Reform financial space with new policies backed with AI, cryptocurrency

Even seven decades after Independence India continues to struggle in providing basic financial inclusion services to crores of our countrymen. Besides banking, all the other financial services, viz. payments, credit, insurance and investment, have eked out a meagre penetration of five-15 per cent in this billion-plus country. Based on my 20 years of experience in banking, financial services industry, and extensively in the fintech sector, I have realised that the root causes for this miniscule financial access are the current regulatory approach, routing of all financial services through the banking channel and lack of a technologically integrated model that serves customers’ basis their needs.

Financial inclusion is seen as an excellent gateway for accessing multiple services like credit, payments, savings, insurance and investment. However, traditionally all efforts for financial inclusion by the government have always been driven through the banking system alone despite the clear definition of inclusion being a joint responsibility of all financial service providers. Our country’s obsession with the banking system has in a way harmed the immense potential of the fintech industry.

If we were to apply “Maslow’s need hierarchy theory” in the financial services sector, services would be prioritised as i) payments, emergency credit, basic health care insurance, accident insurance (targeting 100 per cent consumers); ii) money transfer services (earning members to dependents: approx 50 per cent) iii) savings (banking), life insurance, housing loan (remaining 30-40 per cent); iv) investments and other HNI (high net worth individuals) related financial services (10 per cent).

Basis the above context the mass middle and bottom of the pyramid which comprises almost 60-70 per cent would just avail the first two type of fundamental needs and for them banking does not even stand relevant. In fact, the aforesaid services when offered via the banking model would be more complicated and expensive.

Only 30-40 per cent Indians have meaningful savings that can use banking services, which is clearly reflected in the number of active transactions that consumers make. We, therefore, need to have a model where the mass consumer segment can access these services based on their immediate need rather than putting the cart (banking) before the horse (payments, insurance and emergency credit services).

The financial services sector is one of the fastest growing sectors in India. However, the fact that it still focuses on tech-savvy urban users comprising the top tier of the customer pyramid makes the fintech market a mile wide but just an inch deep, depriving the industry of a huge growth potential.

The low penetration of fintech services further makes the market very attractive for new players. But under the current model, bulk dependence again is on the banking system, especially the public sector, which is already struggling with its own core issues. There are just a handful of companies in the non-banking space which are minimally empowered to serve this massive market. It makes the overall economic model completely unviable for those who want to target the mammoth opportunity for the mass market.

Today the top 10 per cent of the customer pyramid has full or excessive access to available services and yet they pay the least for this assistance. On the other hand, limited availability coupled with a very poor delivery model has further crippled activity levels for existing consumers.

We have very active and capable regulators, viz. the Reserve Bank of India, Insurance Regulatory and Development Authority, Securities and Exchange Board of India etc. However, India being a large country in terms of scale, the regulatory framework for financial services is highly fragmented which drastically impairs its reach.

Costs go up when a single customer accessing multiple services fills up the same compliance forms many times over. This results in higher costs, making it financially unviable. Ideally, the delivery model should be constructed in a way that offers low-cost services at a reduced rate and each new individual accessing the facilities does so at a lower cost.

Thus, minimising overheads and leveraging high-volume transactions should be the new normal for the fintech sector.

Meanwhile, the “Indian Financial Code” has attempted to integrate financial services regulations like in the UK. However, very little progress has happened beyond the draft. What is required is a technological integration of multiple rules that allow a potential user to fill up many forms at one go and keep it simple every time.

A good learning ground could be the telecom sector that was beset with slow growth and very heavy costs in the 1980s. Its success story in the next two decades was scripted by minimal regulation, intense competition and regulators that often were ahead of the curve. The then government bit the bullet by allowing public sector telecom monopolies Bharat Sanchar Nigam and MTNL to fall by the wayside and let the private sector take the lead. Something similar needs to be done in the financial services industry.

The telecom sector that was beset with slow growth and heavy costs in the 1980s is a good learning ground Photo: Reuters
Today, India has more than 110 crore mobile users. And more and more wireless customers are upgrading to smart phones with Internet access. This growing catchment represents the juiciest opportunity for digitally smart financial players to offer inexpensive services with the minimal regulatory hassle. But if we continue to bind fintech players to provide their services mandatorily via the banking systems then we are sacrificing hockey-stick growth.

We need to reform the entire financial space with a completely new set of policies backed with future technologies like blockchain, artificial intelligence, machine learning and cryptocurrency. A newly integrated framework which works on risk mitigation and other core principles should be allowed very aggressively to provide services in both the middle and bottom of the pyramid, thereby reaching to almost 60-70 per cent of our population.

Our country is moving towards being “Digital India”, however that cannot be achieved without “Digitising Bharat” (60-70 per cent of population) and digitising our money (still over 85 per cent of retail transactions are done in cash).

We need to make bold decisions without getting carried away by imaginary risks which stifle competition and market expansion. Absence of adequate understanding of a particular entity should not pause the entire system. We must allow new innovative models to find better and inexpensive solutions.

We, therefore, need an open access to all entities desiring to serve the mass middle and bottom of the pyramid without restricting operations through the banking channel.
The author is chairman, Payments Council of India

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