The Business of Financial Inclusion

By Rama Bijapurkar - July 17, 2010

The discussion on financial inclusion ought to focus a lot more on building an economically viable and consumer acceptable business model, with a specially designed regulatory ecosystem appropriate for that model. Evangelism or moral pressure to force banks to serve those not so far served by them cannot help square a circle. But a new tetrahedron that is superior to both the circle and the square can be built if we abandon orthodoxy and do not constrain the business model by saying: (a) Financial inclusion has to be driven by banks because we know how to regulate them, and should not be driven by a new ecosystem that does not have an existing bank as the lead; (b) it has to be offered below a particular price point which is defined either by some fuzzy-logic comfort level or by a mandated number based on somebody's test of reasonableness (not the consumer) (c) the product and service offered have to look like and be like familiar banking products.

The fact is that it is a business economics and a business design problem of how you serve a large, geographically scattered base of consumers who individually have very little money, but collectively are financially attractive. There is plenty of learning to be had from lots of other industries that have been striving to design a win-win business model to expand their consumer base. What is required is to design a "value-right" bundle of consumer-acceptable features at a price that the consumers can and are willing to pay. It is incorrect to assume that poor consumers always want the least benefit at the lowest cost. In fact, lots of studies show what we ought to have known – that people with very little money undertake more complex financial transactions and use more complicated financial "products" than those with a lot more money. Banks should explore how consumers process value (benefits and costs), what complexity of benefits they desire and how they process price. Consumers think about costs more holistically than they do about interest rates – 15 per cent interest is fine, if the roof gets fixed before rains and the husband doesn't get sick. The no-frills low features, low price and no-profit model mindset are flawed, and financial inclusion needs a more complex, integrated life cycle that includes saving, spending and borrowing products that is a win-win for both parties. Having identified the "value-right" price performance point, as perceived by consumers and not as imagined by suppliers and financial experts, the next and seemingly impossible step is to design an internal business system to deliver the chosen features at a cost that is gross margin positive, to a consumer base that is geographically scattered. Once the scale builds, overheads will be covered and net margins will also start looking up. If, however, gross margin itself is negative, financial inclusion will be treated like corporate social responsibility. Who is best positioned to design and meet this challenge? It could be telcos, NBFCs, retailers, agricultural inputs firms, technology companies, or some combination of these. If it's a web, must an existing bank always be the webmaster and the prime mover? Or, can we think about a different category of banks with new players, specific customer segment mandates and appropriate policy as well as regulation?

Again, as we've learnt from other industries, given the hyper growth of the richer end of India and the geographical concentration of these consumers, most established companies are not interested in going after the bottom of, or even the middle of, the pyramid. Even if they have a presence there, it is in a "project/experimentation" mode. The best human resources are not deployed here, nor will it figure in the top management's key result areas. Providing subsidies to encourage banks to focus more on financial inclusion is not a great idea either. Charity cases will never get treated as regular customers. In fact, a mystery shopping experience with big-name banks will show that no-frills account holders get the no-frills treatment. The business design requires them to minimise their face-to-face transactions and use the ATM more. However, using an ATM isn't easy and requires a lot of learning – it isn't as simple as operating a mobile phone. The current design of no-frills products doesn't even offer any assistance or training on how to use these, and to someone who has never heard of a PIN or a telephone ID security system, this is all quite a big blur. A total ecosystem needs to be built for these things. It's like the Bombay-Pune expressway. It needs slums to be cleared on either side or overhead bridges to be built so that kids don't run across the road; it needs radiailised tyres to cope with high speed; it needs mobile ambulances and police to safeguard travellers and cope with accidents.

Business systems that serve customers who have special requirements and are starkly above or below the average customer on any parameter need to be differently designed. Forcing one-size-fits-all products is not a good solution.

The author is an independent market strategy consultant.