IT in Financial Services: Creating Disruptive Changes

Social inclusion was the slogan on which the UPA government came to power. Soon, it realized that no social inclusion is possible without financial inclusion. And since then, financial inclusion has been one of the more important priorities for the government. Of the 3 national priorities we have covered in this issue-access to and quality of education, access to and quality of healthcare, and access to and availability of financial services-it is only in the area of financial services that we have seen a vision, a coherent action plan, and significant actions on the ground. In fact, the prime objective of the huge UID project has been inclusion. The well-planned approach in financial inclusion has been possible because a single regulator, the Reserve Bank of India (RBI) is driving this. That coherence is lacking in healthcare, a state subject and education, a concurrent subject.

That, however, does not mean that we are anywhere close to the goal. Close to half of India's population does not have a bank account. More than 80% do not have access to credit or life insurance cover; 95% have no general insurance; and 98% of population does not participate in the capital market. We have miles to go.

However some of the basic questions have been answered. For example, a recent realization is that you cannot get people to financial services, but rather take the services to them. The fact that the traditional branch approach is a slow, costly, and inefficient approach, is something that the availability of ICT tools and services made us realize. The scope for intermediaries was also a recent realization, which was made possible by application of ICT.

Yet, if there are some things that are working and some that are not, the challenge is to keep readjusting the approach till we are closer to the goal.

Deadlines after Deadlines

While technology has been instrumental in rolling out financial services at low cost in villages and remote areas, the classical problem with the Indian system, that of dragging deadlines to future dates is unchanged. Earlier, the Reserve Bank of India (RBI) had set a deadline of achieving 100% inclusion of villages with population of at least 2,000 by March 2012. It was later extended to March 2013.

Is it because the government or the RBI has laid less focus on making technology an equal partner in the game? Perhaps not. Rather the problem is of execution of schemes and enforcement on banks to spread awareness about various government schemes to the customers. The fact is well known to the RBI, that is why recently D Subbarao, the governor, RBI, directed banks to go beyond opening accounts. "The main objective behind financial inclusion is not only opening bank accounts, but also to provide information about subsidy, interest, bank loans, and other schemes launched by the government for the benefit of people", says Subbarao.

Though the financial inclusion is taking some time, we may feel that there has been a substantial progress in camouflaging a bigger chunk of rural poor under the banking services. "Recent government initiatives to include people in the banking sector had a significant impact. Though the expectations are high, the length and breadth of the country is another big issue", regards Siddharth Chaturvedi, director, AISECT, a firm that has been working with the government on financial inclusion front and offering services through the common service centers.

India may have half of the people unbanked even today, but the RBI has taken many initiatives to ensure inclusion over the last many years. Starting with the nationalization of banks, priority sector lending requirements for banks, establishment of regional rural banks (RRBs), service area approach, self-help group-bank linkage program, etc, the RBI has taken many steps to enhance access to the poorer segments of society. And the role of technology is well visible in steps like general credit cards (more than 950,000 in circulation) and Kisan credit cards (22.49 mn cards in circulation).

Graduating from No-frills

Undoubtedly, the government has embarked upon bold initiatives such as opening 'no-frills' accounts. But it is time to look beyond. Financial inclusion does not mean opening a bank account for every person in the country. The real purpose of financial inclusion will be achieved only when people start taking advantages through government subsidy, interest, bank loans, and credit cards, etc.

Started in the year 2004-05, 'no-frills' account was perhaps the first big step to encourage people to be the part of the banking or country's financial system. But many banks complain that the accounts opened under this initiative has little served, since most of the accounts receive zero transaction, thereby making it difficult for banks to maintain. "No-frills account initiative was an encouraging move, but needs to graduate to the next-level now. The objective of achieving financial inclusion will be accomplished only when all kinds of financial activities are conducted through the banks. In my view, technology can help it take to the next level," says Prabhat Gupta, former assistant general manager of RBI and currently the country manager of Wolters Kluwer Financial Services India.

Making Co-ops Tech-ready

The challenge is to make the banking sector efficient in terms of both allocation and operation. While the former pertains to easy access to people, the latter is about harnessing technology rather than merely mechanizing to improve the functioning of banks. While the large banks in public and private sector own efficient technology set-up with sophisticated core-banking solutions, the cooperative banks and regional rural banks, which has the reach in the rural and sub-urban areas, are slow to deploy the core banking solutions. The obvious reason is that many banks do not have a scale to deploy CBS solutions and thus not capable of offering financial services to the rural poor in a secured and fast manner. Hence the RBI has laid its focus on empowering cooperative banks and urban cooperative banks (UCBs). The central bank have also issued a directive to the cooperative banks asking them to automate their processes over a CBS solution.

Today, there are a number of cooperative banks which have gone on CBS and are competing with the public and private sector counterparts with the best of services like ATM, online banking, and mobile banking services. "The RBI has certainly played a key role in driving the technology adoption in many of the cooperative banks. For those cooperative banks that do not have the scale to implement in-house CBS solutions, we suggest them to use the shared infrastructure for CBS," says Hanuman Tripathi, MD, Infrasoft Technologies.

Of course, the technology is ready to automate the cooperative banks in a cost-effective way. ICT solutions are ready to position even single-branch banks against the large banks. "Cloud based CBS is a perfect fit for cooperative banks that have either a single branch or have less branches. It saves them the pain of managing infrastructure on their own and is cost-effective," suggests Venkatramana Gosavi, AVP and regional manager, Finacle, Infosys.

Since the objective of reaching out to villagers cannot be accomplished without the engagement of cooperative banks, it is almost imperative to incentivize financial inclusion program for these banks and encourage them to further their services through innovative meals like mobile, business correspondents, and common service centers. There are cases of banks like Surat District Cooperative Bank, Himachal Pradesh State Cooperative Bank, etc, which have successfully expanded their operations after the CBS implementation. These banks are successfully offering anywhere and anytime banking facility to their customers, thereby competing with their large counterparts.

Outreach through BCs and CSCs

The government, along with RBI, has allowed the banks to relax 'know your customer' (KYC) norms and has also allowed transactions through banking correspondents in places where it is not possible to set up a bank branch. In January 2006, RBI permitted banks to engage business facilitators (BFs) and business correspondents (BCs) as intermediaries for providing financial and banking services at the doorstep. BCs have emerged as a great way to provide financial services to the poor in villages. The program is a combination of IT and banking. The business correspondents go to the poor and help them deposit money in their accounts through the wireless biometric devices. The model allows banks to provide services like cash-in/cash-out transactions, thus addressing the last-mile problem.

Furthermore, BCs are mostly local people whom the villagers recognize and trust. There are many banks and financial institutions like SBI, FINO, EKO, technology companies, etc, who have engaged BCs in the rural areas. September 2010 onwards, for profit, the companies have also been permitted to be BCs now. "Business correspondent model brings the sense of localization and is a viable option for outreach measures. The banks can engage locals as BCs, thereby generating employment opportunities," says Gupta.

The payments and transactions are reflected in real-time, since BCs are equipped with wireless-connected gadgets. Even if the connectivity is not there, the data from the devices at the end of the day is extracted into a banks core banking platform. "Wireless and mobile payment systems have enabled BCs to fetch locals into the financial loop," says Ajay Adiseshann, founder and MD, PayMate.

Undoubtedly, the services these banks offer shall have business viability if more and more transactions are made through the no-frills accounts. BCs are perhaps a step in mitigating the issue. "We are working through partners like FINO and Integra to offer banking services via BC model. It is a good step to engage the unbanked into the banking process," says CVG Prasad, CIO, ING Vysya Bank. He further reveals that it is difficult to have business proposition in rural branches because the volume of transactions is fairly low and thus recommends BCs as an option.

Common Service Centers (CSCs): Similarly, the BC services can be further provided through the use of CSCs in remote areas. CSCs are part of the e-governance initiative and being set up in remote areas like at the panchayat and block levels. "The government is promoting the rollout of financial services and payment of utility bills through CSCs. We've a network of CSCs offering financial inclusion services in remote villages. In addition, it is an effort to encourage village level entrepreneurs who can set up their own CSC kiosks", says Chaturvedi of AISECT.

Mobile: The Future of Banking

Mobile based technology is ubiquitous in India where more than 800 mn people have mobile phones. To achieve success for financial inclusion scheme, the use of mobile platform will play a decisive role. "Mobile banking will help achieve what credit cards and debit cards achieved in the previous decade. Even the farmers have mobile phones. They know how to use the device for daily usage," says Adiseshann of PayMate. "We, along with Tata Indicom and Corporation Bank, launched 'Green Money Transfer', a person-to-person mobile money transfer service in November 2009. It had an overwhelming response. These kinds of initiatives from both the banks and the technology providers will surely have an impact," he adds. "Mobile technology is a step forward towards achieving financial integration. Today, an illiterate villager too knows how to use a mobile phone," says Anand Shrivastav, chairman & managing director, Beam Money.

The RBI also understands the role mobile banking can play in spreading the transactions through the country's financial system. That is why it has recently removed the ceiling of `50,000 per customer per day limit on mobile banking. The banks are now free to place per transaction limits based on their own risk perception with the approval of its board. The move will facilitate banks to come out with innovative mobile banking solutions for business. Even experts say that the move was inevitable as increased convergence would make it difficult to distinguish between mobile banking and internet banking. For instance, a customer could access his internet banking account through a tablet using mobile networks.

"Access to credit is significant. If it is being provided over a platform like mobile, it should not be a worry. We have today odd 80,000 plus branches. But they are not enough to serve the masses. So, mobile should be made the bank, if it can," says Gupta.

Even telecom operators like airtel, Vodafone, and Tata Indicom, etc, are already in tie-ups with many large banks to offer mobile money.

Dataquests 7-Step Approach

Unlike in education and healthcare, the vision is clearly in place. The challenge is to enhance effectiveness and leapfrog in terms of technology. Here are some specific recommendations, based on our discussion with experts:

Use ICT to continuously look for disruptive innovations, not just improvements.

Create an achievement index and track it continuously; index can have penetration, availability of multiple services, and actual usage.

Create a development index and track it continuously; index can have inclusion initiatives, level of computerization of rural branches, etc.

Use the financial inclusion and financial inclusion technology fund more effectively; the later should be managed by IDRBT.

Incentivize indigenous solutions based on success.

Continuous research and testing of mobile based services.

Integration of government, retail, and financial services in rural areas.