How have low-income communities embraced digital payments in India?

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Rajas, a 40-year-old widow, started a grocery shop in Bhiwani in the state of Haryana to earn a regular income after her husband—the sole breadwinner of the family—died five years ago. Her shop caters to 20-30 customers per day with an average daily sale of INR 3,000 (~USD 41). Although most of her customers preferred to pay through cash, her children suggested that she accept digital payments as well since many of her customers find it more convenient.

While Rajas had a smartphone and was fairly comfortable using it, she knew that not many customers had smartphones in her area. She asked her bank about the possibility of accepting digital payments without smartphones and learned about BHIM Aadhaar Pay (BAP). Subsequently, the bank put her in touch with a third-party provider, which onboarded her onto the platform and installed a BAP device in 2019. Since payments through BAP only require Aadhaar and biometrics, it quickly became a convenient payment mode for Rajas and her customers.

Despite being new to this payment mode, Rajas could conduct transactions through BAP and even encouraged her customers to pay through this mode. The COVID-19 pandemic further propelled the adoption of digital payment modes. Many customers turned to their friendly neighborhood Kirana shops to stock up on daily provisions and preferred to transact using digital modes rather than cash. Beneficiaries of government cash transfer programs, migrants, daily wagers, and other informal sector workers are some of the major user segments of BAP that continued to keep the transaction rates high during the pandemic. Small and emerging merchants like Rajas are among millions of micro-merchants who fueled the digital payments growth as they continued to transact digitally post the lockdown.

Just like Rajas, the pandemic changed the way of life for Manak in Chhattisgarh—about 1,300 km away from Haryana.

Manak is a 35-year-old technician at a power plant in Durg, Chhattisgarh. Despite receiving his salary directly in his bank account, he used to transact in cash. Due to pandemic-induced restrictions it became difficult for Manak to visit ATMs frequently to withdraw cash. He had very little cash in hand and was unable to buy even the bare essentials for his young family. His friends suggested using a mobile wallet on his smartphone, but he was not comfortable making digital payments as he had never used it before.

Today Manak is an advanced user of digital payments, even though he first started using it during the lockdown. Manak’s friends helped him immensely to switch from cash to digital payments. They transferred some money into his account and explained how to use digital payments. Manak began watching videos online to understand how to use mobile wallets and eventually UPI.

Manak is among the 80 million people who adopted digital payments during the pandemic. Restricted mobility and the fear of contracting the virus pushed many like Manak to start using digital payments for the first time.

The growth of digital payments since the pandemic

The changes in the payments landscape induced by the pandemic have altered the outlook of several customer segments. With limited access to ATMs and long queues outside bank branches, COVID-19 brought many first-time users like Manak into the fold of digital payments, and further, onto the path of financial inclusion. Digital payments growth continues to observe an upward trend even though the pandemic continues to subside.  The usage of UPI and QR codes has attracted nearly 150 million users since its inception and became the most common mode for P2P and P2M payments. Transactions made to merchants account for 19% of UPI transactions and have grown in transaction volume by 20% during Q2 2022 as compared to the previous quarter.

Source: National Payments Corporation of India—UPI and BAP Product Statistics

While UPI and QR codes emerged as the frontrunner, BAP also gained popularity in rural areas and semi-urban areas. The usage of BAP soared high as many merchants like Rajas adopted it in rural areas. The average transaction value for BAP increased to INR 2,681 (~USD 33.62) in FY 2021-22 from INR 398 (~USD 5.38) in FY 2017-18 and continues to grow. More than 2.3 million BAP devices have been deployed across the country. As with UPI and BAP, other digital modes, such as BBPS and AePS have also gained significant pandemic-driven usage. AePS transactions grew by 88% over the past financial years from 2018-20. Largely these payments were made by LMI customers who typically lack conducive infrastructure and require handholding support to conduct digital payments. 

The growth is also a direct result of the relief funds disbursed by the government to support citizens during the pandemic. These payments were largely made to vulnerable rural and semi-urban households. Although the growth of payments through cards as a category decreased by 25%, the market share of RuPay in total debit cards issued increased.

COVID-19 boosts digital payments uptake but usage of cash persists

Source: RBI – Money supply data   

Despite the growth in digital payments in 2022 we observed that cash and digital payments continued to coexist and grow throughout the year, as consumers sought both the contactless safety of digital payments and the convenience of cash. While the value of non-cash payments in India has increased steadily since 2007, cash transactions still dwarf the alternatives. Most customers are oblivious to the fact that cash handling incurs several tangible and intangible costs, such as waiting time, transaction charges, cost of transit, and the effort involved to access cash, among others.

Way forward to improve the adoption of digital payments

The pandemic has created a positive impact on the attitudes of both merchants and their customers to digital payments. Customers like Manak are now keen to use digital modes owing to the convenience and abundance of options available. Meanwhile, merchants like Rajas are ready to explore and adopt other modes of digital payments to offer ease and convenience to their customers.

Today, India is one of the leading countries in the world when it comes to the adoption of digital payments. Digital payments adoption has grown multifold from meager 8% penetration around a decade ago. It is all set to grow to 58% by 2025.  Financial service providers (FSPs), government, and infrastructure providers have made concerted efforts to increase usage across all user groups. However, despite the tremendous potential to digitize the existing cash-based transactions in the country, we are still a long way from the ubiquitous use of digital payments. In our next blog , we unpack this huge untapped opportunity for FSPs to digitize payments in India and also highlight a few challenges that need to be resolved to tap the opportunities available.

 

How digital payments drive financial inclusion in India: Abridged report

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India’s digital payments story is akin to none. Several factors have transformed India’s payments ecosystem. These include improvements in payments infrastructure, disruptions in information and communications technology, a responsive regulatory framework, a conducive policy environment, and a greater focus on customer-centricity. Besides, the increased adoption of smartphones, greater access to the internet, and people’s growing comfort with using technology and their improved financial capabilities have also aided this growth.

This report is an abridged version of the detailed whitepaper, “How digital payments drive financial inclusion in India.” It charts the evolution of digital payments in India and looks at the different barriers and triggers for providers and users in the ecosystem. It focuses on how various stakeholders can work together to empower users and drive the adoption of digital payments among the LMI segments. 

The last-mile reach: Postal banks across the globe that serve the rural and the remote

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In our previous blog, we focused on the Target segment-Technology-People-Process (2T2P) approach that postal banks can use to enhance their offerings to low and moderate-income customers. With the changing financial inclusion landscape, it becomes essential for postal banks to meet the needs of their customers. Our framework highlights major areas a postal bank can focus on to keep up with the changing financial services landscape.

In the following section, we focus on some successful practices that postal banks have followed across different countries under the 2T2P approach and the impact of these developments on customers, such as Ramesh, Ali, Dizola, and others worldwide.

1. Target segments: Postal banks that cater to the changing needs of the customers

Customer segmentation and profiling focusing on different use cases can be critical for postal banks as they serve a large set of customers through their network. Customized products for different customer segments based on their financial behavior will be vital to improving customer experience.

Some postal banks, including Al-Barid Bank in Morocco and Tunisian Post in Tunisia, have been leading the way and targeting a specific set of customers through their network:

  • Focus on low-and-moderate-income groups:

In some countries, post offices receive banking licenses to offer limited products and services. This allows them to compete with regular banks or supplement them for specific customer segments. In 2010, a subsidiary of Morocco’s post office received a limited banking license, and it floated Al-Barid Bank to serve low-income consumers. Since its inception, Al-Barid Bank has opened 400,000 to 500,000 bank accounts every year and improved access to banking for those in remote areas of the country. Similarly, Egypt Post has supported customers like Ali through their banking services.

  • Improving customer stickiness to the platform:

The Tunisian postal bank, La Poste Tunisienne’s mobile banking services for virtual accounts increased retention among young customers, who usually switch to other banks once they start earning. Once La Poste Tunisienne extended mobile payment services to virtual accounts and started offering additional benefits, it became popular among young customers. Adem, an engineer from Ariana, opened his account at La Poste Tunisienne in 2019 and uses the platform digitally to make mobile payments due to the ease of performing transactions.

Tunisian Post has also been focusing on advanced use cases and is exploring this through big data and blockchain to expand the reach of digital financial services. Recently, it launched a new payment infrastructure with the Swiss tech platform, Monetas. The new digital payment infrastructure enables e-Dinar users to make instant, secure peer-to-peer mobile transfers, pay online and offline merchants, pay their utility bills, send remittances, and manage official government identification documents. Tunisian Post now seeks new use cases to expand digital financial services to its customers.

These postal banks are exploring newer use cases and keeping stickiness at the forefront for their loyal customer base. With this strategic focus, they have to potential to expand digital financial services to the unserved and underserved.

2. Technology: Unique scalable solutions using emerging tech

Postal digital transformation is difficult to achieve by simply layering technology over legacy systems. It requires building a modular tech infrastructure and an easy-to-use interface that target segments whom we met in the first blog – like Ramesh, Ali, and Dizola finds intuitive and convenient. Several postal banks have been implementing innovative solutions at the front end to provide a better user experience and at the back end to build scalable infrastructure.

  • SmartCard solution introduced by NamPost Savings Bank in Namibia:

Namibia post offers banking services to its customers through its “SmartCard.” Whenever customers open their account with NamPost Savings Bank, the financial services arm of Namibia’s post, they get a smart card. The biometric card helps customers withdraw money in post offices and ATMs, transfer money to an account or another card, and pay in retail shops across countries via Point of Sale devices.

  • Partnership with mobile operator networks (MNOs) to improve technological capabilities:

Tunisia Post partnered with three major MNOs in the country, Tunisie Telecom, Ooredoo, and Orange, to offer mobile postal financial services. This allowed customers to transact conveniently from anywhere in the country. The partnership had a significant impact on improving financial inclusion among last-mile customers.

  • Partnership to digitize traditional financial products:

Benin Post partnered with the FinTech e-Savings club to digitize and formalize rotating savings and credit associations (ROSCAs). The postal agents collected monthly savings from customers at the convenience of their doorsteps. Further, they were also responsible for sending timely reminders to reduce the delinquency rate among customers. Once the amount collected is deposited in the post office, the customers receive a confirmation message.

The digital revolution has allowed these postal banks to use emerging technology, build innovative solutions, and provide different financial products through FinTech partners. The introduction of customized financial services through the network of postal banks can potentially disrupt and scale them—and extend their reach to the last mile.

3. Process: Building efficient processes and operational models to deliver relevant products to specific segments

Service providers can offer several services at low cost through digital and non-digital channels, thanks to the expanding internet and smartphone user base across the markets. Postal banks can build “phygital” models and processes, that combine technology with human assistance, to deliver efficiently to their target segments.

  • An agile approach to adopt innovations in the market and serve customers adequately:

Elta Hellenic Post, commonly known as ELTA, is Greece’s national postal service. Doorstep delivery of social security payments through bank checks was one of ELTA’s essential tasks, besides other postal services. However, when a law was introduced to outlaw the physical delivery of G2P payments during the COVID pandemic, ELTA was quick enough to respond to this change. ELTA introduced giro accounts to serve beneficiaries. Beneficiaries approach the postal delivery staff to open giro accounts to access their social security payments at home. This helped ELTA retain its customer base and adopt a robust system to deliver no-contact payments.

  • Co-branding approach and effective processes to deliver financial products:

In the UK, many private-sector banks have partnered with postal banks to offer co-branded basic financial products, such as customer savings accounts and current accounts for merchants. The partnership also enables banking agents to use post offices as a physical touchpoint to help customers conduct transactions, such as deposits and withdrawals. Several banks in high-income countries show similar trends to maintain their presence in rural areas. In Spain, Slovenia, and the Czech Republic, post office employees execute customer transactions on behalf of several private sector banks. In effect, these post offices act as agents for banks.

4. People: Capacity-building of the agent network and staff within the organization

Traditionally, the role of a postal agent is limited to mail delivery services, and they are not well acquainted with digital interfaces. The transition from being a mail carrier to financial inclusion enabler requires training. Further, postal banks also need strategic leadership at the top to drive innovation in service and processes to maintain a sustainable business model over time.

  • Training and capacity building through creative tutorials:

India Post Payments Bank introduced creative video modules for its network of 189,000 agents. These modules are constantly updated and available in regional languages across India for postal bank agents to understand the content without any challenges. This includes engaging comic strips that have generated higher awareness among agents of IPPB to serve customers effectively.

  • Leadership from both banking and startup experience can help drive innovation and growth:

Some post offices focus on building a solid leadership team to drive innovation. The leadership of Anas Alami, former Director General of Poste Maroc, laid the foundation of financial inclusion for the Morocco Postal Bank. The in-house experts’ knowledge base helped the bank minimize expenditure on hiring external consultants. Further, the experience of the senior management team comprising different age groups and diverse backgrounds helped Morocco Postal Bank to make well-informed strategic decisions.

The future is now, and postal banks can use their competitive advantage to make the most of the opportunity

Several postal banks, such as those in Japan, India, and Morocco, have adapted to their country’s cultural nuances, customer needs, and technological developments. Most importantly, they use the postal networks’ widespread presence to provide financial services, specifically in pockets that lack traditional banking outlets for customers, such as Dizola and Ramesh.

Postal banking played a crucial role in increasing financial inclusion globally and was a game changer during COVID-19 for beneficiaries like Ali receiving social security payments. They enabled multiple use cases across P2P and G2P payments during those difficult times. Thus, if postal banks can build their model around local requirements, they are here to stay, sustain, and thrive.

How digital payments drive financial inclusion in India

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India has been at the forefront of transforming the global digital payment landscape. The past five years have seen a massive transformation. While UPI has hit record high numbers, AePS has transformed how beneficiaries access subsidies. Merchants now conduct digital B2B payments, while FinTechs continue to evolve unique solutions to disrupt the space. 

This whitepaper has been developed in partnership with the National Payments Corporation of India to showcase how digital payments continue to drive financial inclusion in India. The whitepaper shares insights on the evolution of digital payments in India and looks at the different barriers and triggers in the current state of play for providers and users in the ecosystem. It focuses on how various stakeholders can work together to empower users and drive the adoption of digital payments among the LMI segments. 

This paper was launched at the Global Fintech Fest in Mumbai, India on 20th September, 2022.

Customer-centric and responsible digital credit solutions for urban and rural non-farm entrepreneurs and smallholder farmers

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MSC conducted a deep-dive analysis of the digital credit users in India, Indonesia, and Kenya to assess the impact of digital credit on their financial health. The analysis presents the insights from the assessment and recommends actionable interventions at the level of providers, regulators, and policymakers to enhance the financial health of digital credit users.

This report was launched at the Global Fintech Fest in Mumbai, India on 21st September, 2022.

Postal banks: A stepping stone to the formal financial system?

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Ramesh, a daily-wage worker from Bihar, India, can send money easily to his family with the help of postal workers. Ali, a retired military officer from Aswan, Egypt, no longer has to queue outside any government offices to receive his social security payments. He can withdraw money easily from any Egypt Post ATM or POS-enabled post office with zero charges. Dizola, a micro-entrepreneur from Allada village, Benin, can conduct digital transactions through his postal account, even on his feature phone.

What common thread binds the lives of these people? The answer is the role the respective postal networks in their countries play to spearhead safe, affordable, and convenient customer transactions.

Worldwide, around 1.5 billion people access formal financial services through postal banks. Most belong to the low-and-moderate-income (LMI) segment. Postal banks have immense potential to push financial inclusion across the world. Since their conceptualization in 1861, postal banks have grown multifold in terms of their reach and financial offerings to bring last-mile customers into the fold of inclusion. Through their vast network of postal agents, postal banks are strategically well-placed to support universal financial inclusion, especially for the low- and moderate-income (LMI) segment. These postal agents mainly belong to the same communities as their customers and thus command high trust and approachability.

Research by the Universal Postal Union (UPU) highlights that postal banks worldwide have driven inclusive growth by providing financial services through 1.4 million postal agents and 2 million physical touchpoints. However, operational and regulatory limitations prevent postal banks from realizing their true potential to serve last-mile customers adequately.

Predominant supply-side challenges faced by postal banks across the globe

Demand-side constraints including limited literacy, lack of formal documents, and lack of awareness about the formal financial channels, further exacerbate the situation. As a result, financial institutions, including postal banks, struggle to cater to LMI customers. Postal banks must now transform themselves to cater to their existing and potential customer segments against the backdrop of the changing financial service ecosystem and evolving needs of customers like Ramesh, Dizola, and Ali. The graphic below spells out some demand-side challenges:

We have used the 2T2P: Target segment-Technology-People-Process approach to assess and suggest how postal banks can optimize their business operations, serve the target customer segments, and transform digitally to survive and thrive in the diverse ecosystem of financial services.

1. Target segments: Identify the right user base for the services

The customer comes first. Over the years, we have seen a major shift in customer behavior and expectations. This change has compelled financial institutions, including postal banks, to redefine their priorities to meet evolving customer needs. The postal banks must first understand the target segments to provide them value.

Profile customers: Capturing the customer lifecycle with data on financial behavior can help postal banks offer customized products, predict the need for different products, use their channels efficiently, and unlock new opportunities in the space.

Focus on advanced use cases: Emerging technologies can potentially offer advanced use cases for digital financial services. The emergence of big data has enabled different approaches to credit scoring, allowed providers to cross-sell and upsell products and services, and enabled the addition of new use cases. Postal banks are well-suited to use their existing database to provide financial services to underserved populations.

2. Technology: Achieving scale through intuitive tech infrastructure

Technological progress is transforming the financial services ecosystem globally, which can help postal banks build an efficient business model over time. Postal banks worldwide struggle with legacy systems and the inability to innovate fast. Postal digital transformation cannot take place by simply layering technology over legacy systems. It requires the creation of modular tech infrastructure and an easy-to-use interface that target segments will find intuitive and convenient. Once such upgrades are implemented, postal banks can scale and use data to advance their customers’ digital finance journey.

Build an intuitive frontend interface for customers: A user-centric platform is essential to facilitate usage and enhance customer experience. Since LMI customer segments have limited digital literacy, postal banks must build intuitive and easy-to-use solutions in regional languages with voice-assisted modes. These users have not experienced financial services on smartphones. The frontend customer interface must therefore be intuitive, with ample handholding to boost customer confidence and trust in digital transactions.

Develop a scalable infrastructure at the backend: Postal banks must use technology to implement new services and diversify into new business models to scale their services. Their core architecture must include digital innovation, e-commerce, data collection, API development, and digital identity. This inclusion will enable postal banks to propose new services, increase efficiency using technology, drive innovation and agility, and improve resilience and scalability.

Ecosystem enablement—API-driven open architecture approach: Postal banks can build strategic partnerships with emerging FinTechs and other institutions to provide products on demand through open APIs. This will help customers access multiple solutions through postal banks. It becomes a win-win solution for FinTechs and postal banks, which they can use to build competitive advantages and drive financial inclusion.

3. Process: Building efficient processes and operational models to deliver relevant products to specific segments

Customers prefer a bank that understands their needs, offers suitable products, maintains transparency, offers simple and streamlined processes, and is approachable. With an expanding internet and smartphone user base across markets, postal banks can offer many services at low costs efficiently through digital and non-digital channels. However, postal banks need to combine an all-digital experience with a human touch to cater to people at the bottom of the pyramid.

Build a “phygital” operational model and processes to deliver relevant products and services to the last mile: Most postal banks have a significant physical presence that they can use to serve customers better. Depending on the existing bank structure, postal banks can gradually move to a digital-led operational model where their postal agents serve customers using digital devices. Many postal banks can take a phase-wise approach to roll out the services and move gradually from an assisted model to a self-service mode. This way, they can still keep features like doorstep delivery that add to the convenience of the customer segment, and take digital financial services to vulnerable segments, such as pensioners and rural women.

Use the trust in the post’s brand and network to add new financial and non-financial services: Most customers trust their postal banks. Postal banks can use this implicit trust to add new value-added services based on the lifestyle needs of customers, who otherwise largely remain unserved and underserved by incumbents in the ecosystem. They also offer a really important opportunity for G2P (government-to-people) payments, as postal banks typically have significant outreach into the vulnerable and remote communities targeted by G2P programs.

4. People: Developing capacities of the agent network and staff within the organization

Postal banks reach and serve customers at scale through their vast distribution network. Evolving customer expectations and technology make it essential for postal banks to recognize the emerging needs of their customers and build a skilled workforce that caters to their specific target segments. A major struggle for postal banks is achieving a sustainable business model while developing their network capacity.

Build capacities and skill sets of postal agents to deliver digital financial services: Traditionally, the role of a postal agent is limited to mail delivery services, and they are not accustomed to using digital devices for operations. Transitioning from a mail carrier to a financial inclusion enabler requires nuanced training. If postal agents wish to develop their skills, they must receive training at regular intervals with hands-on experience. They can then serve customers better.

Acquire strategic leadership and enhance the existing team’s skills with a focus on innovation with better product design and delivery: Postal banks need leadership teams that understand tech-based solutions of FinTechs and know about the operations of traditional banks. A combination of the two will help them select the right partners to drive innovation in postal banking and expand their business. They can then sustain their digital finance ambitions with a clear vision, strategy, and roadmap in-house.

Conclusion:

Research suggests that households and businesses with access to formal financial services can respond better to financial shocks. Postal banks, alongside other financial institutions, continue to make efforts to reach the 24% of people worldwide who still lack a bank account. The assisted banking approach, and technology-based solutions offered by postal banks, coupled with their vast network, show a high potential to serve millions of underserved customers like Ramesh, Ali, and Dizola.

The following blog in this series captures lessons from postal banks spread across our 2T2P model, which highlights how some postal banks can serve the excluded.