A digital banking revolution comes to India

April 11, 2016 was a monumental day for millions of people living in India. On that Monday, the government launched its Unified Payment Interface (UPI), a digital banking system that allows people to easily transfer money to and from a bank account or to others via a smartphone. While this kind of money transferring was available to people before that date, it wasn’t accessible to everyone. Now, with UPI, nearly everyone in the country can open a bank account, save money and make transactions.

Most Canadians take banking for granted, but in India having a bank account is not a given. In fact, 233 million people were considered “unbanked” in 2015 — most of these people have never walked into a financial institution before and if they do have an account it’s balance is likely zero. What Indians do have, though, is smartphones. The country has 220 million smartphone users, which is second only to China, and while overall penetration is just under 30%, the user base in the country is growing at a 27% compound annual growth rate, according to Vserv, a mobile marketing company.

It’s these smartphones, and a growing digital banking culture, that will allow the unbanked to open accounts and those with bank accounts to more easily manage their finances. In India digital banking has become a political priority, says Piyush Singh, Accenture’s head of financial services business in India. It’s actually implemented a three-part digital banking strategy called the JAM Trinity – the J is for Jan Dhan Yojana, a program that offers basic savings accounts with small credit lines to the unbanked, the A is for Adhaar, a biometric-enabled authentication system and the M is for mobile, which is the primary mechanism for access.

The goal is to make banking cheaper, more efficient and easier to access for all of the country’s citizens.

But it’s also meant to bring the millions of unbanked Indians into the financial system and to create an easy way to transfer government benefits to the people who need them most. “The aim of all of these initiatives is to bring banking and financial services to hundreds of millions of people,” says Singh.

 

The move to mobile

As innovative as western societies are, when it comes to digital banking, the financial industry is lagging behind many developing nations. That’s party because of legacy systems, enormous branch costs, and outdated technology that can’t handle mobile. In many emerging markets, including India, there was no real financial system until the 1990s, so the industry was able to develop with a technology-first mindset, says Chris Skinner, author of Digital Bank: Strategies to Launch or Become a Digital Bank. “Alongside the birth of Facebook, you have the birth of financial systems that never existed before,” he says.

In many ways, the banking system has been built off the back of the mobile network. For instance, customers in India can communicate with their financial institutions by text message. If someone wants to get their account balance, they dial a number from their cell and then the balance gets immediately texted back. Essentially, all someone needs is a phone – they don’t require anything else to get started.

That’s been enabled, in part, by the country’s biometric identification system, which uses fingerprints and iris scans to help identify people properly, says Skinner. Once these identifiers are collected, the country issues a 12-digit Aadhaar number, which is then linked to a bank account to prove that the person accessing the account is the person who owns it. This takes the place of the “know-your-client” forms that Canadians are used to. Many Indians can’t read or write, so they can’t fill out paperwork, while others live nowhere near a branch. The biometric ID allows people to open accounts without having to fill out a pile of forms.

The banking applications themselves are also far more mobile and social friendly, says Skinner. India’s ICICI Bank, for instance, allows clients to get onto their account using their Facebook login. There’s also a large financial startup ecosystem that’s driving innovation in the sector. Companies like PayTM, Oxigen, and FreeCharge all offer online wallets that allow consumers to put money on their phone that they can then use to purchase items online, pay bills or buy things in store. 

The micro payment revolution

One of the other reasons why India has adopted digital banking in such a big way is because of the growing demand for micro payments. We’re used to paying for a coffee with cash or a debit card. In India, many people don’t have access to physical money nor do they have a way to obtain any plastic. In a digital banking environment, it’s much easier and cheaper for someone to use their phone to cover a $5 food purchase or to pay the rickshaw they just took down the street.

It’s micro payments that offer the most promise and the most explosive growth, says Phil Gomm, banking and financial services practice leader at Capgemini, a global consulting company. He points out that micro payment revenues are growing at a 225% compound annual growth rate and it could become a $5 billion market for the country’s telecoms by 2020. “People can use their phones to pay for very low valued payments to local merchants and then those local merchants can receive money and put it right into their bank accounts,” says Gomm.

For many Indians, the first interactions they will have with money is not with cash, but with these mobile-based micro payments, says Gomm, and that will speed up the rate of digital banking adoption. The increase in micro payments, though, will also have a massive impact on its GDP, says Gomm. If millions of more people are moving from unbanked to banked, and spending and saving, far more money will end up flowing through the country’s economy. “This accelerates the velocity of the transfer of money which ultimately contributes to GDP,” he says.

Digital banking offers yet another advantage: it allows people and business owners to obtain credit.

Many people in the country don’t have a credit history. Some don’t have birth certificates and others don’t have any way of identifying themselves at all. With biometric technology, and UPI, everyone can be identified and, essentially, given a place in the country’s economy, says Skinner. The most important aspect of this is credit. If someone can be identified, they can get a credit card, or a mortgage or a business owner can borrow money to expand a company.

“Consider lending,” says PG Raghuraman, Accenture’s operations and quality leader for financial services in Asia Pacific. “If a storekeeper wants to add an additional item for sale he or she may need to borrow to expand. With no credit and likely no collateral, the vendor could be looking at a ten percent daily interest payment. Falling behind can be catastrophic.”

The financial services sector has traditionally stayed away from this segment of the population partly it has been costly to provide small loans. Digital technology, though, makes the process far more efficient and cost effective, which then allows banks to offer micro loans at reasonable interest rates, he says.

India’s financial sector will only get more digital from here, says Skinner. More products will be offered and more people will start banking. It will likely take Canada years to become this digital, though some companies are much farther ahead of others partly, because the need for virtual options isn’t as great. But the world is quickly changing and what’s happening in India will eventually make its way here. “I think a very open and low cost payment transfer system will become very pervasive (in all parts of the world),” says Gomm. “As you can see in India, changes are afoot and disruptive forces are driving digital transformation inside banking.”