Spotlight
New
Delhi, 1 August 2020
Digital Finance
NEW NORMAL & BEYOND
By Moin Qazi
Digital finance finds
itself at an inflection point as the world continues to tackle the socio-economic
fallout of 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 more 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 these are dependable, durable, and continue to
command a high level of confidence from general population. These
have eased age-old pain points in delivering financial
services to underserved 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. Digitisation
is dramatically changing financial services landscape, which are being made
available where you need, when you need and how you need these. 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 its 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 strengthening of UPI by RBI, digital payments have been
made secure, compared to the past. To this end, many payment gateways have come
up to further improve digital transfer. This has made it possible for
low-income populations to participate in the digital ecosystem.
Financial institutions are leveraging technology to revolutionise
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
organisations 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 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 which are being mostly served by banks. 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 future and the other in Stone Age -- almost literally. It had
the most vibrant and innovative high-tech ecosystems in the world; but
alongside it’s 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 and a plow. Thus, moving to a digital and cashless way of life involves a
shift in cultural pattern, and these are often hard to break. But once 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 ground-breaking 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 these, we must commit to
ensuring 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 these 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 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. Digitalisation
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 need 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 foolproof 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 over-indebtedness is critical.
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 demonetisation, triggering
largescale social and economic disruption. Instead, the government must ensure
the pace of this journey is determined by the ability of it people to cope with
it. There is need for leaders to think
strategically, communicate persuasively, and take action decisively.---INFA
(Copyright,
India News & Feature Alliance)
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