Fintech sector pushes financial inclusion in Covid-hit India

As more people overcome their wariness about digital transactions and India’s domestically developed UPI platform facilitates billions of monthly transactions by consumers who had hitherto been left out of the formal economy, the government’s aim of ushering in a near cashless society is coming closer to fruition.

Masood Karim works as a driver to an executive working in Gurgaon. Last week, he made his first online purchase – of an affordable Chinese smartphone to help his son keep with his online classes. He paid for the phone using Paytm, a payments solution company that uses UPI, India’s domestically developed digital payments solution that is empowering millions of people across the length and breadth of India.

The UPI, which is an initiative of the National Payments Corporation of India (NPCI), the Reserve Bank of India (RBI) and the Indian Banks Association (IBA), the umbrella body of Indian banks, and works by instantly transferring funds between two bank accounts.

UPI is an initiative taken by the National Payments Corporation of India (NPCI) together with the Reserve Bank of India and Indian Banks Association (IBA). Subscribers can use their mobile phones as virtual debit cards and send money instantly between two bank accounts. The use of QR codes has meant that digital wallets don’t have to be filled in order to make transactions.

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This has democratised finance and is boosting financial inclusion in India like never before by ushering in cashless transactions, thus, giving wings to Prime Minister Narendra Modi’s goal of weaning Indians away from cash.

Covid-19 provides tailwinds to digital payments

The Covid-19 pandemic has only accelerated this trend. Since the onset of coronavirus in India in March last year, the number of UPI transactions per month have zoomed – from 1.25 billion transactions worth $28 billion in March 2020 to 2.8 billion transactions worth more than $65 billion. To put these figures in context, the number of UPI transactions in the corresponding months of the three previous years were 800 million in 2019, 178 million in 2018 and a mere 6.2 million in 2017.

With India’s smartphone population exploding and more people overcoming their wariness of digital transactions, the fintech sector is breaking down barriers and offering new suites of products not only to India’s burgeoning middle class but also to people who had traditionally been left out of the ambit of India’s financial services sector.

Digital footprints for targeted financial products

“As millions of more people start transacting digitally, it is creating a digital financial footprint that will enable credit agencies and financial services companies to map them better. This is already leading to the advent of products tailored to this segment of the market,” said Bhupinder Singh, a financial consultant who services several middle-and-low-income clients in Kolkata.

He pointed out that many more people are now buying insurance and investing in mutual funds even in the suburbs of the city and in outlying Tier II and Tier II towns and making payments online. Both the decision to invest in these instruments as well their mode of making payments is a huge change from even a couple of years ago.

ET, a leading Indian financial daily, quoted Navin Surya, Chairman Emeritus of Payment Council of India as saying: “The type of transactions, the type of audience that I am seeing has never happened before. Even the smallest neighbourhood retailer is now accepting payments digitally and this frequency of day-to-day transactions will create a habit and finally change the way we transact.”

New risks could emerge

According to an IMF paper titled The Promise of Fintech: Financial Inclusion in the Post-Covid-19 Era, “… digital finance is increasing financial inclusion… (It) could play an important role in mitigating the economic and social impact of the ongoing Covid-19 crisis.

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Broadening the financial access of low-income households and small businesses could also support a more inclusive recovery. These potentials, however, cannot be taken for granted, as the pandemic could accelerate pre-existing risks of financial exclusion, and give rise to new risks to the fintech sector itself. Digital financial services are faster, more efficient, and typically cheaper than traditional financial services and, therefore, increasingly reaching lower-income households and small- and medium-sized enterprises (SMEs).”