The Global Findex Survey 2017 reports that 80% of adults in India have an account at a financial institution. This is an important milestone for India and the world. Yet, the number of respondents who did not use an account (no deposit or withdrawal in the previous 12 months) increased from 22% to 39%, while non-usage for respondents with a bank account rose from 42% to 48%. Considering that, in the same survey, only 1% of the respondents without a financial account reported that they didn’t need financial services, demand-side issues are unlikely to explain this phenomenon.
This accounts-usage disconnect is not entirely surprising. The increase in account ownership can be attributed almost entirely to the Jan Dhan Yojana (JDY)—where 19.34 crore accounts have been opened since the last round of Findex. This was largely done through government diktats to public sector banks (PSBs): 96.8% of JDY accounts were opened by PSBs and regional rural banks RRBs. The usage journey, however, cannot be mandated and must be demand-driven.
Given the continuing dominance of cash in transactions, convenient access to JDY accounts is a function of proximity to transaction points. We have known for a while that a traditional bank branch cannot be this transaction point for all Indians given the high cost-to-serve in the context of small value accounts. The exact cost structure of opening and maintaining a savings account with a bank is not readily available. Using an activity-based costing approach, we estimate that the cost of opening and maintaining a JDY savings bank account is approximately Rs 300 for one year.
Thus, a substantial increase in transaction points can only be brought about by activating new, non-branch networks. The business correspondent (BC) channel has made some progress on this front with about 1.26 lakh BCs. Further, white label BCs (WL-BC) can help to improve profitability of BCs and achieve a more efficient distribution network. Payment banks (PBs) are expected to be the other business model that expands the agent network, particularly in rural areas. Now that some of the PBs have received their final licences, there will hopefully be more progress there.
In other markets, intermediaries that manage agent networks on behalf of financial institutions have been successful at expanding access to accounts, despite the significant operating challenges around cash movement, fraud management and handling customer grievances effectively.
Beyond points of engagement for simple deposits and withdrawals, the relevance of bank accounts grows when it becomes a gateway to other services such as remote payments, loans and insurance. The acquiring bank (that opened the account in the first place) may not always be interested or able (due to licencing restrictions) to offer these additional services.
However, there will be other specialised providers who may be interested. This is part of a broader “unbundling” phenomenon sweeping across financial services. For example, a fin-tech company might provide unsecured credit based on savings bank account behavior using proprietary credit models. Once underwritten, the fin-tech could use the JDY account of the customer for disbursements and repayments rather than dealing with cash or cheques or opening yet another bank account. For the above use case to be feasible, we need two things: Full account inter-operability and clarity on ground rules for customer data sharing along with the technical interfaces (including APIs) required to enable it.
The fin-tech must be able to access the customer’s account and transaction data with her consent, and where relevant, by providing adequate compensation to the issuing bank. RBI’s account aggregator NBFC model is significant for easing customer information flows between incumbent banks and new entrants. Several market players are using the e-NACH platform for services that entail recurring payments. Penalties for transaction failures due to insufficient account balance can be as high as Rs 750. These need to be reviewed in the context of the “newly banked” customer segment who is unfamiliar with the system and will be very sensitive to fees.
India is being viewed as a trail-blazer when it comes to the commitment of government policy and creation of unique public infrastructure for financial inclusion. The next phase will be about increasing usage and relevance of services to the customer. We highlight two key priorities for this phase: A dramatic increase in the number of transaction points so that every user is within easy walking distance of one; and secondly, build on the infrastructure innovations by enabling more entry and competition at the “application layer” in financial services through appropriate regulations for non-banks.
This article first appeared in Financial Express.