India seems to be leading the charge in financial inclusion today. With one of the world’s largest populations (banked and banked), the central bank needs to move fast and decisively. And is doing so by creating its banking big bang.
The government started with the creation of biometric ID cards. The central bank (RBI) has followed with it’s reshaping of the Indian banking landscape and issued new payments bank and small bank licences: 11 payments banks and 10 small banks recently.
The aim for payment banks is to capture/convert cash into digital (i.e.the formal banking system). They focus on remittance and payment, have very limited deposit acceptance and debit card capabilities but cannot lend – high fixed cost, low margin transaction fee activity and hence large volumes are needed to sustain initial capital investment. Given the ‘last mile’, telecom/mobile channels have a cost advantage over the ‘foot soldier’ business correspondent channel.
Hence, the small banks are looking to create service advantage, at lower costs than incumbent banks. Driving up lower value deposits at a lower cost will be critical to the new small banks, many of whom are converted microfinance institutions with existing lending books. Under the lighter regulatory regime (to incumbent banks) small banks will still need to maintain cash reserve ratios and statutory liquidity ratios, both of which drive up the cost of capital when lending to the underserved.
Digitization offers both payments banks and small banks the opportunity to increase margins but also customer engagement and acquisition. While each will strive to create a mobile-first compelling user experience, the gaps in each player’s competences offers room for collaboration between small banks and payments banks. The microfinance companies (MFIs), who have deep experience with the underserved, lack the ability to accept deposits and make payments are a complementary piece of the puzzle. By partnering/collaborating, all 3 players stand to gain, and most importantly, do the underserved.
But interconnectivity and collaboration aside, the key to widening financial inclusion lies in the hands of the underserved. What they await are simple, safe/transparent and low cost solutions that improve their daily lives. User experience and the overall customer proposition must be delightful to allow for the customer growth that every new player is banking on. Digitization can automate, but it also needs to innovate and simplify.