Innovations for an inclusive financial system

India’s push for public digital infrastructure began in 2010 with Aadhaar. Over the past 12 years, the DNA of the Indian financial system has seen a drastic change. With fintech and big tech competing with banks across markets, digitization has also enabled customization in financial services.

Traditionally, banks have offered standard financial products and have followed a one-size fits-all approach in terms of designing products, thus making the market supply-driven. Given where India stands currently, the market is ready to move towards a demand-driven approach. This means customers should be able to choose the mode of access like online or offline, how they want to tailor financial services (such as repayment size and frequency), and when they want to access such services.

Access to digital infrastructure has been a game changer in the Indian financial space. Tools like Aadhaar, UPI, and Account Aggregator (AA) etc. are enabling fintech and banks to offer many innovative, customized and frictionless products. This has given rise to an interesting conundrum —the majority of new-age financial products are designed for digitally savvy customers, further isolating farmers, MSMEs and migrant workers.

Today, small digital loans are offered to tech-savvy customers within a few minutes, while a farmer undergoes a cumbersome and time consuming process to even apply for a loan. Digital avenues like UPI, AA, video KYC, etc. might reduce friction for some but can put additional pressure on those who are not digitally literate.

The majority of the population that has reaped benefits from this digital public goods infrastructure is digitally savvy and financially well-off. Nearly 65% of the Indian population lives in rural areas, and customers of the mass market tend to be from low-income groups. The economic flows of this segment of the population are not well-understood, creating an information gap between solution providers and targeted users.

To expand the benefits of digital infrastructure to the 1.3 billion Indians, financial innovation must keep the 65% rural population at the centre of the design. This can be done by accurately mapping a customer’s journey, to provide a closer look into specific customer and financial service provider interactions. It can also help identify and address customer experience gaps and points of friction. It would be beneficial to map the economic flows of customers to understand their requirements. Most loan products today do not offer flexible repayment terms. The economic flows of a vegetable hawker, who earns daily, will significantly differ from that of a salaried professional. These aspects must form the backbone of a financial product design.

To bring customization to customers who do not have a digital footprint, proxy parameters like mobile phone recharge data, DTH recharge data, DBT data, psychometric testing, data from milk societies and emerging platforms like ONDC, etc. can be utilized to offer tailored financial products in the form of embedded finance. In addition, gaining behavioural insights into the target customers can also enable suitable financial products. For instance, according to research done by PayNearby—a digital payments provider—more than 60% women prefer cash transactions over UPI QR and cards, in that order.

Simplification of financial processes to suit the customer and delivery of services in multiple languages are tools that can be explored to truly create a frictionless experience for all. Further, delivery of financial services in assisted mode can be particularly useful in scaling the benefits of innovations like AA to larger sections of the population.

Another area that must be explored in designing innovative products is emerging technologies like facial recognition, voice assistance (like Siri, Alexa), artificial intelligence, machine learning (ML), internet of things (IoT) that can change the game in the design and widespread adoption of financial products.

The Indian financial ecosystem must focus on conscious innovation; designed to benefit all segments of the Indian population equally. Efforts need to be made to understand every customer better, because only then can financial products and innovations be tailored for scaled adoption. And only when our economy is strong at its core will we soar and reach for the skies.

Rajesh is CEO, RBI Innovation Hub, and advisory board member at Global Fintech Festival, 2022. Somya is a senior associate at RBI Innovation Hub. The views expressed in this article are personal.