Serving the underbanked – what lessons can India teach western countries?

What lessons can western countries take from the likes of India when it comes to reducing their number of underbanked citizens?

Tackling the issue of unbanked and underbanked citizens is a concern for many countries around the world. On a global level, it’s estimated that more than a third of the world’s adult population make little or no use of formal financial services, and this represents a huge opportunity for banks.

Research by Accenture suggests that bringing these citizens into the banking system could generate as much as $380 billion in new revenue for the sector. It noted that as income levels around the world are growing, the time is right for financial institutions to make losing this gap a priority.

However, this is not only a challenge that affects developing markets with less comprehensive financial infrastructure. In the US, for example, it’s estimated that in 2015, there were as many as nine million households that did not have a bank account, while a further 24.5 million were classed as underbanked – meaning they had a checking or savings account but also obtained financial products and services outside of the banking system.

Indeed, less developed countries in Africa and Asia may be doing a better job of reaching out to unbanked populations than more developed markets, where legacy systems and higher costs to entry may act as barriers. So what can these countries teach the US and Europe about extending the reach of financial systems?

How India is tackling the underbanked problem

A study conducted earlier this year by Citi and Imperial College London found one of the most improved countries when it comes to offering access to finance is India. This was described as one of the “stellar performers” of 2017, increasing its readiness to embrace digital banking solutions by almost ten percent year-on-year.

The report noted there are several lessons that developed countries can take from India’s efforts, which have been a priority for the government, with prime minister Narendra Modi last year setting out a goal of moving “from a less-cash society to a cashless society“.

Some of its measures, such as the demonetization of the country’s 500 and 1,000 rupee notes last October, have been controversial, but others, such as the Aadhaar digital identity scheme, were highlighted by the Citi report as playing key roles in reducing the number of unbanked.

This system, which was launched back in 2010, is now the world’s largest biometric identity system, with some 1.1 billion citizens enrolled. This allows users to easily access their bank accounts and make basic transactions using fingerprint authentication.

Lessons for the rest of the world

A simple and effective digital identification system such as Aadhaar should be a key feature of any digital money strategy, the report noted, alongside solutions such as a unified payments system and app, and merchant apps to facilitate digital payments.

As well as Aadhaar, initiatives in India that other countries should take note of include the Unified Payments Interface system, which launched last year and allows users to transfer funds across different banks using a single identifier. The key feature of this is interoperability, which makes it much simpler and accessible for citizens.

India can serve as a good example to countries such as the US as it already has a reasonably well-developed banking infrastructure that covers both urban and rural areas, while the use of smartphones is also widespread. Therefore, its environment is closer to developed markets than many other emerging economies.

Citi noted that India’s performance “highlights what’s possible when government and enterprise join forces to make the digitization of money happen”, so if other nations are seeking inspiration for their own initiatives to extend the reach of their banking systems, the country could be a good place to start.

Written by Jack Dougal

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