Essay on Digital Financial Inclusion

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DIGITAL FINANCIAL INCLUSION


According to the report of the Committee on Financial Inclusion in India (Rangarajan, 2008), Financial Inclusion is defined as “the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost”. In simple, financial inclusion means the sustainable provision of affordable financial services that bring the poor into the formal economy.

Basically financial inclusion aims at embracing the economically underprivileged sections of the society without any form of discrimination. It is also committed to being transparent while offering financial assistance without any hidden transactions or costs. Its main intention is to eliminate all barriers such as lack of basic document, lack of financial awareness, minimum income, minimum credit score, etc. that these people face at the time of availing any financial services or benefits from the financial institutions. It provides financial services to the less fortunate sections of the society so that they can be financially independent. It also intends to spread awareness about financial services and financial management among people of the society. Moreover, it wants to develop formal and systematic credit avenues for the poor people.

Now coming to digital financial inclusion, it involves the deployment of the cost-saving digital means to reach currently financially excluded and underserved populations with a range of formal financial services suited to their needs that are responsibly delivered at a cost affordable to customers and sustainable for providers. Different technology-based solutions like mobile banking, Point of Sale (POS) solutions and ATMs, among others, use digitization to enable financial service providers to more easily scale among rural and remote areas. 

Digitization connects people, processes and things intelligently. This gives access to more data so as to make more intelligent decisions and to derive more benefit from the digital revolution. Digitization is a key to accelerating the impact of financial inclusion as it provides various benefits, such as –

  •        The rural masses will get access to banking facilities like cash receipts, cash payments, balance enquiry and statement of account can be completed using fingerprint authentication and issuing an online receipt to the customer.
  •         Reduction in cash economy as more money is brought into the banking ecosystem.
  •      Greater efficiency in providing financial services as providers can process a large numbers of transactions in a cost-effective manner.
  •      Direct cash transfers to beneficiary bank accounts, instead of physical cash payments against subsidies will become possible.
  •      This also ensures that the funds actually reach the intended recipients instead of being siphoned off along the way.
  •      It also reduces the risks of loss, theft and other financial crimes posed by cash-based transactions, as well as the reduced costs associated with transacting in cash.

Since 2014, India has embarked the most ambitious financial inclusion initiatives ever seen anywhere in the world, bringing over 330 million people into the formal financial sector. The expansion in digital financial inclusion in India has been driven by significant innovation in both the public and private sectors. One of the key drivers has been government policy that explicitly prioritizes access to the banking system as a tool for poverty reduction and inclusive growth. Under the financial inclusion mission the Government of India and National Payments Corporation of India (NPCI), an initiative of RBI and IBA, has introduced several schemes. The schemes are – Pradhan Mantri Jan Dhan Yojana (PMJDY), RuPay Card, Direct Benefit Transfer (DBT), Unstructured Supplementary Service Data (USSD), Aadhar Enabled Payment System (AEPS), etc.

The Pradhan Mantri Jan Dhan Yojana (PMJDY) was launched in the year 2014. Data from Global Findex demonstrates how since 2014, the access gap between rich and poor that had grown between 2011-2014 has begun to close. In 2011, there is a gap of 14% in bank account penetration. In 2014, this gap had widened to 16%. By 2017 however, the gap narrowed to just 5%. According to data from Financial Inclusion Insights in 2014, 59% of urban Indians had access to a bank account compared to 52% of rural Indians. By 2017 however this gap had disappeared – 79% of the rural population had a bank account compared to 76% of urban Indians. This scheme does seem to have effectively lifted the accessibility constraint for the bulk of the population who were financially excluded in 2014.

In order to facilitate usage of newly opened PMJDY bank accounts, customers were issued with RuPay debit cards to allow for ATM withdrawals and POS payments. Of the 330 million people with PMJDY scheme bank accounts, 79% have also been issued with a RuPay card. This represents 260 million people provided – likely for the first time – access to a tool for accessing and spending their money without needing to handle cash. According to Global Findex data, debit card ownership in India increased from 22% in 2014 to 33% in 2017.

PMJDY has been closely linked with the growth of the government’s Direct Benefit Transfer (DBT) mission. DBT is a government-led initiative comprising multiple schemes for which benefits are directly transferred to beneficiaries channeled primarily through state institutions. For many of those who accessed financial services for the first time in the period between 2014-2018, receipt of DBT payments into a bank account was the first time in which they had used a digital financial service.

Unstructured Supplementary Service Data (USSD) is a unique payment platform that allows mobile banking services on a basic mobile handset without the use of internet data facilities. USSD service is devised to bring about the inclusion of the under-banked section of the society into the mainstream banking sector. An individual can get into a banking transactions by dialing *99#. Similarly, Aadhar Enabled Payment System (AEPS) – a system that leverages Aadhar online authentication and enables Aadhar Enabled Bank Account (AEBA), to be operated in anytime – anywhere banking mode, by the marginalized and financially excluded segments of the society through micro ATMs.

The RBI has invested huge amounts in technology for banking services so that innovative techniques can be incorporated to make banking process simple, quick and cost-effective. The scheduled commercial banks have been asked to utilize information and communications technology (ICT) to offer affordable digital banking services. Banks have also started to offer door-step delivery of bank accounts, loans and other financial services with the help of technology. They can make use of technological devices and operate through biometrics. This also makes sure that customers have safe and secure transactions without any scope for scams or frauds. This will also make the unbanked sections of the society rely on the banking system.

While concerted efforts are being made to bring basic financial services to these unbanked individuals, policymakers are faced with several hurdles in improving financial access to the last mile. These are –

·    Infrastructure – Robust back-end architecture is crucial for an effective and streamlined customer experience. Timeouts during transactions and pending status on transactions impact trust for the last mile user in adopting digital payments solutions. Frequent network downtime becomes a significant bottleneck for digital financial inclusion.  
·   Novelty – Customers are not familiar with these new digital products and services and hence this results in vulnerability to exploitation and abuse.
·    Financial Literacy and Orientation – Lack of awareness among the people prevented them from utilizing the right products and services that suited their particular needs. Hence, financial literary camps need to be promoted for imparting financial literacy and offering convenient financial access to low income people of the society.

For standing out on a global platform India has to look upon the inclusive growth and financial inclusion is the key for inclusive growth. India is home to an unbanked population of around 47%. Here, technology can play a crucial role in driving financial inclusion of the under-banked as well as un-banked population in the country. With increased usage and penetration it will pave the way for a seamless digital economy. Financial inclusion has not yielded the desired results yet but there is a long road ahead and no doubt that the modern technology is playing a significant role and is working on the positive side.



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Location: India

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