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One-size-fits-all won’t fix banking in India
One-size-fits-all won’t fix banking in India

Opinion | Banking on tech to reach Bharat

Less than 10% of India gets a salary. Yet most financial products on offer operate on a monthly schedule

Two kinds of Indians don’t go to banks. The first are those fortunate enough to be reading an English newspaper. The second are those whom banks can’t afford to serve—people like your security guard, vegetable-seller, delivery boy. They are visible to us, but not to institutions that have the power to change their lives. They must face the biting reality of having to borrow from a moneylender at punishing interest rates—to pay for a medical emergency or because a chit-fund’s foreman grabbed their savings. The tragic aspect of this reality is that these challenges could be addressed by well-designed financial products. Yet, formal financial services are vastly under-penetrated—India’s household debt to GDP ratio is 11% (the global average is 60%). This isn’t because Bharat does not borrow; they borrow from the wrong lenders.

Bharat has historically been let down by the formal sector. To remedy this, we have to overhaul the design, distribution and servicing models of financial products. The products from financial institutions have to be in sync with the way we save, borrow and invest. On product design, consider this—less than 10% of India gets a monthly salary. Yet most financial products operate on monthly schedules. This leads one to the question—what is the point of an equated monthly installment (EMI), if the borrower doesn’t have an equated monthly income?

Fiscally speaking, there exist hundreds of Indians. Different professions come with different cash-flow curves. The vegetable seller doesn’t need a 75 lakh home loan; she needs a 1,500 daily line of credit with low-interest and short tenure. Farmers have two income spikes in a year during harvest. Traders operate on a 90-day schedule, and daily wage labourers earn a little every day. Each needs different loan, insurance or savings products that match their cash-flow curves.

To serve all of India, we need hundreds of differently designed products with flexibility on size, tenure and collection schedules. These products cannot be distributed through brokers and agents. Middlemen are useful but expensive, and these expenses are borne by the end consumer. Who is best placed to distribute financial services to these cohorts? Simple: The companies that transact with them regularly. For the vegetable seller, it might be an agri-supply chain company. For the delivery boy, it’s the app that employs him.

The only way to do this is to unbundle the entirety of banking into its building blocks and expose them as APIs. APIs, or application programming interfaces, are software connectors that can be used by any firm looking to provide financial services to customers. We’ve seen this happen with payments using unified payments interface (UPI ). Today you can reach your bank account from a third party application like PhonePe, and transact with anyone. This led to UPI crossing the one billion monthly transaction mark in three years. That’s the power of interoperable APIs. The next step is to provide Indians with interoperable access to their banking user data. On 8 November, the RBI launched the NBFC Account Aggregator specification, saying it “consolidates financial information of a customer held with different financial entities...adopting different IT systems and interfaces". This means more Indians will have another asset with which to qualify for financial products: Their data. With the consent of the user, firms will be able to use this data to underwrite risk more effectively, thus rendering finance more affordable. The final step would be an interoperable API to open a new account, and link existing accounts with any bank, lender, insurer or brokerage house from any certified third party application. This trifecta of payments, data, and accounts APIs would make it possible for finance to disappear into every user experience, ultimately rendering financial inclusion ubiquitous.

In the near future, any company could (and should) become a fintech company. We, as a nation, are building the digital bridges required to make that happen. To paraphrase Bill Gates, banking is necessary, but banks might not be the only ones to do it.

Sahil Kini is co-founder-CEO of Setu, an API banking startup. This column is part of Mint Visionaries: Conversations resonating with the idea of new India.

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