Financial inclusion, the cashless way

Last week, several banks launched app-based services, kicking off a revolution in the way we digitally transfer funds using smartphones.

It is now possible, as easily as messaging someone, to transfer funds 24x7 through our smartphones to not just pay utility bills, transfer to another bank account, but even move funds to each other (P2P or peer-to-peer)—all this without sharing personal details like a bank account or a credit card number.

And this is being made possible by employing the unified payments interface architecture launched by the National Payments Corp. of India (NPCI)—the brainchild of the Reserve Bank of India and the Indian Banks’ Association and serves as the umbrella organization for all retail payments systems in India.

There are an estimated 200 million smartphones in the country. So, this is the potential base for drawing the new highway of financial transactions; and this adds up to about half the size of the population of the US.

If this does not convince you about the sea change that is underway in the financial sector, then sample this nugget shared by Axis Bank Ltd in its latest quarterly earnings report—much before the launch of the new payments interface last week. According to it, the market share of Axis Bank in mobile transactions is 13%, significantly higher than their market share in overall deposits.

And then the kicker: “Mobile banking spends in first quarter reported a growth of 159% on a Y-o-Y basis. In terms of number of transactions, digital channels are outpacing every other channel by a wide margin,” and then adding, “Electronic channels, i.e. Digital and ATM, now contribute 88% of all customer induced transactions in our retail base.”

There are several ways to look at this change. For one, as already demonstrated, it empowers the user in an incredible way (previously, the ATM-inspired disintermediation led to the death of queues at the teller counter in banks). Second, it also benefits banks by reducing the cost of each transaction dramatically compared to moving money through a cheque or facilitating an ATM transaction. Third, it incentivises the transition to a cashless economy, which not only augurs efficiency but also establishes a much-needed audit trail to discourage black money creation.

Clearly, the disruption in Indian banking is underway. Last week, Mint carried an infographic, authored by Nandan Nilekani, the man who gave us Aadhaar, on the likely path of this transformation. In this presentation, he shares the fact that electronic clearing (NEFT, IMPS, etc) is growing annually by 50% and overtook cheques clearing in the first quarter of 2015.

All this has been made possible by a fundamental reset in the ecosystem of the financial economy. And the key enabler is JAM—the acronym which denotes Jan Dhan (no-frill bank accounts for all), Aadhaar and Mobile. It has reached a critical mass with nearly 240 million bank accounts opened as on 17 August, 1 billion Aadhaar numbers issued and over 1 billion mobile phones. Take the three together and what you have is a gigantic financial web on which you can undertake, without being physically present, cashless transactions.

In the process, what is happening, to quote Nilekani, is India is going from being “data poor to data rich”. What he means is that once an individual is part of this emerging financial architecture, their transaction data is accessible to all financial players. So, if a bank needed an individual’s credit history to take a call on extending a loan, it is available now; just as much as it brightens the prospects of an individual obtaining a loan based on the mining of their transactional data.

In a previous column, I had written how this is slowly enabling the informal economy to join the mainstream and avail of the benefits of the formal economy. If loans are given/denied based on an individual’s credit history as opposed to the discretion of a bank manager, it is undoubtedly a good thing. Also, at the cost of sounding repetitive, it is an important step in transitioning the country towards a rules-based regime; for most of the seven decades, India has relied on an exception-based regime with disastrous consequences.

Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics.

His Twitter handle is @capitalcalculus

Comments are welcome at capitalcalculus@livemint.com