Editorial Today – How to win the financial inclusion war

What is financial inclusion? Financial inclusion is the delivery of financial services at affordable costs.

What is no frill account No Frills account is a basic banking account. Such account requires either nil minimum balance or very low minimum balance.

Benefits of financial inclusion The rural masses will get access to banking like cash receipts, cash payments, balance enquiry and statement of account.

How these products and experiences will reach customers Technology is changing the way financial services are provided to the underserved and will be critical to success.

What is business correspondent model? Provide service at people’s doorstep through the use of third party services.

Ways to make the agent model more sustainable  Players can expand the portfolio of products sold by agents to include higher margin products such as loans or investment products.

Approaches needed for various product delivery Research with agents suggests that distinct approaches are needed for simpler lower-margin high-volume services.

What does all this mean for payments banks? Findings point to a tiered agent model, where different types of agents provide different types of services.

Conclusion

What is financial inclusion?

• Financial inclusion is the delivery of financial services at affordable costs to vast sections of disadvantaged and low income groups (for example “no frill accounts”).

What is no frill account

• No Frills account is a basic banking account. Such account requires either nil minimum balance or very low minimum balance. Charges applicable to such accounts are low.
• The central bank had introduced ‘no-frills’ accounts in 2005 to provide basic banking facilities to poor and promote financial inclusion.
• The Reserve Bank has asked banks to convert the existing ‘no-frills’ accounts into ‘Basic savings bank deposit accounts’ in 2012 because the nomenclature ‘no-frills’ had become a stigma.

Benefits of financial inclusion

• The rural masses will get access to banking like cash receipts, cash payments, balance enquiry and statement of account can be completed using fingerprint authentication. The confidence of fulfillment is provided by issuing an online receipt to the customer.
• Reduction in cash economy as more money is brought into the banking ecosystem
• It inculcates the habit to save, thus increasing capital formation in the country and giving it an economic boost.
• Direct cash transfers to beneficiary bank accounts, instead of physical cash payments against subsidies will become possible. This also ensures that the funds actually reach the intended recipients instead of being siphoned off along the way.
• Availability of adequate and transparent credit from formal banking channels will foster the entrepreneurial spirit of the masses to increase output and prosperity in the countryside.

Hence, it is believed that financial inclusion can initiate the next revolution of growth and prosperity.

How these products and experiences will reach customers

• While technology is changing the way financial services are provided to the underserved and will be critical to success, it is believed that the reliance on agents for last-mile banking coverage is likely to continue in the medium term. High-tech will thus need to be combined with high-touch, that is, cost-effective and at-scale agent networks.
• But India’s past experience with the business correspondent (BC) model offers a cautionary tale for payments banks looking to build agent networks. The model has chronically suffered from low profitability and high churn.

What is business correspondent model?

• In India more than 65% of the population is classified as “Under Banked or Unbanked”. Recognizing this problem, the “Reserve Bank of India (RBI)” introduced a regulation in 2006 allowing banks to provide service at people’s doorstep through the use of third party services. This model is referred to as “Business Correspondents/Banking correspondents” in short BC’s.
• BC is a representative authorized to offer services such as cash transactions where the lender does not have a branch. Primary role of BC is to oversee the proper development and functioning of indirect banking channels. These business correspondents are subject to RBI regulations and would have direct contact with one or more financial institutions. These BC’s charge a commission from the bank for enrollment of clients, transactions, deposits etc.

Ways to make the agent model more sustainable

• First, players can expand the portfolio of products sold by agents to include higher margin products such as loans or investment products.
•  Second, players can pick agents who are involved in businesses other than financial services so they are not ‘dedicated’, that is, not solely dependent on the financial services business for their income (according to a study, two-thirds of BCs in India are ‘dedicated’ agents, far higher than in other countries such as Kenya, Pakistan or Bangladesh).

Approaches needed for various product delivery

• Research with agents suggests that distinct approaches are needed for simpler lower-margin high-volume services (such as cash-in, cash-out and remittances) and for more complex higher-margin low-volume ones (such as account opening, insurance, credit and investments).

Here are three important considerations.

• First, agents that are in “push businesses” (that is, those that require active selling, for example, clothing, electronics) are likely to be more successful in selling higher-margin low-volume products (such as account opening, insurance, credit and investments).

Lower-margin high-volume products (such as cash-in, cash-out and remittances) can be sold by “pull businesses” (that is, those that are more reactive to customer demands, for example, kirana stores, and mobile top-up agents).

Higher-margin, more complex financial products (for example, credit, insurance, investments, etc.) are likely to be “push products”, meaning they are likely to require the agent to get involved in the various steps of the sales process—identifying customers, generating interest, explaining the product’s value proposition, handling queries, closing the deal and then managing documentation and customer on-boarding as well as post-sales support.

In contrast, simpler financial transactions such as remittance transfers and mobile top-ups are “pull products” for which there is an existing active demand for the product from the customer.

• Second, merchants that have a high footfall in their core businesses (for example, kirana stores), and thus limited time to serve, are more suited to selling lower-margin high-volume products, while merchants who have low footfall (for example, speciality clothing, electronics) can manage higher-margin low-volume products as well.
• Third, for complex high-margin products, it is important to pick agents with a strong standing in the community, while technological proficiency is key for selling low-margin, high-volume products., for complex high-margin products, it is important to pick agents with a strong standing in the community, while technological proficiency is key for selling low-margin, high-volume products.

What does all this mean for payments banks?

(Payment Bank– We can define a Payment Bank in India as a type of bank which is a non-full service niche bank.  A bank licensed as a Payments Bank can only receive deposits and provide remittances. It cannot carry out lending activities. Thus, Payment Banks can issue ATM/debit cards, but cannot issue credit cards as they are not empowered to carry out lending activities.)

The above findings point to a tiered agent model, where different types of agents provide different types of services.

• First, there could be a cadre of dedicated “full service agents” who conduct the most complex and time-consuming transactions and essentially serve as mini bank branches. They need to be educated and technologically savvy. They need to see financial services as their primary business and be comfortable offering a full suite of products. They will need intensive training and support from payments banks, akin to an in-house sales force.
• Second, there could be “medium service agents” who do some of the more time-consuming transactions such as opening bank accounts, selling loan products, etc. (It is important that these agents be comfortable with active selling and be well established in the communities they serve so that customers trust them with these financial transactions)
• Finally, there will need to be a large number of “lite service agents”—small merchants in “pull businesses” who have little time to devote to complex services and only do simple financial transactions (for example, cash in and out, remittances). These would be businesses that have a high footfall, with younger, more tech-savvy agents, who are likely to require little training and support.

Conclusion

• Success as a payments bank will require cracking the agent model.
• It is believed that such a tiered approach to agent banking will be critical to balancing scale with complexity