Acceptance of Fintechs is on an upward trajectory owing to digitization in the financial world and with customers embracing the change, the shift is evident. Artificial intelligence, machine learning, robotics etc. have accelerated the acceptance and currently, Fintechs are better placed than before and are contributing to the financial world in multiple influential ways, for instance, they are attempting to bridge the $ 3 trillion global trade finance gap. By forming a strong technological base, Fintechs can do what large financial institutions cannot, i.e., provide swift access to finance along with alternatives to collaterals especially for MSMEs, an otherwise underserved segment. As per reports, MSME loan value has increased to 24.6% in FY 2021 from 16.2% in FY 2017. While Fintechs are still evolving, legacy banks; who have spent decades building their reputation and trust in customers, offer a wide range of products and services yet stand challenged today. While traditional financial institutions have shown little to no desire to reform, Fintechs have emerged as- Customer centric State of art service provider Sophisticated customer journey enabler Bank charters These aspects have allowed them to navigate and penetrate the market successfully. For instance, digital payments have witnessed a sharp growth in India in the past few years. As per reports, India witnessed 48 billion digital transactions in FY 2020 and is set to account for 71.7% of total payments volume by 2025. With Fintechs evolving so rapidly, traditional financial institutions view Fintechs as strong collaborators rather than competitors. Nonetheless, until the regulatory body does not recognize Fintechs as an independent body, they will invariably be considered lucrative alliances. For instance, Niyogin Fintech Limited, India’s unique early-stage public listed company, offers financial assistance to MSMEs by partnering with several leading banks like HDFC, Tata Capital Financial Services, IDFC etc. They are striving towards becoming a ‘banking as a service’ platform. Why should Traditional Banks collaborate with Fintech? Increase Market Penetration- Fintechs can take advantage of traditional financial institution’s swelling customer data they have maintained over the years while offering their ‘banking as a service’ platform. This way, both, traditional financial institutions and upstarts can map out best opportunities for themselves. State of art stack- Fintechs offer state of art technology and service stack to traditional banks which otherwise may require high intensity brainstorming and most importantly, cost. Advanced Technology- Legacy banks often stick to unreformed systems and solutions due to limitations they face. Fintechs offer simple plug and play up-to-date technology and services. Cloud Based Stack- Fintechs offer technology stack that can be accessed on the cloud and so, cybersecurity, uptime performance, data storage and residency will be managed by them. This allows traditional financial institutions to add new scopes, technologies, requirements etc. at a much lesser cost. Increased ROI- With Fintechs offering platforms that enable out of the box services and technology stack, traditional banks can reckon on them for a better prospect thereby increasing their Return on Investment which otherwise is fairly short. Workable Regulations- While the regulatory framework for traditional financial institutions is quite stringent, Fintechs can prototype new technological approaches that work around current regulations and devise offering within regulatory boundaries. Traditional financial institutions and upstarts both have better prospects if synergized. Both can work collaboratively to bridge gaps rather than competing.
Month: December 2021
Financial Inclusion: Concept and Measurement
The concept of financial inclusion was first introduced in India in 2005 by the Reserve Bank of India. It strives at offering banking and financial services to economically underprivileged individuals. It aims to elevate the socio-economic status of individuals regardless of their income or savings, ensuring the marginalized make the best use of their money and receive financial assistance. With the help of technology, more upstarts are making financial inclusion a widespread reality. The Concept Financial inclusion refers to the financial access by enterprises and households to reasonably priced and uplifting formal financial assistance. Access to financial services can be basis several dimensions, for instance, geographic, socio-economic, etc. Enterprises and individuals residing at different geographic locations will require distinct services from location-specific providers. Financial inclusion appropriately designs products and services that are sustainable and meet the needs of clients with a reasonable pricing structure. Financial institutions that work towards financial inclusion indulge in different techniques for effective delivery and provisions. The development and efficiency of financial systems can have an impact not only on aggregate growth but also on contracting disproportionate income distribution and helping people out of poverty. The Measurement The sub-indices of Financial Inclusion majorly depend upon the following variables- Access sub-index- This value is largely driven by the growth over the years, and recently, in the number of bank outlets manned by own staff, FBCs, total number of savings accounts, post offices, number of subscribers in Mutual Funds (MFs), JAM ecosystem, number of offices for insurance, Prepaid Payment Instrument (PPI) issuers, and Point of Sale (PoS) terminals etc. Usage sub-index- Usage has shown highest growth as compared to other sub-indices, driven largely by ‘Insurance’, ‘Credit’ and ‘Saving & Investment’. Some of the indicators under these dimensions which have shown substantial growth include total number of credit accounts, amount outstanding in the credit accounts, volume and value of Unified Payments Interface (UPI) transactions. Increased use of direct benefit transfer (DBT) for various government programmes also had a positive impact on the index value through higher outstanding amounts in Savings Bank (SB) accounts. Of the three sub-indices, FI-Access with the index value at 73.3, expectedly, is higher as compared to both FI-Usage (43.0) and FI-Quality (50.7) which indicates that building blocks for greater financial inclusion in the form of financial infrastructure put in place over the years needs to be built upon by deepening the FI through focusing on promoting ‘Usage’ and improving ‘Quality’. However, before investigating what influences the measurement in financial inclusion, it is imperative to assess the impact of financial inclusion on society as a whole. Several financial inclusion indicators depend upon multiple variables like outreach, usage, quality, etc. The objective to establish indicators are as follows- Include as many economies while maintaining originality to avoid bias results for a cross country setting Standardizing the measure for all countries to develop a consistent and robust method of financial inclusion To validate other findings To reach a measurement, surveying the people keeping in mind the socio-economic factors like occupation, income, literacy, rural debt value, etc. are vital along with understanding perception and acceptance of the services. Understanding the perception will allow financial institutions to device services accordingly while measuring the impact of these services on households. Another important aspect for measuring the efficacy of financial inclusion is collecting information on credit data, deposits, remittances, insurances, etc. The idea is to measure the impact and not simply open a bank account for the underprivileged. One of the main challenges in the measurement of financial access is the distinction between access to financial services and actual use of services. This is because of the presence of voluntary exclusion in the system. As per a study, 33% of the people voluntarily exclude themselves from financial assistance. This may be due to several reasons like lack of knowledge, cultural barriers, religious beliefs, etc. Therefore, measuring the proportion while regarding the voluntary exclusion is difficult. The measurement of financial inclusion is complex, attached with several layers and most importantly, linked to a perception of different researchers. Although the measurement calculates basis 3 vital aspects- financial participation, financial capability and financial well-being, the exact measurement is still a far-fetched objective. The concept and measurement of financial inclusion will face several hurdles but ultimately bring effective policies and comprehensive services that will benefit and uplift the underserved and underprivileged.