Financial inclusion – not by banks alone

Financial inclusion is a key path to poverty alleviation. In defining financial inclusion, it is important to see it as a progression and a hierarchy of financial needs which begins with the most basic needs, such as a secure account for holding payment transaction funds and bill payment, and moves to more complex ones such as borrowing and insurance.

Research by Financial Access Initiative, a consortium of researchers from institutions including Yale, Harvard, and New York University, has found that around 50 per cent of the world’s adult population is financially unserved.

Even among the Organisation for Economic Cooperation and Development (OECD) countries, 8 per cent or 60 million adults remain financially unserved. The US has 15 to 20 million such adults.

Financial Inclusion in India

In India, unsurprisingly, it is estimated that only about half the population has bank accounts: 80 per cent of bills in India are settled at the biller’s office, 90 per cent of these with cash.

Roughly only 15 per cent of bills are paid online, either through online banking or biller’s Web site — options primarily available for the banked population. For the unbanked population, the primary alternative to the biller’s office is walk-in payment at a retail outlet using cash, though this currently accounts for less than 5 per cent of the bill payment volume.

One key reason for this is that, historically, access to financial services and products has been closely tied to people having bank accounts. At the same time, the infrastructure costs and regulatory requirements of offering bank accounts have made it economically unviable for banks to offer accounts to the large segment of the population that falls below a certain income threshold. Clearly, using bank accounts as an enabler for financial inclusion has its limitations.

Bill payment

New emerging solutions such as mobile payments and prepaid cards are trying to provide alternatives to bank accounts to drive financial inclusion. This approach makes sense — over half the world’s population owns mobile phones. Attaching a payment account to the phone or leveraging the phone account as the payment account could potentially drive rapid penetration of payment solutions, especially for P2P payments.

There are four concrete reasons why bill payment is well-positioned to initiate financial inclusion and drive it forward: (1) the large scale of bill payment; (2) the large potential for making bill payment electronic by creating a value proposition for all stakeholders; (3) the potential to drive electronification of other payment categories by creating stickiness for an electronic payment method; and (4) the potential to achieve greater financial inclusion beyond payments.

In a developing economy such as India, every household pays four or five bills per month, or 10 to 12 billion bills per year. In a developed market such as the US, every household pays around 15 bills per month or over 20 billion bills per year.

One of the main reasons behind the failure of payment solutions is that they do not create a value proposition for all stakeholders in the value chain. Instead, they focus on just one or two stakeholders. Making bill payment electronic has the potential to create a value proposition for all stakeholders and drive financial inclusion.

Mobile penetration

The last 10 years in India have seen the emergence of bill payment aggregators, yet 80 per cent of bills are still paid at the biller’s office. Interestingly though, mobile operators have been able to leverage the same retail network to accept payments — 90 per cent of mobile top-ups in India are at retail outlets.

Mobile penetration in India is over 50 per cent, rapidly growing and significantly higher than Internet penetration (15-25 per cent), making mobile bill payment a potential longer-term solution. Right now, the retail network appears to be the most likely candidate for creating an alternate network for bill payment, based on the success of mobile top-ups.

Bill payment could lead to greater financial inclusion beyond payments by driving other financial activity, such as lending. This is because when consumers have access to electronic payment methods to pay their bills, their payments can be tracked by companies. Companies could then analyse these payments to get useful insights into the creditworthiness of consumers and assess their risk for loans.

Microfinance loans

A study by ACCESS Development Services, a not-for-profit company that specialises in microfinance, found that the total outstanding microfinance loan amount in India at the end of 2010 was around $8 to $10 billion, with approximately 85 million people leveraging these loans. While this has more than doubled since 2007, the penetration of microfinance loans still remains small.

A key reason for this low penetration is the lack of data needed by lenders to assess the credit risk of borrowers.

However, if these borrowers start paying their bills electronically, the information on their payment behaviour could be tracked by companies and used as an indicator of their creditworthiness and could drive higher lending.

Interestingly, vegetable traders in Bhubaneswar are already using their bill payment receipts as proof of payment to secure loans. But because this process is paper-based, it has significant pain points such as lost receipts, making bill payment electronic could make it much more efficient.

(The author is Division President, South Asia, MasterCard Worldwide)

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