Financial Inclusion And the Digital Revolution In the Post-Pandemic Period

Stringent lockdown norms nudged even unbanked people and small businesses to use digital transactions to access products and services

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By Gaurav Jalan


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For years, the government has been implementing policies to promote financial inclusion, given the high number of unbanked people in India. As late as last year, there were around 190 million unbanked adults in the country, who didn't have bank accounts and remained outside the purview of the formal financial industry, as per the World Bank.

Paradoxically, the coronavirus pandemic has transformed the scenario almost overnight. As social distancing guidelines forced people to stay indoors, the pandemic acted as a catalyst in nudging millions to adopt digital technology for ordering essentials and other items. As Bill Gates noted, the pandemic has supercharged the digital revolution, presenting authorities globally with an unforeseen opportunity to bridge the financial inequality gap.

Banking the Unbanked

The benefits are significant when universal financial disparity is considered. Going by World Bank statistics, as late as 2017 only 35 per cent of the population in low-income nations had an account with any bank, financial entity or mobile-money service provider. Conversely, 94 per cent of the population in high-income countries enjoyed these benefits.

Despite diverse downsides, the coronavirus outbreak is acting as a game-changer for financial services by promoting greater financial inclusion. Small firms and low-income homes can benefit immensely from swift advances in online banking, fintech services and mobile money, boosting both economies and societies overall. As a result, digital financial inclusion can foster higher GDP growth.

An IMF study shows that between 2014 and 2017, digitalization amplified financial inclusion even in the context of conventional banking services. Rating the progress of digital financial inclusion in 52 developing economies and emerging nations, the study indicates that this would have most likely progressed much faster since the pandemic has hit us. In many geographies, digital payment offerings have been evolving into digital lending as fintech players accumulate user data and devise novel ways of using the information for analysing customer creditworthiness.

Significantly, marketplace lending that deploys digital platforms in connecting lenders and borrowers doubled in value between 2015 and 2017. Although previously concentrated in the US, the UK and China, this is now growing in other regions, including India. Since financial and lending entities in emerging regions such as India majorly serve people at the base of the pyramid, they can play a pivotal role in social transformation due to their tremendous reach. As economies move from a reactive to a proactive recovery mode, the pandemic is providing more opportunities for financial inclusion.

Nonetheless, major challenges abound in driving financial inclusion across India. The barriers include inadequate financial literacy, the huge digital divide between urban and rural segments and lack of proper banking facilities in non-urban zones. As stated earlier, social restriction norms have given an unexpected fillip to the shift towards digital financial inclusion. Moreover, this benefit is visible in the greater scale, faster outreach and enhanced efficiency of the ongoing transformation.

Opportunities and Initiatives

Fintech players are responding to these opportunities via a positive financial approach. Many fintech entities have been shoring up their capital by attracting additional funds from investors and lenders. Given the earlier restrictions in 2020 on normal business activities, fintech companies have been implementing highly-digitalised solutions in catering to the lending needs of customers.

Simultaneously, to ease the plight of people during the stringent lockdown period, the government and regulatory bodies such as NPCI (National Payments Corporation of India) encouraged citizens to use digital or contactless payments to ensure their families had access to essential goods and services. Consequently, millions of unbanked people began using digital payment modes while existing users accelerated their use of digital transactions.

Furthermore, the RBI introduced numerous initiatives to increase penetration of digital payments. For instance, the use of UPI (Unified Payments Interface) to drive highly secure digital transactions was popularized through removal of MDR (Merchant Discount Rate) charges. All these efforts in augmenting financial inclusion ended up being a boon for e-commerce in India since it nudged millions of new buyers and sellers to digital platforms.

Today, the country possesses a more robust digital payments infrastructure compared to the pre-pandemic period. Undoubtedly, the financial inclusion mission can help drive the country's unbanked or underbanked cohorts to enter the mainstream financial system.

These sections include micro borrowers who were otherwise ineligible for securing credit from legacy lenders following strict customer verification norms. Modern fintech players circumvent these hurdles by using non-conventional means of checking a customer's creditworthiness. These include checking mobile payment records and other non-traditional sources that provide more broad-based insights into a customer's spending habits. The introduction of the biometric-based Aadhaar has also helped in the easier identification of customers.

Thus, once-deprived sections are now enjoying equitable access to financial offerings at affordable rates. In the long run, this can have a major impact in reducing income inequality across various sections in India. Thanks to this alternative lending model that is backed by rising Internet and mobile penetration, the financial inclusion mission is being fast-forwarded pan-India by fintech players.

Gaurav Jalan

Founder & CEO, mPokket

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