Bringing Finance to the Unbanked in India


With about 40 percent of its entire population currently unbanked, India represents a unique challenge for banks and financial institutions looking to expand their services to the country’s consumers. Moreover, around 70 percent of the roughly 1.3 billion people in India live in rural areas, many of which lack reliable infrastructure and are difficult to access by road.

Add those factors to the Indian government’s recent demonetization program to take physical money out of circulation in favor of digital banking and payments and you have a tough environment for banks when it comes to signing up new customers.

That’s precisely what the Infrastructure Development Finance Company (IDFC) Bank, a newly formed commercial and consumer bank based in Mumbai, was faced with in 2015. IDFC has been in existence since 1997, but solely as a lending institution for infrastructure projects. As IDFC grew, the bank decided it was time to tackle the more traditional consumer and business markets for financial services.

But in order to obtain (and maintain) a license to operate in the consumer sector, the Reserve Bank of India (RBI) mandated that IDFC expand into rural areas and commit to serving the unbanked in those communities. In addition, the RBI gave IDFC a deadline of only 18 months to be operational in rural communities. Failure would result in the cancellation of IDFC’s license to operate in the consumer market.

IDFC needed a technology partner that had both a track record of success, as well as the capability, commitment and innovation to help solve the problem of reaching the unbanked. IDFC ended up partnering with Indian multinational IT company Tata Consultancy Services (TCS). Tata Consultancy works with organizations across the world to effectively integrate technology to achieve their business goals, and in 2015 was ranked the 64th most innovative company in the world by Forbes, making it the highest-ranked IT services company—as well as the top Indian company.

What Tata did for IDFC was develop a system called the TCS BaNCS core banking solution, designed to transform the bank from a vehicle for infrastructure financing into a full-service institution catering to a broad spectrum of customers, from wealthy corporate clients to the rural unbanked. Tata had already rolled out similar projects worldwide over 300 times, for some of the world’s largest banks. BaNCS is an all-encompassing enterprise banking system, supporting the premise that customers should have a seamless, convenient banking experience from any device, anywhere. This is especially critical for serving the unbanked, as smartphones are often their only access to basic financial services.

Specifically, Tata developed a “Bank-in-a-Box” scheme along with BaNCS, creating a portable device that performs many of the basic functions a physical bank can. Tata refers to the actual technology as a Micro ATM, authenticating each user with cutting edge fingerprint and biometric authentication. These Micro ATMs, along with BaNCS smartphone integration, allowed IDFC to meet the goals set forth by RBI in terms of serving the unbanked market in India.

Customers can open and activate a new account at a Micro ATM in around four minutes, using a combination of biometrics and common identifiers like a mobile number. Micro ATMs have also proven to be cost-effective, with devices costing less than $295. Within nine months of TCS BaNCS implementation, more than one million rural IDFC customers have benefitted from Micro ATMs to do things like transferring cash and paying utility bills. More than 1,000 IDFC Micro ATMs were launched within a year, also resulting in employment opportunities for rural Indians since the Micro ATMs do require an on-site customer service liaison. Today, there are around 6,500 agents, growing at a rate of about 300 daily.

Aside from offering the rural unbanked in India a customer experience head-and-shoulders above what previously existed, IDFC saw its profitability increase six times over the first year of TCS BaNCS, going from US$8.53 million to US$56.91 million in net profits. Tata also had BaNCS operational in only nine months, despite having to link together and integrate 18 disparate systems within IDFC.

Importantly, access to financial services for the underbanked in rural India were also expanded by more than 50 percent for those areas (like the Krishna district of Andhra Pradesh province) serviced by Micro ATMs. The underbanked includes the self-employed, micro-enterprises and marginal farmers, who are now more financially empowered thanks to the partnership between IDFC and Tata.

Today, IDFC’s Micro ATMs are available in 16 states across India, with the underbanked now able to access government welfare benefits and remit payments to relatives in other remote areas. The TCS BaNCS partnership shows that—with an innovative approach and the use of technology—banks can both generate substantial benefits for both themselves and for rural developing communities.

This is one of 10 case studies that focus on examples of successful innovation between banks and financial technology companies working in partnership. The participants featured in this article were finalists at the 2017 Best of FinXTech Awards.

Is This the End of the Road for Credit Scores?

4-8-13_Sutherland.pngFast Fact: PayPal’s mobile payment processing jumped from $141 million in 2009 to $4 billion in 2011 and is estimated to more than double in 2012. In just over two years, Square has more than 2 million merchant customers—25 percent of the U.S. merchant population.

Some of the holiest tenets of consumer banking are being questioned. Newer players with a totally different attitude toward their customers who understand technology and the Internet are winning market share and earning customer loyalty. 

In the context of financial transactions, the credit score is to individual fitness what the heart is to physical wellbeing. This has been the be-all-end-all metric that determined consumer lending for over half a century and has powered many a consumer revolution in loans, cards or mortgages.

However, the logic and algorithm of the credit score were developed before the age of connectivity, databases, analytics and big data. And although the credit score has transformed itself over time by improvising for various asset classes, it has not truly leveraged big data to assess individual financial potential as opposed to actual performance.  Are we therefore now beginning to see the end of the credit score as we all know it?  

With the growth of digital wallets, mobile payments and the generational shift away from paper checks and brick-and-mortar bank branches, is it time for a new credit score or new metric to enable the next revolution in lending? Or will current providers embrace a “different strokes for different folks” attitude as the millennial generation overtakes the baby boomers as the single largest customer segment for a banks’s services and products? 

Fast Fact: Annual check usage in the U.S. has dropped from 16.9 billion in 2010 to 5.1 billion in 2012. Average customer visits per branch per year have dropped from 21.3 in 1995 to 3.2 in 2012.

The growing volume of payments with social dollars versus physical currency could signal an opportune time to revamp the underlying credit score algorithm and logic or even adopt a totally different approach. Consider, for example, the growing reluctance of the 19- to 30-year age group to open a bank account or write a check. Unlike other generations, they now have choices and providers to enable a variety of financial transactions. 

Also, the not-so-palatable fact is that this new generation of transactions is faster, safer, more convenient and less costly—four dangerously compelling reasons for retail banks to revisit and realign the prevailing offerings. 

Consider the success of the prepaid card as the emerging alternative to the bank account and the resurging demand for payday loans as the preferred financing medium. We are already seeing startup banks promote alternative scores such as the CRED from Movenbank, which uses social media status as the leading input into this very interesting, real-time metric. Will we see Facebook, Google and Apple providing input to credit bureaus to complete the social aspects of a consumer’s credit profile?

Fast Fact: Prepaid debit card payment volumes have grown from $202 billion in 2011 to $297 billion in 2012.

In the past, the terms “unbanked” and “un-bankable” were virtually synonymous and represented a huge market. That, however, is no longer true. In fact, today’s “unbanked” provide a better business opportunity compared to the “banked.” It is therefore essential that we need to evolve new metrics to supplement the credit score as we know it today. A recent Sallie Mae and Ipsos survey found that the percentage of undergrad students who own a credit card was down from 49 percent in 2010 to 39 percent in 2012—a further indication of the lack of desire among the millennial consumers to have any credit history. That might be a good thing in some ways, given the state of the economy and the need to rein in consumer spending. But it might not be a good thing for the economy, as the supply chain cuts production even before we know it and has a head-on impact on the entire value chain.  

This notion of “credit-less” consumer s raises a number of questions:  Will large institutions like Citigroup, Bank of America and JPMorgan Chase & Co. choose to evolve their own internal metric to score a consumer rather than relying on the credit bureaus? Interestingly, in developing countries where there are no credit bureaus, that is exactly the case. Banks have their own surrogate credit scores and this approach seems to be working well in those markets. 

But will Starbucks, which makes more than 30 percent of its daily store sales on a mobile wallet, be reporting to credit bureaus soon? Or will Amazon, mobile wallet company Isis or Google do so?  More to the point… should they? Or instead should they embrace big data analytics and be their own card issuer because they already have daily data on a customer’s behavior? And if that’s the case, will it impact a customer’s credit score or his financial health if he switches from a $4.50 latte three times a day to a $1.80 coffee daily? 

Are we headed for a new world where a micro finance credit bureau will emerge and manage all interactions of less than $500? With the convergence of telecom, tech, banking and retail industries during the next few years, it will be interesting to see the demise of the credit score as we know it and the growth of a new medium of rating consumer credit. As it is, ask the folks from Canada, the United Kingdom or Asia who relocate to the United States with large bank balances (and, in some cases, Swiss bank accounts) yet are unable to get a mortgage or credit card and end up purchasing everything with cash. Even in the traditional sense, we have quite a way to go before the credit bureau is able to do the greatest good for the greatest number.