Financial Inclusion and revolution of Smart phone as key enabler

I had many a times thought before on why Banks create entry barriers to customers like Minimum balance, minimum income limit etc., etc., Who will then support all the aspirations people who are below the minimum requirements? Earlier there used Pawn brokers, small time money lenders, co-operative societies who were serving people outside of the banking. But they were never close to covering a large section of unbanked.

I had understood sometime later why Banks had entry barrier having worked in a Non- Banking financial corporation and a Bank for quite few years. But my question was still unanswered who will support the unbanked.  I felt the central bank and regulators were very stringent on licence and operating guidelines.

Even today there are more than 2 billion people who are not in the banking network.  Majority of this population is in developing and under developed countries where resources are limited and setting up of physical infrastructure is time consuming. Having said these where do go and how do we go?

Mobile as new age identity

There are 2 major areas where this majority of 2 billion plus people (opportunity) live in – Africa and south Asia.  Kenya leads the African continent in financial inclusion through M-PESA. I shall cover the area south Asia which I am more familiar with and in particular India!!

Most of the 1.2 billion people have mobile as a means of identity than a holding a passport. This shows the sheer size of penetration of mobile phones which stands close 975 million users. There has been no other change that has been adapted to the speed of mobile phones in the last decade. They may not have proper drinking water, electricity, roads (or) good houses but most of them hold a mobile phone.

How do we turn this as opportunity using mobile phones?

When I refer mobile phones it refers to basic mobile phone, as smart phone percentage is less (20% of the mobile phone users hold smart phones). This statistics is changing fast even when you are reading this blog.  Basic phone helped people to connect by voice calls and SMS there was not big revolution with basic mobile phones in terms of financial inclusion. People understood the advantages of smart phones to their personal and business use like sending marketing mailers as images through whats App.

In the meantime government of India came out with a brilliant initiative of issuing Biometric based identity card to everyone. The best part of this card (AADHAAR CARD) was linking with mobile number uniquely. Hence this has resolved then fundamental problem of KYC for financial system (there are some flaws which are to be overcome). This is world’s largest database of identity information but that still lacks proper legislation to support the same.

Big Opportunity unfolding for Fintech and Digital disruptors in Financial Inclusion

Following are the challenges ahead in using this opportunity:

1)Building trust to make them use the digital disruption for financial inclusion to increase their standard of living and poverty eradication

2)Key differentiator from Banks that shows that these companies are here to support them rather than see these people as crowd to make money

3)Affordable low cost transaction system which is transparent and simple which works 24X7

4)Payments and P2P Lending is supported without bank account / credit / debit cards

5)Internet infrastructure is poor as its still in 2G and hence the App’s have to work in lesser bandwidth

6)Most of the unbanked people need language centric solution as they may be more comfortable in local language than English

7)Affordable mobiles phones to capture biometrics similar I phone (there are schemes by some state goverments giving free smart phones)

Existing solutions that can be leveraged

1)E-KYC service provided by Unique Identification Authority of India

2)12 payment banks given license for deposits, payments and buy financial products like insurance and mutual funds

3)Missed call service to know balance currently used by banks to support non-smart phone users. Zip deal provides this service which is owned by Twitter

4)100 villages to get free Wifi hotspots with high speed internet through Face book and BSNL (government company)

Fintech companies which want to use this opportunity have to come up with a model that has backward integration to validate the KYC against the on boarding application. Primary identifier needs to be the registered mobile number with AADHAAR. This will exclude the entry barrier of Bank account (or) credit card (or) debit card. For a lighter version of non-smart phones it needs to work similar to M-Pesa but that will require integration with Vodafone (or) Airtel which have got license to operate as payment banks. This platform needs to have the following integration - Bank accounts, credit cards, Debit cards, payment wallets and mobile service providers.

There is another giant which has got license to operate as payment bank is Department of Posts. It has a network of 155,000 branches across the country, of which about 139,040 are in rural areas. Big strength of Department of Posts is physical manpower (Postman) covers a particular area under each post office through which entire length and breadth of India is covered. Online market place like Amazon, flipkart and Snapdeal have started using DOP is no wonder.

P2P lending platforms like Microgram, Milap,I-Lend etc., are having basic infrastructure to support lending. But all these platforms today require bank account and their KYC system goes through more manual verification and hence the cost is more.

Authentication of end customer is a major challenge for payments (or) P2P lending as there is no authentication that is available. As biometric data is available with AADHAAR regulator, mobile phones have to be able to capture the finger print and validate online through the integration of mobile number and unique 12 digit number combination. This will help end to end model to work for payments, buy financial products, trade goods including delivery and online shopping all without bank account.

When this platform is integrated with Vodafone, Department of Post (DOP) and P2P lending service provider, a customer who is on boarded can take loan from P2P lending and buy his raw material. Payment for this purchase can be done through DOP once the post man delivers the product to customer. In this model payment risk and delivery risk are going to service provider as customer can authenticate the delivery through finger scanner which can be confirmed to DOP to process the payment instantly. All it requires is to have Mobile phone connection from Vodafone and smart phone. Lender will transfer to Vodafone wallet and customer can pay to trader from the same. Similarly customer can sell his product through online market place and get the payment to pay back P2P lender.

Critical to this flow will be secure encryption and the platform not store any biometric data during the transfer process as it has no role to capture rather than transmit. The cost of this integration has to be brought down severely for this to work effectively.  Thoughts mentioned by me are personal and it more concept than a full fledged business idea to execute.