Ensuring comprehensive financial inclusion for low-income households (LIH) involves enabling access to basic financial services such as savings, credit, insurance and pensions in a manner that meets their financial needs and aspirations. Past efforts in India, both by the Government and private sector, have focused on providing access to bank accounts and credit access to non-credit financial products such as insurance, investment and retirement products continue to remain very low. This report documents the results of a study conducted by Dvara Research to understand the challenges across the customer life-cycle experience with these products. While we assume that demand for these products is universal, for the purpose of this study, we hypothesize that supply-side challenges in these products are less understood or addressed by financial service providers and policymakers as compared to that of the domains of payments and credit. The study undertook a deep dive into three categories of origination models, namely, traditional mono-product providers, the more recent multi-product providers, and the newest entrant digital-only fintech models, and interviewed a set of practitioners across these categories.
The study found a set of issues that were common across all origination models, a smaller set of issues that were specific to certain institution- or product-types, and a set of issues with distribution channel design and incentive design. There also exists certain issues in KYC and payment systems that are universal to all financial services providers, that have resulted in the inadequate infrastructure needed to enable sustained financial transactions in these products. The absence of such infrastructure was found to result in higher costs, making the business of delivering these products to LIHs commercially unviable.
The study found that difficulties in prioritising insurance, investment and retirement products in the sale conversation and training the customer-facing representative to have such a multi-product sale conversation were two issues that all multi-product origination models faced. These, along with certain regulatory restrictions on Payments Banks and market practices for Business Correspondents were hindering the ability of multi-product providers from realising the full potential that their extensive networks could enable. The study also identified certain prescriptive product- or customer-segment specific regulations have led to the design of products at the manufacturer-level, that were inadequate or unsuitable for LIHs. The lack of business strategies and business models focused on the low-income customer and the prevalence of mis-leading and unsuitable sales practices have resulted in loss of trust in formal providers.
This report lays out a set of recommendations that we believe would be catalytic to solving these challenges that the study revealed. These are bucketed into Distribution Channel Design, Operations and Suitability, Business Cost Reduction, and Product Design.
The recommendations on Distribution Channel Design call for all regulators to jointly agree upon a common set of eligibility rules that corporate financial services providers must meet to become eligible for a ‘Financial Services Intermediary’ license. Existing distribution / licensing types can be gradually collapsed into this license. Additionally, the RBI can consider introducing a differentiated registration and certification mechanism for corporate BCs that have large ABC networks, large clientele and multiple bank partnerships. Such a mechanism will make it possible for a ‘marketplace’ of banking products to evolve and can become a precursor to the evolution of a truly white-labelled BC model. A tiered approach to the grading of BC agents can significantly release capacity constraints as a bottleneck for the BC model.
The recommendations on Operations and Suitability pertain to subjecting all distributors to the same standards of conduct towards their customers, irrespective of their licensing types. This can be in the form of a set of universal conduct obligations applied uniformly across all regulated entities. Also, the various financial sector regulators must jointly agree upon a set of suitability principles that govern the relevant financial functions such as ‘investment’, ‘risk protection’ and ‘retirement income’ that the products under question must abide by. Each regulator can then lay down prescriptive guidelines around how to meet these principles. Following this, regulators need to mandate the need for completing suitability assessments on providers, which they then supervise stringently. The regulator also needs to specify a set of globally unsuitable products that cannot be offered to households or businesses below a certain income threshold or net worth or individuals above a certain age. All incentive design must incentivise behaviour of distributors that is aligned with the right outcomes from these products for the low-income household. For this, the report lays out a set of guiding rules that can be applied.
The recommendations on Business Cost Reduction pertain to cost-reduction that can accrue from having a centralized KYC regime with two important functionalities: a) it allows an institution to reuse KYC completed at the time of customer-on-boarding for another product for the same customer (product overseen by a separate regulator), and b) it allows an institution to rely on KYC verified by another institution for the same customer whether or not the two institutions are regulated under the same regulator). Payments infrastructure that can support automating repeat transactions and the earmarking of small-ticket amounts for specific purposes is needed across the length and breadth of the country in a uniform manner to significantly bring down operating costs for providers in executing these repeat transactions.
The recommendations on Product Design call for removing certain regulatory prescriptions at the product- or customer segment-level, that have resulted in the creation and sale of products that are inadequate to serve the needs of LIHs.
Overall, the recommendations in the report are aimed at enabling providers to deliver a comprehensive suite of products seamlessly at the point of contact with the customer, instead of the customer having to approach many different providers separately. We hope these recommendations can pay the way for attaining a robust financial system that is able to provide the functions of ‘investment’, ‘risk protection’ and ‘retirement-income’ in a reliable, convenient and continuous manner to its customers.