When you meet Muskaan, you are struck by the contradictions in her situation. She welcomes us into her one-room flat on the third floor of a chawl (community housing) in suburban Mumbai, talking animatedly the whole time. Her strict-looking mother-in-law watches us from a distance. We are conducting research to understand the attitudes towards and use of digital payments among low-income communities, as part of the USAID-ministry of finance (MoF)-led partnership to support financial inclusion through digital payments.
Muskaan is a housewife in a conservative household, and her husband manages most of the family finances, with one important exception: she is in charge of household groceries, and every week, her husband gives her a lump sum to spend from. Muskaan saves a little bit from each of her grocery trips, and hides these savings from her husband and mother-in-law, to use for herself and her son. She has a bank account for the government LPG subsidy, but does not use it to save because she finds it intimidating to stand in line and fill out the deposit slip each time. It is far easier to keep her “hidden savings" within flour tins or below her side of the mattress.
In this article, we presented some factors we believe will be key to the success of payments banks. Core to that success will be the ability of these institutions to serve the millions of consumers like Muskaan who remain underserved by traditional banking institutions. Recent work has convinced us that the needs of consumers in this segment differ in important ways from those of the average “middle-class" customer. For example, their inflows are more unpredictable and erratic, and as a result, savings are not just hard to come by, but also unpredictable. They face frequent economic shocks, and since access to formal insurance and credit products is limited, they rely on informal credit, often from social networks, to tide them over. And these observations are just the tip of the iceberg—as several studies over the last decade have shown, low-income consumers employ sophisticated strategies to manage their financial lives.
This has important implications for the products that they need. It is clear that “off-the-shelf" products will not work; new products that resonate with their financial lives will need to be designed. Muskaan, for example, would benefit from a micro-deposits saving product that allows her to save ₹ 10-50 every few days at her local kirana shop, rather than a traditional savings account that requires her to visit a bank branch. The long queues and limited opening hours of bank branches and complex formalities for deposit and withdrawal make them unsuited for her small-ticket, high-frequency savings needs.
For this segment, credit needs often take the form of short-term working capital or liquidity shortfalls; traditional bank loans with their complex documentation processes and stringent credit history requirements are unlikely to fulfil this need. Similarly, traditional pension products that pay out several years in the future do not tend to resonate; they may need to be blended into “hybrid" instruments that pay out some portion of their value over time. Finally, but very importantly, there is a large potential to “democratize" investment products such as mutual funds by simplifying and “miniaturizing" them.
Regulatory restrictions mean that payments banks may not be able to fulfil all these needs by themselves; they will need to rely on creative partnerships with traditional banks and non-banking financial companies (NBFCs) to offer the full suite of products.
But this is not just a products issue. The entire customer experience is critical. Much like any of us, low-income consumers value speed, convenience, comfort, low cost and flexibility in their financial services. And while most of us have experienced the soul-crushing ennui of waiting in line at the bank, for low-income consumers, the stakes are often higher. Many pay for expensive transportation, and forego wages to visit banks, only to be denied service, or leave with a product that they don’t really understand, as a recent IFMR study based on “mystery shopping" showed.
Digital services have the potential to enhance customer experience for the underserved, by leapfrogging the tyranny of the bank branch, but in order to make this happen, companies will need to design digital user interfaces and user experiences that are tailored to the digital literacy and social contexts of this segment (for example, using intuitive icons instead of complex text menus).
Fundamentally, to provide a customer experience that inspires customer loyalty and retention, companies will first need to invest in learning about the financial health, needs, aspirations and behaviours of this segment, using tools like “human-centered design", as the USAID-MoF-sponsored study aimed to do in the context of digital payments. To build deeper customer relationships, some companies, such as KGFS, are already starting with discussing a customer’s financial goals, providing them with financial advice, and only then moving on to selling products.
Ultimately, these organizations will need to embed customer centricity at the heart of their organizations. In the customer experience playbook we helped develop along with CGAP for Janalakshmi, India’s largest urban microfinance company, we describe five operating principles that enable organizations serving underserved segments to be customer centric.
One, making a business case for customer centricity, especially in the face of short-term cost and revenue pressures. Two, adopting a hypotheses-based, prototyping approach—quite similar to the lean start-up process—to identify ideas that have value and can drive up customer experience. Third, making customer centricity a core part of business by appointing a chief customer experience officer, along with a lean team for this function. Fourth, ensuring that customer experience gets adequate leadership support and visibility. Fifth, creating a set of KPIs and skill-enhancement programmes so that the entire organization across various functions—product, sales, operations, etc.—is involved in customer experience projects.
The organizations that have received approval for payments bank licences are quite differentiated, each with its own set of strengths and challenges. As they look to the currently underserved as a potentially important market, investing in understanding their unique needs, and embedding the philosophy of customer centricity across their organization will be critical to success.
Varad Pande is a partner at Dalberg, a global strategy and policy advisory firm focused on social impact, where he leads the financial inclusion practice. Nirat Bhatnagar is an associate partner and Manisha Pandita is a senior project manager at Dalberg.
These is the second article of a four-part series on what it would take to succeed for India’s payments banks. Read the first here.