Role of digital banking in furthering financial inclusion

Banking the unbanked

Several macroeconomic factors indicate that the basic ingredients for successful creation of a digital ecosystem are rapidly falling in place, far exceeding the supply side capabilities that support the Indian government’s agenda of financial inclusion. For instance, digital banking offers numerous advantages that work towards improving the same, largely riding on the fact that Indian consumers have shown tremendous preference for digital technologies, with growth rates for e-commerce as well as mobile phone adoption far outstripping rates in developed economies.

The Reserve Bank of India broadly defines financial inclusion as providing access to a ‘wide range of financial services at a reasonable cost’. This provision of access to banking services to nearly 47 per cent of the reportedly unbanked population in India has the potential to unfold huge growth opportunities for financial services players.

In this context, digital platforms are likely to deliver financial services to both the unbanked and the underbanked population, especially in rural/remote regions, at a low cost, and subsequently increase digital financial access to provide high quality, affordable financial services. By using digital channels, transaction costs could be lower than those incurred through traditional channels by as much as 90 per cent, thereby bringing down break even costs.

As banking becomes much less reliant on physical distribution, particularly as cash needs decline and video-based advice becomes more common; it is believed that the time has come for digital banking players to gear up the launch of digital products and services for their customers.This is expected to lead to future benefits from lower operating costs, along with increased business volumes, while also driving financial inclusion.

Banks should target previously underbanked and financially excluded segments with the help
of technology; this could provide the necessary traction on new demand, as urban markets are crowded with a large number of players. It could also give banks an opportunity to spread the costs or investments in technology over a much larger base and increase the utilisation of existing technology.

Further, government initiatives, regulatory support and active participation of public as well as private participants could be key levers for enabling a successful transition to a financially inclusive economy.

Read the complete insights of this report from KPMG here!