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Over the past few years, efforts to drive financial inclusion in India have delivered mixed results. Access to bank accounts has increased dramatically, driven by a strong policy and regulatory push. But the usage of these accounts, and the uptake of formal financial services beyond savings accounts, has remained exceptionally difficult. Why might this be happening, and could “technology" be a game changer? How might policymakers nudge this process in the right direction?

Let’s start by understanding the problem. A recent study, The Indian Household Finance Landscape by Cristian Badarinza, Vimal Balasubramaniam and Tarun Ramadorai, sheds some light. It suggests that Indian households display three unique financial behaviours. First, they allocate a disproportionately high share of their wealth to physical assets. The average household holds 77% of its total assets in real estate, 7% in durable goods, and 11% in gold, amounting to a staggering 95% of the household balance sheet (compared to about 35% in advanced economies such as the US and UK). This allocation provides households with suboptimal returns.

Second, households borrow heavily from non-institutional sources. A large fraction of debt is unsecured (56% compared to less than 15% for households in advanced countries), reflecting an unusually high reliance on informal sources of credit such as moneylenders, family and friends. Households often borrow at high interest rates, leading to debt-traps.

Third, there is a near-total absence of investment in pension products, and low insurance penetration (both life and non-life). Pension and insurance together account for less than 5% of the household balance sheet (vis-à-vis 15-25% in the advanced economies). This places households at severe risk in emergencies, and reduces their resilience to shocks such as flood and unemployment. India is not only an outlier in comparison to advanced economies, but also compared to other emerging economies.

As these behaviours deviate from what might be considered desirable, it is important to understand the underlying factors that drive these decisions. Part of the issue has been limited supply- side innovation: Traditional banks provide one-size-fits-all financial solutions that simply do not account for the complexity of Indian households’ financial lives. Dalberg’s work on understanding the financial health of low-income segments in India shows that the reliance on financial products from non-institutional sources is high because these tend to be more tailored to their economic lives, e.g., account for their erratic cash flows and evolving financial priorities, and because they are perceived to be more helpful in times of need. There is also a perceived nuisance-factor associated with formal financial services. And most people, especially among lower-income segments, find it inconvenient to understand different product offerings, financial jargon, and related terms and conditions. They don’t see banks as welcoming, and often believe they are not for them.

Households also lack an avenue to receive credible, low-cost and high-quality financial advice. Decisions are based either on hearsay, or on local advisers who may have misaligned incentives. As a result, households either don’t seek financial advisory services, or if they do, often end up with products and services which are not suited to their financial needs and goals.

In this complex context, can technology help overcome these barriers? We think technology can help in three ways.

First, technology can provide more tailored financial products to the mass-market consumer. For example, alternative data-based lenders (who lend based on data trails such as payments history) are beginning to serve the large unmet credit need of those who would usually rely on a non-institutional source, by offering suitable credit products (low-ticket size, no collateral requirements, instant disbursal, etc.).

Second, technology can offer a simpler and seamless user experience—think of the difference in ordering an Uber or Ola versus your earlier experience of ordering a taxi. The same is possible for financial services, and banks and new entrants like payments banks are jockeying to win this user interface/user experience game.

Third, public good tech infrastructure is dramatically reducing cost to serve. Electronic know your customer, for example, that builds on the Aadhaar platform has already reduced time to on-board a customer from a few days to a few minutes. Other innovations such as eSign, which does away with the need for a “wet signature", are beginning to proliferate.

Fintech thus holds great promise to drive financial inclusion 2.0 in India. But why aren’t we yet seeing this potential materialize, especially for the mass-market and low-income consumer? In the second part of this series, we will try to unpack why fintech is not yet achieving this potential, and propose an innovative approach to unlock it.

This is the first article in a two-part series.

Varad Pande, Nadeem Khan and Vineet Bhandari work at Dalberg, a strategic advisory firm.

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