As technological advancements promote growth in our country, lack of financial literacy still prevails. In a recent incident, a farmer has reportedly lost his savings worth two lakhs to rats. He stored his money as cash in his house. The farmer wouldn’t have lost his savings if he was aware of a financial institution. The eradication of financial illiteracy and improving maximum financial inclusion help us overcome such situations.
What is Financial Inclusion?
Financial inclusion aims to offer primary financial products and services to all individuals and businesses and makes these services more accessible and affordable.
Financial institutions aim to offer basic services that include payments, transactions, savings, credit, and insurance sustainably to drive more financial inclusion. New technological innovations in fintech have caused organizations to offer cost-effective services to their customers.
Measures to improve Financial Inclusion
The Reserve Bank of India started taking measures in 2005 to improve financial inclusion in our country. The government initiated the National Mission for Financial Inclusion (NMFI), including Pradhan Mantri Jan Dhan Yojana (PMJDY), which provides services to unserved areas.
Furthermore, the “Digital India” initiative, which provides accessible digital banking services with simplified formal verifications using unique identification (Aadhaar), is also a bold move towards improving financial inclusion in the country.
Fintechs boosting Financial Inclusion
Indian fintechs are the biggest drivers of achieving financial inclusion, with an adoption rate of over 87%. In the recent decade, fintechs have widened operations to provide personalized services without opting for the traditional route. Also, the rise of the popularity of smartphones around the globe led to the establishment of new financial services.
“As of February 2021, there is a record of 2.3 billion digital payment transactions made worth over 4 trillion rupees.”
From Demonetization in India to the Covid-19 outbreak, people are now more interested in using financial services such as digital payments, lending solutions, etc. Digital financial services help many small and medium-income businesses to offer cashless payments option to their customers.
According to an annual report for FY 2020–2021 by RBI, the volume of digital payments is at 453 crores in India.
With increasing ideas and innovations, fintechs ensure more inclusion. With the growth in the industry, a wide range of products and services are set to enter the market to offer customized services. Products such as digital payments, digital credit, neo banking, API banking, prepaid cards, etc., have established effective financial inclusion.
What challenges do we face?
- The excluded sections, such as rural, poor areas, often don’t have access to a financial institution and often approach moneylenders.
- A constant need to improve financial literacy as many rural people have less or no awareness of financial institutions.
- Lack of formal identification documents is also a significant challenge when people reach out to a financial service. Poor sections lack access to financial services, as they lack various documents such as proof of identification, birth certificate, etc.,
- Even though people have a financial account, most users still prefer cash. Lack of trust and reliability prevents a customer from accessing the available financial services.
- Gender inequality to access financial services as women pay higher interest rates than men.
- Low-income levels indulge in a myth that financial institutions only offer services to high and middle-income groups.
- Some people are uncomfortable due to language barriers, formal documents, and the formalities that we go through before a financial transaction occurs.
Overcoming the Challenges
To alleviate the challenges faced by consumers, there arose a need to innovate new and simplified products. New technologies, fintech innovations, and the digital finance revolution have now become the constant drivers of financial inclusion. There is a constant growth in the sections of digital finance over traditional finance methods.
Digital Financial Inclusion ensures that the excluded and unserved population has digital access to financial services.
Digital services focus on affordability, customer satisfaction, and sustainability. New digital platforms run by the institutions now accommodate small levels of cash flow. These services allow the low sections to make transactions, thus preventing the use of informal services.
Understanding the potential and risks such as operational risks, financial crime risks, etc., while improving digital services can contribute to the growth of digital financial inclusion. Similarly, technological innovations have increased financial inclusion. These innovations aim to regain customers’ trust, rectify geographic and accessibility issues to bring in new consumers.
Information technology, smartphone-enabled services have reduced the need for physical banks. With technological development, we can develop a rural information infrastructure that provides financial services to the underserved.
Fintechs have also played a significant developmental role in achieving greater financial inclusion. Fintechs acts as a catalyst for financial inclusion as it creates more opportunities for the unbanked population. The shift of digital transactions from traditional transactions has improved self-employment, rural entrepreneurs, small borrowers, mediums, and enterprises.
Lack of financial awareness, high cost of traditional services, and other policy gaps were significant challenges while achieving financial inclusion. Fintech startups play a critical role in overcoming these challenges in the economic landscape.
The tremendous growth in fintech has shown a positive shift as a report shows that 99.5% of consumers are now aware that they can transfer money and make payments with fintech platforms.
Fintech products driving inclusion
New fintech products have helped consistently in driving the financial inclusion of the country. As discussed earlier, these products allow the work of financial services and offer a streamlined process. These fintech products applied to reality are the main drivers of financial inclusion.
Embedded credit focuses upon integrating ‘lending as a feature’ in digital platforms. Customers receive their credit with the involvement of a familiar interface and eradicate the need for a third-party site.
Micro, small and medium enterprises (MSMEs) face difficulty offering small credits, increasing demand here.
The B2B e-commerce marketplaces provide the ultimate BNPL (Buy Now, Pay Later) option for the retailers while they checkout. BNPL offers these MSMEs to purchase on credit and pay later. BNPL is one of the fast-growing payment options which also helps MSMEs to expand their business. The BNPL would account for 3% of the global e-commerce spend by 2023. Thus, this system provides a convenient platform for consumers to experience new market products.
Digital payments (also called electronic payments) are the method we transfer one point value from one account to another using a digital device. Digital payments are end-to-end digital transactions, and also, they don’t require the usage of physical cards, thus reducing costs.
For example, the latest introduction of e-RUPI which is a digital payment solution created by the Government of India to allow cashless payments. e-RUPI is powered by the National Payments Corporation of India (NPCI), and the one-time payment mechanism is easy, highly secure, and entirely confidential. The distributions are also made easy, safe, and contactless.
Neo banking is an innovative method of approach in which financial institutions offer services without physical presence. Neo banks in India operate on a low-cost model with minimal to zero monthly fees on deposits and withdrawals, and rock-bottom balance requirements. These drivers bring consumers and businesses across income levels into the fintech fold, fostering financial inclusion. Neo banking is highly famous among the millennials and Gen Z as they no longer use outdated processes. Neo banks use Artificial intelligence and machine learning to create a customer-centric Banking experience, with the aim to reduce human dependence. Neo banks provide millennials and Gen Z their own customized product set, making the process fuss-free. Millennials and Gen Z prefer simplified and easy- manageable finances, thus proving neo banks are a blessing in disguise. Curious to know how you can start a neo bank? Check out these 7 steps.
API Banking provides better means to share data, helps in integrating systems, and makes services more personalized. In API banking, tailor-made products improve the overall customer experience.
With the help of API banking, new fintech innovated products offer features and services aligned to provide flexible services. Innovations in API banking have reduced costs and now made it economical for the unbanked and underserved as they can now experience better products and services.
To offer better services, open banking offers third-party financial service providers access to financial data with the help of APIs. Open banking is highly prevalent in Europe. Open banks help achieve more financial inclusion as it allows small, medium businesses access particular tools and services that target the needs of their consumers. Innovations in open banking and the experimentation of products can foster higher financial inclusion in the long run.
Prepaid cards help us process payments quickly as we have better cash flow management, easy reimbursements, and more security than cash or cheques. They are a super alternative to carrying cash around. They are available as gift cards, meal cards, and also as travel cards. Prepaid cards are a great way to control business expenses, improve efficiencies and generate revenue streams. However, the time, cost and effort involved in card issuance in-house are huge.
The best way to manage card issuance is by deploying the right APIs.
Mobile wallets are famous and convenient due to their accessibility. Transactions are made easy as we can send, receive and store money easily with the help of our smartphones. In reality, right from a vegetable vendor to corporate and digital firms, every one of us can easily transact if we have a mobile wallet.
Mobile wallets ensure that every person can participate in a financial transaction with its cashless and contactless technologies. The whole process boosts the economy while achieving more financial inclusion.
The future ideas of the fintech industry will result in product innovations while improving existing ones, thereby offering more affordable and accessible services to both the unbanked and underbanked. Furthermore, the coupling of fintech and financial institutions will help eradicate financial illiteracy and promote financial inclusion. With the acceleration of fintech and its budding ideas, the future of financial inclusion is bright and holds many opportunities that come with new beginnings.
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