Over the past few years, efforts to drive financial inclusion in India have delivered mixed results. Access to bank accounts has increased dramatically, driven by a strong policy and regulatory push. But the usage of these accounts and the uptake of formal financial services beyond savings accounts, has remained exceptionally difficult.
Why might this be happening, and could ‘technology’ be a game changer? How might policymakers nudge this process in the right direction?
Let’s start by understanding the problem. A recent study suggests that Indian households display three unique financial behaviours.
Part of the issue has been limited supply- side innovation: Dalberg’s work on understanding the financial health of low-income segments in India shows that the reliance on financial products from non-institutional sources is high because these tend to be more tailored to their economic lives, e.g., account for their erratic cash flows and evolving financial priorities, and because they are perceived to be more helpful in times of need (as opposed to the one-size-fits-all solutions offered by traditional banks).
Further, households also lack an avenue to receive credible, low-cost and high-quality financial advice. Decisions are based either on hearsay, or on local advisers who may have misaligned incentives.
In this complex context, we think technology can help in three ways.
Fintech thus holds great promise to drive financial inclusion 2.0 in India. But at present, fintech offerings remain primarily accessible to “elite India”. If fintech has the potential to be a game changer for inclusion, why are we not seeing more innovation for the mass market and the so-called “base of pyramid” (BoP) consumer?
While there are several demand and supply side factors explaining this, our extensive recent consultations with over 50 Indian fintech institutions suggest that some regulatory barriers still persist.
Consider a firm that wants to launch a micro-insurance product, purchasable using mobile airtime. The firm will collaborate with telecom players for distribution, and with insurance providers for underwriting risk. However, the firm will require regulatory clarity, since its product will attract the purview of multiple regulators (the Insurance Regulatory and Development Authority, the Telecom Regulatory Authority of India, and possibly the Reserve Bank of India) but regulators are unable to accurately assess the risks associated with such a new product, and regulatory coordination is limited. As a result, the firm will have to abort the launch due to regulatory ambiguity.
Can we create an avenue that avoids such situations by helping regulators understand the risks and benefits associated with a new product, in a rigorous and streamlined way?
An innovation that could help is that of a “regulatory sandbox”- an entity, hosted or endorsed by the regulators, that enables temporary, limited-scale testing of a new product, to assess the potential benefits and risks posed by such a move to consumers or the market.
In the micro-insurance case, the regulators could ask the firm to test their product in a sandbox setting for a limited period (say, three months) and on a restricted scale (say, 10,000 consumers), while laying out metrics for evaluation. This would generate the evidence required to help regulators decide on benefits vis-à-vis risks and how best to regulate it.
After consulting with fintech institutions and regulators in five different countries, many of whom have set up their own sandboxes, we believe that the Indian sandbox should have five key features.
We believe a sandbox approach can be a powerful tool in the Indian regulator’s arsenal. A regulatory sandbox, rooted in India’s realities, and custom-made for India, can become the flag-bearer of the nation’s next-generation financial inclusion imperatives.
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This piece was co-authored by: Nadeem Khan, Nehal Garg, Varad Pande and Vineet Bhandari
The above is an edited excerpt from a two part series originally posted on Mint. You can find the original articles here: Part I and Part II.