Digital Banking – A Chat with Niraj Verma on Dynamics
Niraj Verma is a senior consultant in the banking technology space. He is a banker, ideator, trainer, an artist and a writer. He introduced himself in a rather interesting manner, which I share here – “You are of course right when you say my profile is all over the place and difficult to slot. I have always been uncomfortable with conforming and reluctant to fit into a mold. I guess, that makes it difficult to find a regular smooth-sided hole for this oddly shaped peg”.
Hi, Niraj. Welcome to Dynamics.
The nation has been abuzz with demonetization and digital talk in the last few days. Fintech is the sector celebrating more than anyone else, as the future looks bright. At the same time, it is not without its challenges. What is your perspective on the overall emerging scenario?
Hi, Reena. Thanks for giving me an opportunity to share my views.
When we listen carefully to the chatter on digital money or FinTech with particular reference to Demonetization-2016, we find there are two distinct sets of people who are talking loudly.
- those who are active players in the FinTech space would like to take advantage of the emerging situation, to increase their market share, and
- those who are trying to downplay the chaos by extolling the supposed virtues of digital money. They callously ridicule the genuine problems of a large section of population.
The first set is engaged in genuine business development, which is absolutely fine. My problem is with the second set. These commentators come from relatively affluent sections of society, and are financial and tech-savvy. They are grossly ignorant, if not downright dismissive, of day-to-day problems faced by the less fortunate.
When the FI initiatives started during UPA rule, conservative estimates of unbanked population stood at roughly 45%. Current estimates put the figure at about 30%. In addition, there are urban poor and lower middle class who can at best be classified as under-banked. They would be about 15%-20% of the population. That should tell anyone that about 45%-50% of the population, even as on date, is simply not in a position to adapt to a cashless digital economy.
Demonetization-2016, its ill-planned rollout and the consequent transactional issues would indeed provide a push for higher adoption of digital money. However, the larger digital spend would come from those who are already using it in a limited manner, and accelerated onboarding of some potential converts, who would have otherwise shifted in a year or two. Unbanked and under-banked sections of the society cannot make a magical or significant move to digital money, before cashless market places become the norm (rather than the exception).
Demonetization-2016, on its own, cannot play a significant role in creation of a cashless economy.
When we talk about fintech, payment technology providers like PayTM occupy a disproportionately high visual share in public perception. Actually, the fintech space includes a lot more. Yes, Demonetization-2016 would certainly accelerate the growth of payment technology companies, but, would not cause a major impact on the growth of fintech space in its entirety.
RS : How do you view the Indian challenges on using digital as a tool of financial inclusion, as compared to other countries, say Kenya? IMHO, the technological challenge lies in having simplified user-friendly interfaces in multilingual formats, and internet education. Existing networks like the Financial Literacy Centers (FLCs) and Internet Saathi (initiated by Google and Tata Trusts, using trained female instructors) can play a pivotal role. But, they need to be integrated in the overall financial system, without being captive to a bank or financial institution.
In 2006, I had developed a branchless banking solution for a financial services entity in Venezuela. The solution was based purely on the mobile platform. It was fairly successful. Similarly in Kenya, mobile banking technologies have been successfully harnessed for a financial inclusion initiative.
The linguistic diversity in these countries is much less than that in India. That brings us directly to your observation about user interfaces in regional languages. While customizing a US CBS (Core Banking system) for international clients in China, Thailand and Mexico, all user interfaces had to be converted to the local languages. If you look at CBS solutions implemented in countries like Germany, France, Russia or any East European country, you will find a non-English interface.
India is one of the few markets where banking applications use an English interface, in sync with the comfort of the bankers, rather than the end-user. In the pre-CBS era, I had designed a bilingual total/partial branch automation application. The solution was implemented with English UI in some District Central Co-operative Banks (DCCBs) in MP/UP, and with Hindi UI in some DCCBs in Chhattisgarh. The level of end-user comfort was higher with the Hindi application.
UI, SMS texts and alerts should ideally be tailored to the needs of the intended user-base and device. The application developers have lately, acknowledged the importance of designing device-specific UI. However, the pivotal role of end-users is yet, not recognized. Given the scale of linguistic diversity in India, I believe, we may have to develop a new pictorial and digital language. Think smileys. Or Fineticons (on the lines of emoticons).
In India the FI programs have, by and large, focused on opening zero-balance savings accounts, without giving much thought to touch points for the new customers. The default touch point for such customers continues to remain the traditional brick-and-mortal outlets. Even when an interface through a Business Correspondent has been provided, the model supports and promotes a cash economy. If the intent was to facilitate a transition to cashless economy, creating an ecosystem with access to alternative channels like net-banking, kiosk banking and mobile banking should have been an integral component of the drive. It was never part of the plan.
RS: Let us say, we are taking a step-by-step approach. A lack of transparency in the entire plan is creating a hazy view ……
Maybe. Lately, the number of mobile connections has been discussed as an indicator of suitability of mobile banking solutions for financial inclusion and the digital economy. IMO, the number of connections are grossly inflated especially with reference to rural and semi-urban centers. If I were to cite my own example I am using 4 numbers – 2 for Delhi (Data Plan & Voice Plan) 1 for WiFi & 1 for Kolkata, my wife uses 3 numbers (Family, Friends & Work), my elder son uses 3 numbers (Work, Personal & WiFi) and my younger son uses 2 numbers (General & WiFi). That works out to 12 numbers for a family of 4, and I have not counted the numbers that we have stopped using for one reason or other. I’m reasonably certain that the real count of persons holding mobile connections would be about 60%-70% of the reported connections and most of them would be found residing in metro & urban centers.
Therefore, we cannot look at mobile banking solutions only, as a preferred mode of digitizing FI transactions. A standard starter kit with a smart card, multiple options including agent-initiated-funding, support for multiple funds transfer and encashment methods, and preactivated mobile banking seems a better option to enable financial inclusion and a digital economy.
I am not sure of the utility of private initiatives like FLCs and Internet Saathis, primarily because supervision would be a major problem. I would rather have state-certified trained agents who can enter into standard agreements with multiple BFSI entities. All reasonably-sized population centers may be served by several such agents to ensure adequate competition and better customer service.
When you design and operate a system to cater to low-income groups, cost becomes a critical factor. You and I may be OK with offsetting additional cost of plastic money transactions against inconvenience of going out and cost of fuel/transport; a daily wage laborer would be more likely to walk a few miles to shop. We need an aggressive FI initiative, rapid adaption of payment technologies and hard-headed rationalization of service charges and taxes on plastic money transactions.
Most important, we must remember that semi-literate/illiterate, low-earning members of society derive comfort from physical possession of hard cash. They are weary of banking institutions, due to some discouraging past experience. We may not be able to bring about an overnight transformation.
RS: However, the change needs to be initiated. The concept of a distribution network is changing. A bank outlet will be a device and a box, placed in maybe a kirana shop.
Banking has indeed come a long way from Jesus Christ driving the money-changers out from the Temple. Neither Shylock nor Lala Sukhiram can thrive in the current money-lending scenario. The set of intended customer bases and customer touch points have also evolved and changed over a period of time with development of communication technologies.
Your example of a device placed in a kirana shop, is an instance of kiosk banking. You can think of kiosk banking, manned or unmanned, as a variation on the extension counter concept. Another example would be tab banking – a mobile extension counter. I am reminded of an advert from a leading bank, promoting its mobile app as a ‘bank branch in your pocket’. You could call your smartphone as your very own banking street in the pocket. Technological advances in wearable devices and IOT, would enable bank branches on your wrists, around your neck housed in a pretty necklace, and any number of household gadgets.
The very objectives of the BFSI sector have changed over a period of time with emergence of social banking concepts.
Social or developmental banking is not so new. The technological angle is the novel factor.
From the upcoming payment banks (PBs) and small finance banks (SFBs), some have the advantage of a physical distribution network, some are cash-rich and some telecoms have a deep penetration in the interiors. The universal banks were compelled to open 25% of their new branches in unbanked areas, which they might find unviable. How do you visualize several players functioning on the same field? Will they have tie-ups, or will the competition consume them?
What functionalities differentiate universal banks from SFBs from PBs, strictly speaking, depend entirely on how a national regulator chooses to define a set of commonly recognised banking functions. Compelling universal banks to open x% of new branches in unbanked areas has to be accepted as an unpleasant, but necessary requirement of the transition phase. The universal digital ecosystem is still a long way off, and the distrust/discomfort of the unbanked sections of the society needs to be overcome. Universal banks had to shoulder the burden, being better placed to cross-subsidize a few unviable activities.
A case may be made though, that opening branches is not the only way to achieve the FI objective. Appointment of authorized agents and tie-ups with other entities already having local presence and offering complementary services should be enough for both customer onboarding and servicing.
This methodology has been used in the Jan Dhan Yojana, but the implementation left a lot of question marks. Agencies sprung up for conducting household surveys, and charging upto Rs.20/- per household, only to tell if the family was banked or unbanked. They were supported by local State Level Banker Committees (SLBCs), and in most cases, engaging them was the Hobson’s choice for bankers. I am not sure, if we still have a digitized comprehensive database, with all relevant demographics.
Technological developments now enable BFSI entities to serve a global customer base out of single corner offices, depending only on the definition of a set of services, target clientele and selective technologies. The physical model would not be needed for expansion.
I foresee some consolidation, as many promoters of new banks not conversant with the rigors of running a bank, develop cold feet or incur unsustainable losses, are unable to meet regulations and fall by the wayside. It would be far more interesting to see the impact of the new banks on the cooperative sector. The financially distressed cooperative banks might fold up, though the market size is large enough to support many more banking entities.
We might even see smaller banks serving limited geographies forming conglomerates, to serve the larger market based with some sort of drawing arrangement. From a technological perspective, the UPI (United Payments Interface) has already brought them on a single platform.
In 2006, I had designed a CBS solution that could support multi-bank nodal implementation model. NAFSCOB also had certified the application for SAAS implementation. Recently, I was in discussion with Intellect Design. They are working on something similar with FT-GRID. The key here, I think, would be switching from Private Cloud or Hybrid Cloud to Shared Hybrid Cloud.
Thank you, Niraj, for being with us on Dynamics. It was a very enlightening conversation. I hope to continue the discussion with you, next week, on the online credit perspective.
Readers, stay with us.