Session 3: Fintech for Sustainable and Inclusive Development
10:35 am – 11:00 am GMT
Discussion
Chaired Thankom Arun (University of Essex)
Victor Murinde (SOAS), S. Sundarrajan (I-Exceed), Omar Guerrero (Alan Turing Institute), Priyadarshi Dash (RIS), Varnika Goel (Twimbit)
Transcript: –
Thankom Arun
We have two panel members here
Varnika Goel and Priyadarshi dash, Varnika is co founder and Research Director of twimbit. And she is an experienced FinTech research analyst. And she works on areas such as neo banking, open banking, and SME bank,
Professor Priyadarshi is associated with research and information systems for developing countries. RIS in New Delhi. And his research interest is more about development strategies ,service, trade, and fintech and he contributes to the debates on G20 , IndoPacific, and Asia, Africa.
So with this verse, Let me invite our panelists to say, their perspective about these presentations in their first round of reaction. And after that, we will get comments and questions from our audience as well. You can raise your hand at that point of time. Otherwise, you want to write some points, please put it on the chat. We will pick it up.
So let me start with Varnika first , Varnika please-
Varnika Goel
Thank you, Thankom, I’m apologizing for my voice again, not feeling too well, today. So thank you, keynote speakers, I think that was a really interesting presentation, I would like to start with Sundar’s presentation. And I personally have commissioned a research where we were analyzing customer onboarding journeys for payment banks, and we were trying to assess how frictionless is the onboarding journey for payment banks like India post payment bank, we had Fino payments bank, we had NSDL payments bank and we also had Jio payments bank, and what we were trying to really assess is that despite the digital journey that has been devised by these payment banks, and through the push of the government for Financial Inclusion, it is not completely digital currently in the nature due to certain challenges, which are majorly skewed towards KYC. Because through this effort, what they’re trying to do is like you also mentioned in your presentation is to onboard last mile customers. However, in most of the times, there are chances that these last mile customers have not yet gone ahead and created an Aadhaar card for themselves or they do not have the identity and then the entire process gets stopped at that level itself. And there is a whole new process that opens up that you need to first establish a digital identity and then you can actually get into receiving the Financial Services.
These banks also and my question is, do these banks also support this kind of problem, the challenge of first identifying that, you know, these last mile customers do not have an established identity and how can we onboard and secondary is if once the onboarding happens if there is a credit need, and since these last mile customers do not have a credit history, or they haven’t transacted this, and would need something called as micro finance in nature, which is a very short term small ticket loan, how do we then try to service that request? Because we haven’t established a, what do you say a credit channel for these customers.
Sundar Sundararajan
Sure I will answer both your questions the first one on Yes, the KYC the last mile connectivity getting them done is a challenge. Now with the video KYC coming in, I mean, that also needs to be accomplished, completed to get the whole process done. So here is where the government has now brought in on there is a temporary KYC where you can operate the account open for about six months or 12 months and then by then do the full KYC make sure that it is done. But having said yes, I think one good thing happened I would say today other penetration into the country as a whole is about 95% I think that has really helped in terms of ability to open bank account for all of them. But having said that video KYC getting the authentication done is not always doable, and particularly the where they are connectivity issues related to their part. But having said that is where the partial KYC to get the account going. And then probably in six to 12 months period, do the full KYC, including the video recording. And when they’re completing their process that helps in terms of getting them on boarded.
And I would say I think the payments bank, all of them are also learning and improving. Because they realize how do we make it smooth and friction less and make sure that the entire process is more than that’s only to get them on boarded and do that. So suddenly, they are also fine during this process of getting this done. But having said yes, there are challenges need to overcome . But I’m glad at least what it used to be, let’s say two, three years back, that had been resolved. Now there are few areas still need to improve. But it has been vastly improved. And I have myself seen the new bank account getting opened in like four to five minutes. And if everything all goes well, they’re able to get the functional operational account in four to five minutes. And that’s really a great thing compared to what we’ve seen in the past in terms of getting a new banking account.
The second question on I think in terms of the they don’t have any credit history or will they get lending. And yes, I think the payments bank by nature, they are not able to lend and they are not able to they can only what the money comes in and do. But here is where the small finance bank comes into the picture. So they are traditionally like you take there are like 10 of them. microfinance institutions they normally go give, even those who are not having any credit history, they don’t have, they can’t give any collateral, but they still need an amount and then they repeat it on a daily basis or a weekly basis to the repayment part they use that with the to do but we have seen is really these small finance banks or these microfinance institutions, they are able to offer small loans with no credit history, and then they just build it up from there, they give them a six months loan based on the repayment and then their capacity, how they are able to manage money, maintain that track record, they are able to give them more so that microfinance institutions, Small finance banks are helping them into that stage. But having said I feel it now, the whole FinTech and the payments bank are also evolving, eventually will lead on to also them able to offer and give them the smaller lending. I mean, not the big ticket loan items, but atleast a smaller one. There’s on the capacity they will be able to do. it is improving. But yes, it’s not reached. Let me put it this way. An optimal mark, play Mark.
Varnika Goel
Thank you. Thank you. Sundar so another thing that comes out in this is that what we’re seeing now in India and as well globally is the rise of digital ecosystems. So it is not just about a like a particular license servicing. So for example, a payments bank would have a payments bank license and that would be more restricted towards opening an account conducting transactions. But for financing we have to reach out to a small finance bank. But it is more from a partnership or digital ecosystem where a small payment bank like India post payments can also partner with a small finance bank and insurance distributor and maybe a lifestyle aggregator come together create a digital platform which is a one stop shop. Do you think that is a very the efficacy going forward and going to support again, the last mile customers financial needs from an end to end journey standpoint? Because I know Jio payments bank is trying to do so but the prototype is still not out yet. Yeah, and they’ve been trying to do so for the past two years.
Sundar Sundararajan
True in a way if you ask me, I think it’s already started happening in small pockets maybe as a pilot phase or maybe as an initial case they started doing and I think the good part here is I think including the payments bank, even the large NBFCs, non banking financial corporations or the microfinance institutions, they all realized the digital story now, next case is going to be part when I say Bharat it is the tier three tier four the rural India, because if you take the people in the metros and the tier two, tier three, up to tier one, tier two, I mean they are able to handle they get all that are required needed and I mean probably they are getting so two extra needed, there will be an incremental I mean in terms of offering they can go, but if you take Bharat and that’s where the the rural India where there is a lot more scope definitely that is increasing now. And in terms of the small finance banks, they are able to partner with the FinTech players and then they are able to bond alpha and payments bank they need to do they what I understand. I think there is also certain things related to the regulations in terms of what products they can offer what solutions they can give They are restricted to an extent. But having said I think RBI is doing a great job central bank in terms of in bringing about these payments bank the small finance banks, and then trying it out like for instance, I can give you like the IMPS initially when they opened up the limit is capped at two lakhs. Now, they agreed to 5lacs the same day, the offline payment to enable the rural payment where there is a connectivity poor, it now just getting opened up to 200 rupees, it is so small, probably like two pounds. But advantage here is try this out test is out there, it’s offline. So there is no validation of balance in the account, and then increase the ticket size gradually. So with that approach the same day, whether it is to lending or enabling the payments bank to go to more, or the small finance banks to go beyond the limit setting now, I think it is coming in. But the good thing is, there are a set of players who are the banking licenses they can do, they can offer a set of products, there are a whole lot of Indian players, they don’t have banking licenses, but they can ride along with these core having the banking licenses and offer a complete solution to the end consumers. So here is where the fintechs and the people banks, which are having the licenses to operate, they combine collaborate together and then offer the end product. Yes, there are pockets of pilot faces, initial things are happening. But we see in the next five years, it’s going to be much bigger, much greater and in terms of the reach, and how they’re able to go through and do that.
Thankom Arun
Thank you. Thank you both. Priyadarshi , please
Priyadarshi dash
Thank you professor Arun. First of all, congratulations to both our keynote speakers for making observations on the FinTech development linkages. I’ll not be specifically commenting on the content of both the presentations. But in the spirit of the session that we have. Now how FinTech provides the platform to address some of those concerns that we failed in a conventional model where now you have to go to physically to a bank to access services and other things. You know, what Mr. Sundararajan presented is the faith in the postal system, you know, the postman knows everybody in the village. And I myself have seen in my childhood, that how how one get excited, if you get a message that you have got some money order from somebody, and that the postman comes and delivers whatever amount, the amount is not important, and something has come and he handovers the money. And even though it’s a very small amount, it gets a gift from the receiver, because that kind of equation. So what it indicates that how we can leverage on low cost infrastructure available with us. So converting the Indian postal network to provide financial services earlier also, there were options of opening personal deposit accounts. Not many of them were excited, or many of them found it attractive, but because there was no combination of the value added services. Now what is happening Fintech is not just helping them to access all the traditional financial services, but also the ease at which they can do it which hasn’t read and also of course at a scale, which is optimizing the cost benefit part for the supplier side. Now, what is that we can take from this experience and try to generalize in terms of as a low cost model of including those who are unbanked? The beginning itself we got to know what is the proportion upon bank population. And even though today, if you want to go to open a bank branch, the operational viability in some locations could be questionable, because the small size of the population, the operational area of that branch, so that there are problems with that. So FinTech brings hope that in rural areas , in unbanked population, you can go beyond the conventional financial services, and offer some value added services, for example, you have got UPI. I was looking at some numbers that are in the last three years from as of September 2021, the UPI transactions were worth $6,543.5 billion. That’s 11 times rise in three years. So what we’re witnessing is a movement to our say, less cash society, if not no cash society. So that is a positive thing happening. So wherever, regardless of the physical location of the beneficiary or the household, the services are reaching so this is a positive aspect of inclusion, but what needs to be done is to replicate in other places, and how to avoid the rat race among the FinTech innovators. Now, what has happened, everybody started taking interest in the FinTech platform, the FinTech startups are getting easy funding, they don’t need any fixed capital. So that applies to both overspread and decyl. Also how to see catch a model. So you can operate from a couple of systems, provided you have
some model to some FinTech innovation to offer. So Regulatory Sandboxes precisely does that testing in India, which is necessary, is a controlled experiment and some third phase of the regulatory sandbox experimentation is going on. So once we come up with this type of say, endorsement by the regulator, Reserve Bank of India, and in case of other financial services, the other NBFC and others, also get similar kind of thing. What we do actually, is to fill the gap, where the funnel banking or the beacon model banking model cannot reach, provide complimentary shows, but also in terms of offering services with transparency. Now, imagine the government transfer programs during COVID itself, whatever government has put programs, I’ll just take a faction of millet, the direct benefit transfers, were so transparent and so faster. It is not because of the FinTech innovation, it is because of the digital identity created through other so that the jam Trinity experiment made it quite possible to say, for these kinds of services. So both of you have touched upon the various standards of today, let our participants also participate in this thing. So precisely what is happening, retail payment revolution, the speed and transparency as to which government transfer programs are going on how poor people with a smartphone, can access information and value added services at a low cost. These are the dimensions which actually offer and justify the session. So with this, I close my remarks and get back if there are further opportunities to interview. Thank you so much.
Thankom Arun
Thank you, thank you Priyadarshi . I think we have we have to allow our audience to ask questions. And I can see Nikki, who has been patiently waiting for some time to ask a question. So I think we need to have took reactions in terms of questions and answers. So shall I go to the key and then so that I’m armor can actually respond to these questions together? Is that okay? Is that because in that way, we can say sometimes, Niki, please.
Nikiforos Panourgias
Thank you. Thank you very much. Sorry, I wasn’t sure what the etiquette was. So I wasn’t sure when you when you were going to take questions. So I have a couple of questions. I think the first one is, is for both the speakers actually. One of my PhD students is is actually on the on the governing board of the Central Bank of Iraq. And his PhD is really at the intersection a little bit of both the presentations because it’s about how to ensure social inclusion, sorry, financial inclusion, as they try to rebuild the sort of payments infrastructure of the country in Iraq. The one thing that sort of struck me because he’s done a sort of very extensive and exhaustive literature review is to see really what the kind of fragmented concept financial inclusion is. So you know, it ranges from, you know, very sort of blunt quantitative measurements in terms you know, accounts per million, etc, etc, etc. To kind of much more kind of nuanced kind of social cultural indicators. Obviously, you know, bear in mind that being Iraq They have a lot of complications in terms of cultural, ethnic, and religious inclusion, as well as financial and economic inclusion as well. And, and what struck me was that a lot of the problems I see with almost the entire literature on financial inclusion, basically come under the umbrella of what Omar was presenting, because of the, the interdependencies between a lot of the kind of indicators used in in the literature. So sort of, I was wondering, in practice, how, when you were looking at financial inclusion, you did try to measure it or to assess it some way. And, and then to Omar, if if he could see a way of taking his method from, you know, developmental goals to something more specific, like financial inclusion. And and I think it would be a really fantastic project, because I’m pretty sure my student has kind of almost found every single paper about financial inclusion out there. And I think it’s a huge gap there. And obviously, you know, we’re talking about very many different literature’s looking at this from different angles. So I’m sort of, you know, wondering whether we can, we can come up with something useful as well out of this discussion. And the second question was probably more for Sundar and relates to the question about onboarding, your customer that I think Varnika brought up, we, my presentation yesterday was about the importance of, say, a standardized identify, but more the sort of very high corporate level with the, with the global legal entity identifier. I’m wondering there, whether something like that, but that sort of level of the individuals and legal entities which are probably not caught by something as as kind of high level as the legal entity identify whether that could be something that practically would be useful, or if if in the Indian context, there is some provision for specific kind of identify a standard or something like that, that would address some of the onboarding issues, some of the Know Your Customer issues, and so on. So those were my my two questions. I’m sorry, if I if there’s too much there to unpack. But those were my my two, my two questions. Thank you very much.
Thankom Arun
Thank you, Niki. Anindya, do you have a very quick question, because we don’t have much time left only three minutes left for that. But if it is very important please go forward.
Because I just, you know, wrote my question in the chat box for Omar. So maybe we can just take a look at it. And I will request, you know, the rest of you please go ahead.
Thankom Arun
Thank you. Thank you. Thank you Anindya for understanding. So Omar and Sundar so we got a couple of questions. And it’s, you can you can have good responses to these questions in one or two minutes. Shall I go to Omar first? Omar
Omar Guerrero
Okay, thank you. Yes, quickly to Nikki. Actually, it’s interesting that you mentioned the financial inclusion. And when when Sundar was giving his presentation, I actually had a thought about that, because financial equation seems quite a broad topic, if you will build an indicator is probably this is not expert opinion, obviously. But I’m sure it’s built for many other indicators like financial literacy, which Sundar mentioned. So in the context of ppi, for example, as long as you have indicators on these issues like literacy, financial regulation easiness of doing business, I’m sure those three will have interdependencies that will trickle down to financial inclusion without necessarily having algorithm program to push financial inclusion, but rather these other three more disaggregate specific topics. Now, let me go quickly to the comment to the question of Anindya so I see the question about the critic to IBM’s. From the Lucas critique. I’m actually surprised that you put it in that way because I would say is the other way around. It’s abs are actually one of the best ways to address the Lucas critique. Probably if you see criticisms from the Lucas critic point of view to ABMS is because they’re not criticizing really ABMS, but they’re probably criticizing stochastic models without behavior. So ABM proper properly defined in social sciences has a behavioral model underneath. So for those of you that are not familiar with the Lucas critique is this idea that we can take data many times aggregate, which is the outcome of some behavioral process, and then we estimate relationships within this data, we estimate parameters and then we make policy based on those parameters. The idea is that agents will react to the policy and will change their behavior. So the model that they are using is not valid anymore to to estimate the outcomes of the system. And the only way to address that then is to go too deep parameters which have to do with behavior. In the concept of economic models it has to do with preferences. For example, well, ABM is one of the best tools to precisely specify a diverse set of behavioral models. And we do in PPI actually. And we do have actually a specific paper on the Lucas critique, and all this Xander policy evaluation, which I was very happy to share. So just quickly with, like, was my, my answers.
Sundar Sundararajan
yeah, so Niki what you raised is a valid one, I think in terms of the KYC. The know your customer, particularly country like ours with 1.3 billion population. And then having done validated, maintain, managed, validated, and servicing the every single request or the need. And I would say the government has done an incredible job in terms of managing it, safeguarding securing it. And at the same time, authorizing who is allowed to access for what purpose was, 1- ensure that there are only authorized people can access to this data and 2- I as a consumer, I’ll also get a message if my records have been accessed, for what purpose from whom, so that there is also a counter validation in terms of doing it. And so there is a huge entity, the corporate that has been created to manage and maintain and run like the UIDAI. And that’s an organization that owns manages monitors this data. And they continue to enhance and enrich in terms of protecting safeguarding making sure that who is accessing the data, you need to give access at the same time, you need to avoid a misuse of this information. And then for any purpose, any reason and the same time and give access to that the TVC Percy, we are able to do it on time. And as per the need request, it could be from the banks for to the KYC it could be for today that is being used for many other services. And if I need to do on when to file my tax return, and even now recently, it is even linked to the voters ID. And that’s a really good system like one single identification that’s being used across. And so I think there are measures taken to making sure that it is indeed valid and correct and address the needs of the citizen and at the same time ensuring that it provides the required measures to complete the Know Your Customer process.
Thankom Arun
Thank you. I think, Sheri . Yes, I think it’s your call, please. Sheri please
Sheri Markose
To both speakers. Let me go to my first and the extent to which his models are age based and granular. I think we may have to have another conversation on that Omar. Let me go to Sundar. So now the point is that financial inclusion in his study that Thankom and I have made, you know, I’m of the views that service for the poor becomes poor service, because the funding gap is now properly identified and addressed. And you yourself said to me, the postal bank and most financial inclusion projects at the moment are running in the red, they don’t cover the costs. So you indicated that it will take a number of years it is possible, it is a possibility. This also sort of covers what Omar said, How long will it take to get into the black for Financial Inclusion, let’s say for the postal bank that you’ve studied in great detail, and hopefully, you’re going to give us the data on it.
Sundar Sundararajan
Yeah, I think today, if you ask me, it is also serving the people bottom of the pyramid, the poor in the country, they need to get the benefit. And that’s where the government has taken the initiative, I will say probably about in the next four to five years, they can probably turn it into be a profitable one. Because what is also happened here, apart from taking over the department, of course the Indian postal staff that are available, there is a huge investment that has also come and is brought in on and bringing the record the system, the software, the ecosystem, and it is available 24/7 during the pandemic we have seen the volumes have just gone up and they are able to still service and support them. So I would say probably the next two, four to five years they will be able to break even but it’s what well, they must but in terms of bringing all these people into the formal economy and then giving them the Financial Services access, which was not there till now.
Thankom Arun
Okay, we don’t we don’t have much time left but quickly Varnika and Priyadarshi do you have something very urgent to add on to this please.
Varnika Goel
I don’t have something to add on. But like I want to discuss this as an innovation opportunity within India, that cooperative banks hold a large balance sheets in terms of supply chain financing for small medium enterprises, which also act as an underserved market in India. However, the cooperative banks are becoming this lower dying a segment within India despite a strong hold in the sector. So, how do we create a digitalized journey where cooperative banks can actually create lending solutions or there is a digital platform that supports lending and can actually digitalize the supply chain from the standpoint of distribution small vendors that come in for textiles or agrichemicals or petrochemicals logistics, these are small medium enterprises. From a large scale perspective, manufacturing becomes the bigger larger enterprise group, but at least from a small vendor standpoint or distribution standpoint, who need line of credit or working capital, how can they get supported through the through a digital platform? So if we can think about and maybe if since there’s limited time, we can take this question later as well or I can connect with some them
Thankom Arun
Thanks, Varnika. Sundar hold on a minute. Priyadarshi , do you have any
Priyadarshi Dash
I have similar observations, but not exactly on that dimension, you know, what is happening in the first phase of this financial inclusion started with woman self at that time, digitalization was the not the MO it was inculcating the spirit of saving among the low income households that you can also save, it can also convert your savings into productive capital, which worked, but then what happened. So many civil society organizations community based organization started operate that. So basics and others SEVA and others to do a successful models, they started facing the problem of repayment. So after a point five or 10 times of Tikki savings that was accumulated through the self help groups, that part five or 10, multiple of that they used to get access to go for some low income, passive income generating activity. And subsequently, there are so many microfinance institutions, the repayment was poor and the fail. That is precisely what I was referring to the race to bottom in terms of offering low cost, soon, not ending, not becoming a mess for the world. Regulator and for the whole, that thing, now completed there. Now the banks are thinking to perhaps merge with some FinTech startups, so that small FinTech startups, becoming non viable and then make getting most among themselves is not unlikely scenario, one could think about despite of all these things, that we have good things that we are facing now. So how to see such type of failure or consolidation, are banks competing with FinTech platforms, adopting some of them, these type of things could happen. So we are proceeding, but where it is going to
Thankom Arun
Thanks Priyadarshi , Sundar , your last comments
Sundar Sundararajan
I think he point Varnika, what you raised on the cooperative bank is very valid. The Reserve Bank of India is now as a first step trying to bring them on to the core banking solution, there are 4500 property banks in the country as a whole, getting them all onto the core banking solution. So that that enables them that give them the backbone, the backend processing engine needed to support the customer base install, but what you say is absolutely bang on it’s valid, both the consumer and the SME that are being serviced by the cooperative banks, they are not very well equipped in all the aspects and they need to do but having said Now, if you look at in the last year or two, that each state for all the cooperative banks within that state like Kerala state cooperative banks, Tamil Nadu state cooperative banks, Gujarat state cooperative banks, the state government is taking the initiative saying look, these are the cooperative banks I have in my state, how do I bring them on. So, there is clearly a move now, that is taking place probably have the more on cloud on a SaaS model offered to these cooperative banks they complete banking services they do so, that straight from the channel the digital layer to the backend processing layer, the servicing part everything can be given, because individually, it doesn’t find that cooperative banks having this entire technology ecosystem and their ability to run is a huge task. So, they can just pay by us a transaction, but having said it needs to be these are all very small ticket size very small amounts, I ended the transaction cost needs to be also very, very minimal very, very less so, that they can afford to they can also use this kind of extended services and though that equation need to get worked out, but actually there are steps that are being taken place on the next step the corporate banks the rural banks, how they can do in terms of some of the crowd and addressing the needs of the customers and making use of the digital infrastructure that is available to offer base to the customers.
Thankom Arun
Thank you. Thank you Sundar. It is time to conclude our session. We are late by 10 minutes but looking at the nature and depth of discussion, 10 minutes is not by not a big big lapse. Thank you Sundar and Omar for two very illuminating lectures very illuminating lectures. Personally I learnt quite a lot from the experience and also the that new approach of policy evaluation . So thank you very much for your time and also your presentations here. I’m sure that the whole conference benefited quite a lot out of it. And thank you Priyadarshi and Varnika for your comments and Nikki Sheri and Anindya for your comments.
