Indian adults increased by 20 per cent between 2014 and 2015.

A large number - 84 per cent of PMJDY account holders overall and 86 per cent of female PMJDY account holders - use basic banking activities like withdrawals and deposits. Ownership of a PMJDY account can provide access to more sophisticated financial services.

As these recent survey findings suggest, there is a need to shift interventional focus from simple access-oriented measures toward utilisation and engagement-oriented measures. It is only when people use financial tools to make their lives better, and their communities’ stronger, that the promise of financial inclusion is truly realised. 

The survey also shows that 49 per cent of Indian adults are digitally included. The findings should cheer up the huge pessimist lobby which considers digital financial inclusion an insignificant lever in India’s financial inclusion landscape.

Digital financial inclusion (DFI) has emerged as the new wave in the hope that it will reach the last mile consumer in the most convenient and affordable manner. Digital financial inclusion is defined as digital access to and use of formal financial services by excluded and underserved populations.

But for digital finance to be a transformative tool, consumers must have greater confidence in the markets and services should be suited to customers’ needs and delivered responsibly, at a cost both affordable to customers and sustainable for providers. The painful reality is that providers too often focus on short-term incentives at the expense of long-term consumer trust and loyalty.

money-embed_112516011351.jpg The level of financial inclusion among Indian adults increased by 20 per cent between 2014 and 2015.

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 regulations 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. And customers continue to experience trust-eroding problems in accessing their money.

With new technology-enabled channels through widespread use of mobile and smartphones, an unprecedented number of traditionally excluded or underserved people are accessing financial services for the first time. While this presents an amazing opportunity for providers, regulators, and consumers alike - clients must remain first in this newly digital world in order for these benefits to be attained.

Mobile technology has found its way to the developing world and spread at an astonishing pace. According to the World Bank, mobile signals now cover some 90 per cent of the world’s poor, and there are, on average, more than 89 cellphone accounts for every 100 people living in a developing country. That presents an extraordinary opportunity: mobile-based financial tools have the potential to dramatically lower the cost of delivering banking services to the poor.

The wide mobile phone reach in developing countries has allowed nimbler financial organisations (mobile operators, retail stores, credit card companies, etc) to develop integrated mobile banking platforms for delivery of a broad range of products and services.

However, regulators, as well as industry players that operate in such a new environment, should address a few open issues. Examples are: e-money issuance by non-banking players (eg mobile operators), risk-based approaches to know-your-customer controls, feasible requirements for non-bank retail agents and adequate customer protection.

Mobile finance offers at least three major advantages over traditional financial models.

First, digital transactions are essentially free. In-person services and cash transactions account for the majority of routine banking expenses. But 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.

Second, mobile communication generates copious amounts of data, which banks and other providers can use to develop more profitable services and even to substitute for traditional credit scores (which can be hard for those without formal records or financial histories to obtain). Third, 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.

Also read: Demonetisation about promoting private companies, not curbing black money

Writer

Moin Qazi Moin Qazi @moinqazi123

The writer is a researcher and development professional who has spent four decades in the development sector. He holds doctorates in economics and english, and has authored books on religion, rural finance, culture and handicrafts.

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