Digital finance finds itself at an inflection point as the world continues to tackle the socioeconomic fallout of the Covid-19 crisis. The pandemic could be a game changer for digital financial services. It seems as if digital financial services may become – and remain ~ the new normal, and rightly so. For financial services providers, digital systems promise to enhance customer acquisition growth, deepen engagement, and lower costs. For customers they make transactions affordable, accessible, and efficient. There has been an uptick in digital payments in areas which have traditionally been slow to embrace it. We should harness this momentum to accelerate the pace of digital finance adoption.
Payment systems have demonstrated that they are dependable and durable and continue to command a high level of confidence from the general population. They have eased age-old pain points in delivering financial services to customers. Money sits in a virtual account on a server where it can be transferred with the touch of a button. In the physical banking set-up, maintenance fees, minimum balance requirements, and high indirect access costs (transportation, time) keep low-income individuals from saving with financial institutions.
New technologies are rapidly changing the face of finance. Digitization is dramatically changing the financial services landscape. Financial services are being made available where you need, when you need and how you need them Technology can reduce physical barriers to servicing customers ~ resulting in lower distribution and operational costs, improved scalability, faster service, and ultimately more affordable and accessible products.
Through its financial inclusion journey, India has developed its financial ecosystem to increase the last-mile connectivity of financial services to people. Low income households and small firms can benefit greatly from advances in mobile money, fintech services and online banking. Strategic initiatives like creating technology rails that facilitate various innovations (including targeted initiatives such as the Unified Payments Interface [UPI], GST, TReDS, Account Aggregator framework to name a few) have further facilitated this growth.
With the strengthening of the Unified Payment Interface (UPI) by RBI, digital payments have been made secure compared to the past. To this end, many payment gateways have come up to improve digital transfer. This has made it possible for low-income populations to participate in the digital ecosystem.
Financial institutions are leveraging technology to revolutionize product development, distribution, risk management and a deepening of understanding of lower-income customers to create flexible, sustainable, and adaptive operating models that meet the unique needs of the poor. Technological advances are improving data transmission, collection, and analysis, enabling organizations to develop low-cost distribution models and scalable risk-management practices. By delving deep into data available from mobile usage and other sources and using algorithms, we can get insightful findings and variables that can help build surrogate financial histories of individuals who do not have formal financial documentation.
The technology-development process is one that in general is better left to the private sector, where entrepreneurship and innovation naturally happen. The challenge is that new technologies have to afford the same degrees of consumer protection and have the same degrees of prudential security that traditional tools have. While taking technological leaps, we must understand that most people still crave simplicity. With that in mind, several of them who had gone digital renounced it to revert to cash because they found old-fashioned methods a better and more reliable and effective solution. Traditional banks will continue to be the most trusted financial allies of people despite the fact that stringent regulation is effectively hamstringing them in remote areas. Tech companies may be disrupting financial services, but they lack the solid relationships built up by traditional banks over generations.
India is a country that has one foot in the future and the other in the Stone Age ~ almost literally. India has the most vibrant and innovative high-tech ecosystems in the world; but alongside it is a planet of hundreds of millions of people living in villages who are happy with a technology that’s hardly more sophisticated than a bullock cart or a plough. Thus, moving to a digital and cashless way of life involves a shift in cultural patterns, and such patterns are often hard to break. But once they are broken and new ways emerge, new patterns become solidified as societies update the way they function.
The aversion of underserved Indian customers to digital finance has much to do with their overall aversion to technology, which stems from their lack of trust in it. It is also partly due to the low technical literacy of consumers. Women in particular often face additional barriers, including less access to mobile phones, lower literacy and numeracy levels, less confidence in using technology, and restrictions on their travel or social interactions. These barriers are amplified by the absence of a local support system, in the form of female agents or women support groups. Furthermore, villagers tend to value personal relationships ~ particularly when it comes to money. They will not trust technology that they do not understand for anything except very basic payments.
While groundbreaking technology and innovative business operations provide fresh business opportunities, there are also new risks, which relate to implementing digital financial services, not just operational and technical. Though these risks cannot be eliminated, they can be mitigated. We must keep in mind the concerns of security, affordability, and safety.
Technology may well be the shiniest new tool in the financial toolbox, but it cannot, on its own, be a universal fix. Rather than focusing exclusively on creating digital solutions and expecting everyone ~ literate and illiterate, rich and poor, women and men, rural and urban, ~ to adapt to them, we must commit to ensuring that such advances work for all. The disenfranchised ~ poor, rural and illiterate or semi-literate ~ are in no position to benefit from the mobile money revolution till they get full familiarity with it and can afford to have a good and user-friendly feature phone.
There are several challenges peculiar to India that may constrain a full-scale digital transition in the foreseeable future. On the surface, this transition may not appear to be very deep. But as it pans and plays out, this tectonic shift will have much wider implications and policy executioners will have to contend with a diversity of exponential societal changes. The race to go digital cannot be turned into a sprint. India culturally believes in cash and a paradigm shift in thinking will need time and resources. Digitalization will actually involve a migration to new social and cultural patterns and habits; in a way it is more of a cultural-economic revolution.
There are marked class issues built into India’s cashless transition. The tech-savvy class has poor exposure to critical social theory and will have to get a better grasp of policy impacts on the ground. The digital revolution will have better chances of success if it is driven less by financial punditry and more by empathetic governance. People take to new technologies when they see clear benefits, have greater confidence in the markets and services, find it convenient and can afford it. The painful reality is that providers too often focus on short-term incentives at the expense of long-term consumer trust and loyalty.
In a digital world, safety and security is important for everyone. Payment providers can put in the most fool proof systems in the world but the human element of payments and hence actions resulting in fraud cannot be emphasised enough – whether it is reducing risk, improving uptake and usage, enhancing consumer protection or avoiding overindebtedness.
The pandemic shows that the trend towards greater digitalization of financial services is here to stay. Governments must close the digital divide to reap the benefits of digital financial services. This means finding the right balance between enabling financial innovation and addressing several risks: lack of financial and digital literacy, insufficient consumer protection, and unequal access to digital infrastructure, and data biases.
Building inclusive digital economies requires the collective action of governments, industry, financiers, and civil society. Before speeding ahead, we need to build the infrastructure, align the policies, and create the tools that will enable the poor to comfortably board the digital train. Digital financial service providers will need to institute practices in the design process to ensure that consumer risks are mitigated.
India should avoid the usual overstep and haste, such as the way it pushed millions of new users onto the digital economic grid by virtual fiat of demonetization, triggering large sale social and economic disruption. Instead, the government must make sure that the pace of this journey is determined by the ability of it people to cope with it. When we design solutions that recognize all as equal partners, we have a real chance to of reaching the goal. Each society is at different stages of digital financial inclusion and the necessary solutions and interventions must be appropriate for the cultural and economic context. In an attempt to leapfrog the cash generation to digital payment solutions, it should not take a highway that leaves millions by the wayside.
By respecting the cultural outlook of the people and embracing their concerns we enlist their buy in, and that is what paves the way for lasting and sustainable success. There is need for leaders to think strategically, communicate persuasively, and act decisively.