The year 2021 has started on a positive note for the digital financial sector in India. On January 5, the Reserve Bank of India announced the creation of a Rs 345-crore Payments Infrastructure Development Fund (PIDF) to boost digital payments in Tier III to VI centres and the seven North-eastern states. The move will encourage the deployment of Points of Sale (PoS) infrastructure in both physical and digital modes, improve digital payments, and give people in small towns and villages better access to financial services.
The Fund is a welcome step in promoting financial inclusion – now a key indicator of economic growth – and taking last-mile banking to the unbanked and underbanked communities across the country. In less than a decade, financial inclusion programmes such as Pradhan Mantri Jan Dhan Yojana (PMJDY), Direct Benefit Transfer (DBT), Atal Pension Yojana, and RuPay cards, among others, have accelerated the digital revolution and brought more citizens, especially in rural areas, within the ambit of digital financial services.
For a frame of reference, since the launch of PMJDY in 2014, banks have enrolled over 40 crore new accounts that have provided people in towns and villages with access to affordable banking services such as deposits and withdrawals, remittances, credit, and insurance, and pension schemes. The last few years, in particular, have seen public and private players adopt new-age technologies to empower the semi-urban and rural population with digitised services, including UPI and Immediate Payment Systems, and create an inclusive digital finance ecosystem. Despite this, there are barriers to the penetration of digital services among low-income groups. Some of the reasons for this are lack of financial and digital literacy, the complex nature of digitised financial products, and inadequate payments infrastructure.
Digital Literacy: A work in progress
Digital financial services (DFS) lies at the heart of financial inclusion in India. Despite the government’s efforts to create interconnected digital infrastructure, the adoption of DFS in rural areas is marred by digital illiteracy, which has a direct bearing on the acceptance of digital products. The lack of trust in technology, inability to use smartphones and poor network connectivity restrict digital transactions and discourage people with low digital proficiency from using e-banking services. As a result, cash is still the preferred mode of payment in rural India.
Financial inclusion does not depend only on the digital capabilities of rural customers, but also on the ease with which they can carry out transactions online or on their phones. The absence of financial products and services suited to the rural masses remains a challenge in digital financial inclusion. Products have to be designed in a way that they are both easy to understand and operate. Language is another factor. Banks and fintechs must necessarily integrate local languages into their products so that users have little trouble accessing them. So what can be done to promote digitised financial products in rural India?
Introducing the Physital model
Switching to digital modes of the transaction can be a daunting task, particularly for those relying heavily on physical modes. Here, banks and fintechs must reach out to such users and guide them in the use of digital financial services. One way to do this is through business or banking correspondents who can, through local community centres or kendras, explain the many benefits of digital payments and other transactions. These agents are trained to carry out digital banking services such as opening accounts, cash-in and cash-out services, and peer-to-peer payments. They can also play an important role in creating awareness about new products and solutions among the townsfolk and villagers.
E-commerce has gained traction among rural consumers in recent years. Banks and private companies are establishing a network of rural entrepreneurs to create a one-stop-shop for the financial needs of rural customers and help them shop online via digital platforms with built-in digital payment modes. Many NGOs and educational institutes have come forward to spread awareness about digital finance among India’s semi-urban and rural population, and thus further the goal of financial inclusion.
Simplifying product offerings
In rural India, the mass adoption of digital payment platforms and mobile apps can be driven by hyper-localisation and addressing the pain points of switching from cash-based transaction mode to digitised services. Multilingual options will also help develop a more inclusive model. Public and private entities can support local innovators who are more clued into regional demands and collaborate with them on products that suit local needs. For example, the lack of documents has been the biggest deterrent in weaning rural customers away from traditional banking services. However, AePS (Aadhaar-enabled Payment System) helped address this issue. Rural citizens are now carrying out basic activities such as deposits and withdrawals using their biometric ID and Aadhaar at the AePS kendras.
At the same time, banks and fintechs will have to develop new product lines and align their policies with rural financial needs, rather than merely sell complex urban-centric products to rural segments. Instead, simple banking services such as remittances for migrant workers, low-interest credit facilities, and small-ticket loans can help bring the unbanked into the formal banking system. Finally, digital financial inclusion depends as much on product innovation and simplicity as it does on retaining rural customers and protecting their livelihoods.
Need of the hour
Covid-19 and the ensuing lockdown have underscored the need for digital financial services in rural households – daily wage workers, low-income farmers, and small businesses – and encouraging them to adopt digital payments in daily life. This will not only open a whole new world for them, but it will also bring them a slew of benefits through the government’s many financial inclusion programmes. After all, the success of digital financial services will depend on the transformation of rural India from a cash-driven economy to a less-cash and more digital payments economy.
Dilip Modi is the Founder of Spice Money. Views expressed are the author’s own.