Jayshree Venkatesan is a financial inclusion consultant focusing on innovative delivery models to serve the excluded. As part of the CFI’s recent financial capability-building project, Jayshree conducted a review of financial capability in the Indian context. India’s market is rapidly changing, with the influx of new banking licenses, government programs, technologies, and providers. In this podcast Jayshree discusses the state of financial capability-building in India, and in the post below, she offers some additional thoughts.
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Recently the Reserve Bank of India (RBI) put forth draft guidelines on licensing universal banks. The RBI had already put forth a call for universal bank license applications and issued in-principle licenses to two applicants who then formed banks. In an industry where obtaining a license has not been seen as easy, the issuance of these guidelines is an unprecedented move and one that clearly aims at solving supply side challenges of financial access. In the last two years, competition between institutions has already begun increasing with the provision of the two universal bank licenses, 11 payment bank licenses, and 10 small finance banks. If one were to consider perfect conditions of demand and supply, this would be a fantastic situation and one would assume that the era of the customer had finally arrived. However, India also has one of the highest account dormancy rates in the world. Uptake and usage of financial services, especially those where usage is traditionally contribution-driven, such as insurance and savings accounts, continue to be low. For financial service providers, such behavior fails to build a strong business case.
Unless banks decide to focus on newer client segments, including lower income households, and work to understand and shift their behaviors, what might result is increasing competition focused on a narrow, over-served segment and unhealthy price wars, without meeting the RBI’s original vision of complete financial inclusion. Building the financial capability of lower income customers is essential for both providers and customers.
In the Indian context, there is an additional factor to consider: the government’s focus on ‘digital India’. India is especially well-positioned to harness digital finance – the country has the third-highest number of internet users in the world, according to the latest World Development Report. While this number is higher among higher income populations, with cheaper data packages and falling prices for smartphones, India will see a large influx of first-time users of financial services. However, new financial services users diving directly into digital creates a huge customer protection risk for financial service providers. The time to address these risks is now, and regulators and financial service providers, along with think tanks, need to jointly address these challenges. And that includes not just usage and uptake, but incorrect usage of services, which can be far more damaging.
A search for upsides to the overlap between technology and finance can yield interesting results. In areas that financial education classroom training has been found to be less effective, it may make sense to look at technology-enabled initiatives that are based on financial capability principles. Technology offers a platform that allows delivery of financial-capability-building messages at lower costs, allows for customization of services, and can use popular media to make the message more engaging. Providing a tailored and timely nudge or reminder via mobile phones can help people save for old age or not lapse on loan repayments.
Money View, for example, is a mobile app in India that functions as a personal money manager, tracking bills, expenses, and account balances. Money View harnesses credit card and bank account transaction information to provide a daily, weekly, and monthly summary of financial expenses. The application also allows users to set a monthly budget and alerts users when budget limits are approached.
Financial capability principles that look at changing customer behaviors and empowering them, without entirely shifting the onus to customers, may be the bridge between technology-enabled financial access and customer protection. In the meantime, the older banks in India that have been facing challenges of dormancy have an opportunity to get ahead of the curve by adopting financial capability principles instantly. As the ancient Chinese proverb goes, interesting times indeed.
For more, see the CFI’s recently-launched project, A Change in Behavior: Innovations in Financial Capability Building, including the deep dive on India.
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