Is Advancement in Technology Leading to Financial Inclusion?
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Financial inclusion covers much more than just payments and transactions - it includes savings, credit and insurance, none of which receive the same level of attention as the first two. Financial inclusion is about access to tools to facilitate day-to-day living, and for everything from long-term personal and business goals to unforeseen emergencies.
India has made enormous strides in payment systems, and the numbers are growing rapidly. Google is the latest entrant into the Indian ecosystem of service providers for payments, joining the likes of PayTM, Aadhaar Pay, MobiKwik amongst several others.
Scope and Scale
According to an IAMAI-IMRB Report, India has around 700 million mobile phone users; while mobile internet users totalled around 450 million at the end of June 2017. Morgan Stanley expects this number to double in the next 10 years, providing an avenue to tap into the large underserved segment for banking services.
Even after demonetisation, roughly 80 per cent of transactions in India are in cash, compared to 21 per cent for developed countries, a band that India aspires to join. Experts estimate that the digital payments business in India will grow from $50 billion in volume in 2016 to about $500 billion in 2020. There is tremendous growth potential scale for providers of mobile payment solutions like wallets, peer-to-peer payment applications, etc.
Moving Beyond Payments
Moving to the lending sphere, small and medium enterprises (SMEs) contribute around 37% to India's GDP yet theyface a huge gap in much needed credit because of geographical inaccessibility, or the lack of a credit history.Deloitte's 'Fintech in India: Ready for Break Out', reports a credit demand-supply gap of about $127 billion for SMEs.
Technological intervention can easily address the challenges imposed by traditional lending and credit scoring models; fintech companies - and the banks partnering with them - are able to leverage alternative credit assessments, reducing turnaround time and transaction costs in approving loans and credit lines.
As a 2017 PwC report pointed out, there are now 158 start-ups in the alternative lending space.At the end of October 2016, alternative fintech based lending in India received $199 million in equity funding across 33 transactions, almost twice the amount in 2015: $103 million across 21 transactions.
In the insurance space, technology has been much slower to develop, partly because of delayed adoption. But growing customer demand is changing that; insurance companies are looking for solutions that enable better customer engagement and retention. Cost and process efficiency gains are big opportunities, giving fintech companies significant scope for innovation.
What's Below the Radar?
How can people of very limited means in rural India benefit from financial technology? There are two possible ways. First, minimal transaction costs can help poor people use savings products so they don't have to keep their cash at home. Second, and even more importantly, as more people use digital payment systems, their transaction history will help build the foundation of a credit profile that will enable access to credit products, both digital and from regular banking channels.
The legendary Bill Gates, co-founder of Microsoft, said that banking is necessary but banks are not. "Digital payment systems can do more for equality in poor countries than they can do anywhere else," he also said "We're not waiting for it to trickle down as we do for many advanced technologies. That's not good enough." That's a takeaway for us in the fintech business.'
Futurethink: Some Ideas for Navigating the Future
So, what are the takeaways for entrepreneurs exploring fintech? Technology is driving financial inclusion, but the journey is not without its challenges.
First, entrepreneurs will have to stay on top of the regulatory landscape.
Second, data and cyber security will have to be managed. Third, the banking and credit ecosystem will be looking for solutions that enable consumer protection; this will also align with the regulatory framework for misconduct and fraud, that most people expect will be implemented fairly soon. Fourth, you cannot ignore customer expectations. Consumers will want more: more products, and more innovative solutions to meet their various finance needs.Some will have concerns on data security and fraud protection.
The players who will lead this change and achieve success will be those who are able to manage the convergence of evolving technology, the regulatory environment and changing consumer expectations.