Keep an Eye on Inclusion

With the spending beginning to happen again, the IT industry is back to proactive selling. With excitement all around, I am not too surprised that an announcement from the Reserve Bank of India regarding financial inclusion has gone largely unnoticed in the IT fraternity.

On September 28, 2010 RBI announced its new guidelines for engaging business correspondents by banks. In what could well be called a game changing decision, the Central Bank has allowed for profit businesses (barring NBFCs) to become business correspondents of banks. Though RBI had earlier allowed individuals, cooperative societies, and section 25 companies/trusts, according to a discussion paper published by it in August, most of the banks that have engaged BCs have appointed Section 25 companies/ Trusts/ Societies as BCs. RBI also noted that almost all the Section 25 companies engaged as BCs have been floated by the technology service providers who had provided the smart card or biometric solutions for account openings.

While a few dedicated companies such as FINO, ALW, Eko, Integra, and Glodyne have added about 20 mn such accounts together and have done excellent work against all odds, that is too little, too late for a country like India. Especially when financial inclusion is the topmost agenda item for this government.

RBIs decision to allow business entities mean banks will now have the option to choose companies that would have ability to invest big on creating infrastructure and network, possibly tagging it along with their existing business. A large part of that investment would actually be in technology. RBI is explicit in its guidelines that banks should ensure that the equipment and technology used by the BC are of high standards.

In addition, RBI requires that the banks should ensure the preservation and protection of the security and confidentiality of customer information in the custody or possession of BC. Simple as may sound, this would probably be the biggest challenge before banks.

Today, the model typically works like this. Most of the BCs mentioned above have created/deployed some authentication technologies that are mobile-based or biometrics-based, while the shopkeeper/full time agents deployed by the BCs act as human ATMs to accept and disburse cash. While they use enough technology to convince the user that his transaction is recorded, often by sending a USSD message or giving a receipt, that is meant for customer confidence that his cash is secure. It does not, in any way, ensure that his information is securesomething that RBI is now explicitly asking for.

The new guideline is clear on how it should be doneThe banks should adopt technology-based solutions for managing the risk, besides increasing the outreach in a cost effective manner. The transactions should normally be put through ICT devices that are seamlessly integrated to the Core Banking Solution (CBS) of the bank. The transactions should be accounted for on a real time basis and the customers should receive immediate verification of their transactions through visuals (screen based) or other means (debit or credit slip). Today, there is no seamless integration with the CBS in most cases, though many BCs argue that seamlessly does not mean in real time.

But all these debates would go away once banks and the businesses that act as BCs see the opportunity and it becomes a competitive market where apart from FMCG like networks, FMCS like marketing also comes. Today, it is all being driven by the government. We have seen this transformation of increasing teledensity objective getting changed to a lucrative business in less than a decade in telecom. This would happen here too. And technology would play a key role.

I believe apart from this branchless banking, a model of RRB/Coop Bank-led traditional branch-based model will also emerge in financial inclusion and technology will make that happen in a cost-effective manner.

The game has just begun.