In a conversation at the IE Thinc event on ‘Financial Inclusion in the Digital Economy’, policymakers, experts and industry players spoke on issues of using digital financial inclusion to reach out to those who are not in a formal economy, need for financial education and importance of digital financial products to be safe. A panel highlighted the need for government and regulators, along with private organisations to ensure that the platforms are secure, as one bad experience can turn off potential users. The panel — comprising Gopalakrishnan S, joint secretary in the Ministry of Electronics and Information Technology; N Hariharan, chief general manager at the Securities and Exchange Board of India (Sebi); Leena Datwani of the Consultative Group to Assist the Poorest (CGAP) with the World Bank; and Srinivas Peddada, chief information officer at Bharat Financial Inclusion (formerly known as SKS Microfinance) — spoke on the issues of data privacy and the need to institute a culture of using data responsibly and ethically. The discussion was moderated by Sandeep Singh, Associate Editor, The Indian Express. Edited excerpts:
What is financial inclusion and what is happening in the field that you command?
Gopalakrishnan: Focus is on digital financial inclusion. The way I look at it is that first part is opening of Jan Dhan bank accounts. As we mature, we see not to just open accounts but avail of services also. One indicator of that is payments. With respect to payments, it has been a challenge for the past one year that why would people change the way they have been making payments? At a high level of operation, people are convinced that it is convenient but for a merchant, it makes no point to collect cash if the amount is Rs 2,000 or above. Sometimes, in big cities, people refuse digital payments. Sometimes, there is a premium on digital payments. Some allude that all payments come out into the open. People are afraid that linking with Aadhaar will vanish all their money. So, some change in behaviour has to be brought about after understanding this psychology. Convenience of digital payment is not being appreciated down the value chain. But, psychologically, people may change this behaviour if they see something in return. There, I expect killer app to be flow-based or transaction flow-based credit particularly for people from un-organised sector. If he is making transactions on trackable system, he can get credit easily at lesser rates and it can act as a hook that can force people. But it is not a cashless world we are talking of. To think of numbers, cashless and all the percentage of economic transactions is estimated to be 5 per cent or less. If we take it to 10 per cent, it will improve efficiencies down the payment system.
In India, there are about 30 lakh machines where you can use debit or credit cards, and there also, I suspect, it will be available at 15 lakh locations or less. So, inevitably in a country like India, you have to move towards Quick Response (QR) code-based payment. The person who is giving out the cards for payment should graduate to move to phone and pay.
Hariharan: Financial inclusion, financial education, financial consumer protection are powerful ingredients for financial empowerment of individuals. How we give digital financial access to citizen of the country. With financial education, we see how to create demand for such products, and to take care of consumer protection where every stakeholder has a role to play. Over a period of time, risk has been transferred to individuals and households. Over time, products are becoming complex and rapid technological change is happening. So, financial education is needed not only in India but in developed countries also, especially after the financial crisis. Digital inclusion has been propelled by the trinity of Jan Dhan, Aadhaar and mobile. Financial goals need to be set up and hence financial education is important. We are in security market and it is slightly riskier than banking. We found people lack basic financial education. So, we embarked on resource person programme empanelling teachers, professors, lecturers, professionals, retired people who are given training on financial products and they have to go back and train people in their respective places. Our target groups are executives, women, middle-income group, self-help groups (SHGs), retired persons, and financial education is done in local language. The educators come from the districts where they will work and we train them on financial planning, principles of compounding, what are the products available, insurance, pensions, mutual funds (MFs), how to save themselves against ponzy schemes, and educate people on various schemes of the government as well. We began in 2010 and today, we have covered 80 per cent districts. In the country, 1,300 resource persons have been empanelled and more than 63,500 programmes have been conducted, covering 35 lakh people. The people first get used to simple financial products, and then can graduate into taking riskier products in the capital market. Second part of it is digital financial education and the latter adds more to the learning of these people on the use of internet, credit card and mobile phones, among others.
Datwani: Greater access to financial services can lead to some of the financial goals. To have a bank account is important even for farmers, as they can unleash bigger incentive at planting season, leading to greater yield and greater food security. For families, a savings account can mean hospital bills, children’s fees, etc. India has made tremendous progress in financial inclusion. The government has laid down a road map with multiple policies being drafted where a variety of players can participate, where a lot of infrastructure is laid out for effective delivery of financial services. Companies, banks, micro-finance institutions (MFIs) and financial technology (fintech) can leverage the infrastructure to better services and products. We need to move from account access to account usage. With increasing digitisation, there is a lot of rich data that can be used to design relevant solutions. There is a need to bring in the excluded into the banking fold, so that they are not left behind or marginalised.
Peddada: We are the oldest micro lender with 80 lakh customer base in 20 states. We touch hundreds of thousands of villages every week. Our field force is 10,000. The world changed for us on November 8, 2016, when demonetisation happened. Come November 9, as a non-banking financial company (NBFC) declared by the Reserve Bank of India (RBI), we were told not to take old currency. November 9 we saw the great initiative of the Jan Dhan-Aadhaar-mobile, we thought is it scalable and found it is. We latched on to it and today, we disburse Rs 10 lakh loan every month. We don’t disburse it unless the member passes the thumb test, an imprint on device that the loan officer carries. We do 80,000 such transactions every day. We are launching a project on how do you let these people to use a bank account. We started 100 kirana points. Our member who is with us for 5 years and has a kirana store is given a device where others purchase everyday goods by putting their thumb impression on the device. Money is debited from the Aadhaar-linked bank account and credited to the bank account of the kirana point, with no cash transaction. The small savings are deposited at the kirana point, so we call it kirana banks. We want to spread it further.
How do you look to address fear in people to link bank accounts with Aadhaar? And, do we see new people coming into the financial system or is it mere transformation of the existing consumers?
Gopalakrishnan: Fintech is bubbling and evolving. About 800 new start-up companies have come up in the fintech sector in India. Most of them have nothing in terms of banking. They have big names such as Google, WhatsApp, and scope for innovation is a good thing there. Will this allow uneducated people also to play a role here? Can they not have a credit card and still use it? Here, Aadhaar-enabled payment system is used. They can give fingerprint and money then goes from the bank. That is as good as the fintech can get. Sadly, some literate people also do not have the card as they are comfortable with cash only; there is a knowledge issue. So, a change in mindset is needed. Media and the government need to educate and at the same time, digital payments should be secure, foolproof and reliable for masses. This is a bigger challenge, as till sometimes ago, the transactions were few lakhs a day whereas today it is about 5 crore daily.
While you have been conducting financial education programmes, do you see people using digital platforms for trade in smaller cities and towns?
Hariharan: Firstly, digital financial services is low-cost and it is convenient. Sometimes, we confuse between educated persons and financially literate persons. So, education is important. People should be cautioned not to share their PINs. Today, young people are tech savvy. We do not need to go through an MF agent but invest in it directly. There again, financial literacy is important. So, financial education has to cover what all risks are involved. Grievance redressal is also important. Sebi has a robust online system and with this, we have reduced the number of days from an average 150 days to just 21 days for redressal. We are coming up with a mobile app also for registering complaints. So, the customer needs to understand financial inclusion logically before using it.
Is digital inclusion happening on a real-time basis, as a rural person would want to deal with a physical bank rather than a technology platform?
Datwani: There is a hypothesis that digital reach is more efficient and is cheaper, too. But, reality of the situation is that behaviour is difficult to change. Handholding is needed and many times assisted digitisation is what we see. It’s a process that will take time. It’s not a magic bullet. However, we see movement in the right direction. but as the number of fintechs increases, we see a kind of inclusive fintech. Going back to behaviour and changing of customer experiences, the latter goes a long way in nudging that behaviour. An interaction with a platform or an app can put off a customer. We have done some work globally on design principles, it may need less text, simple language, more cues, simple process for registration, for grievance redressal, visual cues relevant in a local context. A lot of good work is being done and the world will see more to come.
Is the payments system the first thing to help people with and then will the other systems come in?
Gopalakrishnan: I don’t think so, payments all do at some level. And, it involves significant behavioural changes. If it comes to micro finance or flow-based credit, that could be the first point of engagement for new citizens into the fintech sector and then they can take to payments, as in payments, it’s more comfortable if you are available. People are gullible, and more and more literate people are greedy. The flip side is it is so convenient that you have to make one payment to get hooked.
Datwani: One area is micro, small and medium enterprises (MSME) lending that is bringing people into the fold that formerly didn’t have access to credit.
Hariharan: We should talk of digitalisation in the ecosystem, as in Sebi, we have made intermediate registration online. It is a seamless experience. Similarly, for shareholders to participate in general meetings, an electronic voting system to make the entire ecosystem more digitally enabling is what is to be done, so that geographical distance does not block the carrying out of your activity.
Do you think that the push for digital payments has been aided by your physical presence, with the help of your team being on ground?
Peddada: I think the physical presence there is a must as the kirana point has our members, who were with us for the last 5 years. It is critical as if you are not on the ground in a remote village, you will not be able to do that.
Gopalakrishnan: I won’t comment on the virtual token system. But, the point is we have to move to a culture where privacy is respected. The recent Supreme Court (SC) judgment says privacy is a fundamental right. That includes Aadhaar number, mobile number, photo, etc. So, we have to adjust to it. More than the private sector, the government itself has to change internally to bring in the right to privacy culture. It will be challenging for us all.
Credit profile of people is being built. Will it help proliferate credit availability to people going forward?
Datwani: There is a lot of credit opening up to people that had no credit before. By using social media, digital lending for small merchants is taking place and in different innovative ways. As these people build a digital trail, a lot of rich data is being created to draw out insights and to tailor products and services, protecting customer needs. But how data is stored, used, shared are the areas of concern. So, data protection and privacy is very important. We did research on what poor people thought of privacy in the context of financial services. The research was small, qualitative not nationally representative but it came out that poor people actually do care about privacy.
Is there any need to have standardisation among fintech players. So, what is the way forward?
Gopalakrishnan: Many companies trol the net and take out any data they want. There must be due protection on this. Privacy must be protected. But that apart, the payment system terms are part of public sector regulation that is done by RBI; they are also evolving. Things are changing so fast. But need for new supportive environment is needed for fintech.
Datwani: Goal is to encourage innovation by opening any one to too much risk. The amount of regulation should be in proportion to the amount of risk. Ultimately, it’s about using the data responsibly, ethically, respecting the customers and keeping their interests at heart.
Hariharan: The game changer will be mobile phone penetration. The GSMA 2018 report says there will be 1.9 billion connections by 2025 which is going to cover more than 75 per cent of the world population and the prime movers will be countries like India, Bangladesh, Indonesia, etc. Second is mobile internet connection which will lead to more people into this fold. We need to understand how consumer interests are protected, how data is secured. cyber security is going to be challenging for all players — the regulator, consumers, etc. So, it will need more of financial education.
On grounds, what gaps do you see?
Srinivas: Strong client protection principles are needed till the consumers believe in it. It is a matter of time.
How can data be protected? Is there any mechanism in place?
Gopalakrishnan: For data protection, things are in pineline. In a few months, data protection regime will take form. It will cover governments, private industry, foreign internet giants and Aadhaar, and any breach if happens will be met with proper regulations, violations and penalties.
The government wants to achieve 2,500 crore retail electronic transactions in 2017-18. Where have we progressed till now? What will we do next year if we don’t achieve the target?
Gopalakrishnan: We have crossed 1,900 crore and by March-end we near 2,000 crore transactions. Reaching next year will be too low target. Many times, UPI transactions are doubling every month. For next year, anything less than 3,000 is a cake walk.
With more financial education, do you think there will be a reduction in the number of ponzi schemes?
Hariharan: Financial education will really help to caution people against Ponzi schemes. Greed should not lure one into a financial product. Some people think that all money raising schemes are chit funds. It is not so. SEBI regulates as what we call Collective Investment Schemes. What is a CIS is well defined. SEBI has taken enforcement actions against many unregistered CIS who have been raising money from the people.
Awareness will help a long way in people not getting trapped in Ponzi schemes. Rights comes with responsibilities as well. So consumer should take informed investment decisions.
Gopalakrishnan: Greed is rife in our world. I will not agree that with technology things are going down. Today the thief is smarter than the cop. With AI, you can get a phone call from me without me making a call; your camera opening up and doing anything. In this circumstance you need to be careful.