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Banking on technology to bridge financial inclusion gap

Banking on technology to bridge financial inclusion gap

New Delhi: A Wharton School study pegs the cost of a transaction at a bank branch at around $1 (Rs 45). At an automated teller machine, it goes down to about $0.40. And done through business correspondents, the cost drops even lower to $0.10.

This is why the business correspondent model finds a resonance in India’s thrust towards financial inclusion. Besides, of course, the reach they offer to remote, largely unbanked populations.

A business correspondent can be an individual or a local grocery shop doing financial transactions with banks on behalf of people. For banks, they ensure significant savings in terms of not having to open and run branches in far-flung areas while allowing a wide reach. For the unbanked, they offer a degree of comfort and trust in how their finances are handled.

A lot of the trust a business correspondent commands is due to technology. Business correspondents are adopting a range of technologies, which includes biometric smart cards to ensure secure financial transactions in the absence of bank branches.

For instance, representatives of Seed Financial Services, a banking correspondent for around 15 banks, carry with them hand-held devices similar to credit card swipe machines. Account holders in the remote areas these representatives visit use biometric-based smart cards to make banking transactions through these devices.

“It’s like having a bank at your door-step," says Anirban Roy, managing director, Seed.

The problem with such a system, though, is that the transactions are updated not in real time, but only when the representative connects the device to the Internet.

Eko India Financial Services Pvt. Ltd gets around this by using a more commonly available technology. “We use the cellphones instead for the business correspondent as well as the end customer level," says co-founder and chief executive Abhishek Sinha.

Eko, a business correspondent for State Bank of India and ICICI Bank Ltd, the country’s biggest lenders, uses the unstructured supplementary service data technology, commonly used by cellular subscribers to check the balance in their prepaid accounts. “We use the most common denominator to do transactions, which is dialling numbers," says Sinha.

He explains that while some account holders in rural areas may not be able to send text messages or use other applications on their cellphones, they would be familiar at least with dialling numbers.

But Sinha agrees that though this model ensures real-time update of transactions, it is constrained by the fact that account holders would compulsorily need a cellphone to bank. “Even areas with no mobile connectivity are out of bounds for us," he says.

To the credit of this model though, India is the the world’s second largest and fastest growing telecom market. The country had about 687 million mobile phone users at end-August, according to the Telecom Regulatory Authority of India.

N.D. Rao, chief technology officer of microfinance firm Basix, says there is new technology to address infrastructure challenges when it comes to providing last-mile connectivity. “But these technologies are very expensive and make the projects unviable," he says.

Basix, which is in the business of lending small sums to the poor to encourage growth, earlier experimented with smart cards and has now migrated to mobile technologies to make the process cost-efficient. “There is a need for a simple application to be built for the mobile phones so that everyone can use them."

Sophisticated applications available on handsets are expensive, he says. “Applications have to be developed for the most basic mobile phones to make them all-pervasive."

According to the Reserve Bank of India data, out of the 600,000 villages with a population of 2,000 or more, only 30,000 have access to banking services.

The government, along with firms working in the financial inclusion space, is betting on the unique identity project to take financial inclusion to the next level.

Nandan Nilekani, chairman of the Unique Identification Authority of India, under which the Aadhaar project has been launched, recently said on the sidelines of an Indian Institute of Banking and Finance conference that 80% of the people being given unique identity numbers want a bank account as well.

“If we are able to provide every such person with a bank account, financial access will explode in India," he said.

People like Roy of Seed says that once the UID number is all-pervasive, it will be the common thread for any transaction between an individual and a company through any technology. “It will be easier to link financial inclusion transactions to the payment gateways, which will not only ensure economies of scale, but will also make banking accessible anywhere in the country for migrants and people living in rural areas."


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