India in 10 years: The beginning of a digital era of inclusive finance

A revolution is brewing in the financial ecosystem that will extend the benefits of formal financial services to the masses

Vijay Shekhar Sharma
Updated4 Feb 2017
Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

A revolution is brewing in the financial ecosystem that will extend the benefits of formal financial services to the masses. Global trends suggest that the banking and financial services sector are undergoing the change that the telecom sector witnessed a few years ago. A number of OTT (over-the-top) players came up with innovative solutions to provide a comprehensive communication experience. They leveraged the infrastructure created by telecom service providers and provided value-added services to consumers. Similar innovation is happening in payments and other financial services.

Traditionally, the banking system has had a stringent regulatory environment. This is beginning to change as regulators take cognizance of the innovation in the area. Companies providing value-added services over and above bank accounts for customers are getting good traction. These companies are coming up with constantly improving technology, data analytics and lean processes to provide high-quality services at an economical cost.

Financial services can be divided broadly into two segments. The first category consists of frequently used services like payments, cash in, cash out, etc. These services will witness innovation in the area of customer experience. For example, payment being made through a QR (quick response) code-based solution enhances the experience of making a payment and has the potential of reducing a consumer’s reliance on cash.

The second category consists of long-haul services like lending, insurance and cash management. This category will witness innovation that can extend the reach of these services to the masses. A company giving a personal loan based on utility-bill payment history or extending a working capital loan to a merchant based on its digital transaction history comes in this category. Companies are banking on their ability to provide such services to a hitherto untouched market.

In India, the pace of this change is even more rapid due to the favourable combination of a government policy environment, a progressive banking regulator and the emergence of innovative fintech companies. The percolation of financial services to every citizen will happen the way it did with telecom services. The pace will only accelerate. Aadhaar is going to play an important role in this change.

Innovation and regulation balance out each other and grow together. Innovation solves restrictions and regulation sets boundaries to safeguard consumers. When both innovation and the regulatory environment move in sync, the service delivery goes to the next level. The emergence of wallets, payment banks and small finance banks is the result of such synchronous movement of innovation and regulation.

A large segment of the population will enjoy the benefits of formal financial services for the first time. The first step in this direction has already been taken with Jan Dhan accounts. Digital payments through various instruments like wallets, UPI (unified payment interface), cards, etc, are growing consistently. The last few months have demonstrated that consumers are willing to become digitally savvy if the right solutions are provided. A critical mass of consumers and merchants is getting comfortable with digital payments and apprehensions have reduced significantly in a short span. This is leading to a network effect and unprecedented growth in the digital ecosystem.

Digital payments are leading to access to credit through formal channels for consumers and merchants who were unable to get this benefit till now. There is similar innovation in the areas of insurance and wealth management, where the focus is on increasing penetration of these services. For, services like wealth management have remained limited to a select segment. Technology companies are developing ways to provide such services to consumers irrespective of the quantum of their wealth. This is being made possible through technology innovation that renders the incremental cost of acquiring and servicing a customer negligible. Effectively, the reach of financial services and consumer experience is going to improve drastically in the country.

Vijay Shekhar Sharma is the founder of Paytm

This is part of a series of articles in Mint’s 10th anniversary special issue that look at India 10 years from now. The entire list of articles can be found here

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